Capitalism and Society

Comment on "Financialization of Art" (by Mark C. Taylor)

Noah Horowitz — Fri, 09 Dec 2011 10:22:01 PST

Comment on "PSST: Patterns of Sustainable Specialization and Trade" (by Arnold Kling)

Peter Howitt — Fri, 09 Dec 2011 10:21:59 PST

Comment on "Animal Spirits Revisited" (by Alexander Dow and Sheila Dow)

Robert Skidelsky — Fri, 09 Dec 2011 10:21:57 PST

Financialization of Art

Mark C. Taylor — Fri, 09 Dec 2011 10:21:55 PST

Art and money have always been inseparable. During the past several decades, however, this relationship has been transformed by a new form of capitalism—finance capitalism, which has been made possible by the networking of new information, media and communication technologies. This is a genuinely novel phenomenon whose global impact has become undeniable. In previous forms of capitalism (agriculture, industrial and consumer), people made money by buying and selling labor and material goods; in finance capitalism, by contrast, wealth is created through the circulation of signs backed only by other signs. The structure and development of financial markets mirror each other. As art becomes a progressively abstract play of nonreferential signs, abstract financial instruments increasingly create an autonomous sphere of circulation whose end is nothing other than the endless proliferation of monetary and financial signs. When the art of finance becomes the finance of art, art is no longer merely a commodity to be bought and sold, but becomes the currency of exchange fabricated for hedge funds and private equity funds, where it is traded like any other financial asset.

PSST: Patterns of Sustainable Specialization and Trade

Arnold Kling — Fri, 09 Dec 2011 10:21:53 PST

This essay offers an alternative way to look at macroeconomics. The current standard approach uses aggregate supply and aggregate demand (AS-AD). I call the alternative approach "patterns of sustainable specialization and trade" (PSST). The PSST approach combines many old and new strands in economics. It suggests that the economy is a highly complex system that is constantly adapting to new circumstances, especially opportunities created by technological innovation. We can view employment fluctuations as a reflection of the difficulty that markets sometimes have in making the necessary adjustments, so that for a period of time some workers have extremely low marginal revenue product and as a result become unemployed.

Animal Spirits Revisited

Alexander Dow et al. — Fri, 09 Dec 2011 10:21:50 PST

The term ‘animal spirits’ has returned to academic and public discourse in a way which departs significantly from the original use of the term by Keynes. The new behavioural economics literature uses the term to refer to a range of behaviour which falls outside what is normally understood as rational. This treatment follows from the mainstream dichotomisation between rationality and irrationality. However, Keynes explained that, given fundamental uncertainty, rationality alone was insufficient to justify action. Animal spirits was the name he gave to the (psychological) urge to action which explained decisions being taken in spite of uncertainty; animal spirits for him were neither rational nor irrational. Nor are they beyond analysis. We explore how the nature and role of animal spirits can vary according to context (as between different sectors, types of firm and within firms). This analysis indicates ways in which policy can promote structural change to strengthen animal spirits in the long term as well as offset short-term weakening in animal spirits.

Comment on "Corporate Strategy and National Institutions: The Case of the Man-Made Fibres Industry" (by Geoffrey Owen)

John Sutton — Tue, 23 Aug 2011 11:28:05 PDT

Comment on “The Complex Economic Organization of Capitalist Economies” (by Richard R. Nelson)

Rogers Hollingsworth — Tue, 23 Aug 2011 11:28:03 PDT

Comment on "Implementing a Macroprudential Framework: Blending Boldness and Realism" (by Claudio Borio)

Charles W. Calomiris — Tue, 23 Aug 2011 11:28:01 PDT

Corporate Strategy and National Institutions: The Case of the Man-Made Fibres Industry

Geoffrey Owen — Tue, 23 Aug 2011 11:27:58 PDT

This article discusses the impact of national policies and institutions on the strategies that companies adopt when they are faced with disruptive changes in their external environment. The article focuses on the man-made fibres industry in the U.S., Western Europe and Japan between 1980 and 2010 and describes the different ways in which the leading fibre manufacturers in those regions responded to the shift in textile, clothing and later fibre production to low-cost countries, principally in Asia. These companies had to decide whether they could continue to compete profitably in the man-made fibres industry, and, if not, what non-fibre businesses they should invest in. In countries such as the U.S. and the UK, where capital markets are powerful and companies are under pressure to enhance shareholder value, virtually all the former leaders have withdrawn from the industry and a set of new entrants, including private equity firms, have taken their place. In Japan, by contrast, leading companies such as Toray and Teijin remain committed to man-made fibres, although they have also diversified in other directions. Despite the increasing role of Anglo-American investors in Japan, Japanese companies see themselves as responsible to a broad range of stakeholders, not just to shareholders; the continuity of the enterprise and of employment is given a higher priority than in the U.S. or the UK. In Continental Europe, the restructuring of the man-made fibres industry has involved numerous divestments and demergers, and this partly reflects the growing influence of Anglo-American investors, but in some of these countries the stakeholder view of the enterprise continues to carry considerable weight. Lenzing in Austria, which is now the largest European man-made fibre manufacturer, is an example of a company which has combined commercial success with a strong sense of responsibility to the region where its main factory is based. In reviewing these different strategies the article shows how Japanese-style “long-termism” can be a source of strength in certain industries such as carbon fibre, but has the disadvantage of allowing companies to persist for too long with low-return businesses which might do a better under different owners. Some further movement towards the Anglo-American model is likely in Japan and in Continental Europe, but these countries have a different view of what companies are for, and this will continue to affect how their companies respond to industrial change.

The Complex Economic Organization of Capitalist Economies

Richard R. Nelson — Tue, 23 Aug 2011 11:27:56 PDT

The ideology of how economic activity is organized in capitalist economies is sharp and simple — markets. However, in reality, economic activities in capitalist economies are organized in a variety of different ways, market organization prominent among them but not totally dominating. The basic argument of this paper is that capitalist economies should be understood as mixed economies.

Implementing a Macroprudential Framework: Blending Boldness and Realism

Claudio Borio — Tue, 23 Aug 2011 11:27:54 PDT

There is now a broad consensus in the policy community that strengthening the macroprudential orientation of regulatory and supervisory frameworks is essential for the promotion of financial stability. The window of opportunity to put in place fully fledged macroprudential frameworks should not be missed. Meeting this challenge calls for a finely balanced blend of boldness and realism. Boldness is required to face the hard design questions head-on; realism to avoid overreach and to manage expectations. Policymakers should be as ambitious as possible, but no more. In all this, research has an important role to play in allowing the framework to grow at a pace commensurate with our knowledge. This speech considers how to strike the balance between boldness and realism in several aspects of the framework: in the criterion for judging its success; in how closely systemic risk should be tracked; in the mix between an aggregate and a sectoral approach; in that between rules and discretion; and in governance arrangements. It also highlights some key questions for research.

The Ghosts of Corporatism’s Past and Past Corporatisms: Commentary on Three Articles

Mark Blyth — Wed, 05 Jan 2011 14:16:03 PST

The Constitutional Economy of Dynamism and Inclusion: An Inquiry into the Causes of Argentine Economic Decadence

Juan Vicente Sola — Tue, 14 Dec 2010 17:09:52 PST

The constitutional structures and traditions that promote corporatism are the main obstacles to economic dynamism and inclusion in societies. Corporatism is the cause of Argentina’s “reversal of development” from the 1930s to the present. If the normative and imperative rules in Constitutions change both incentives and culture, some questions arise: how should we design Constitutional rules that promote economic dynamism? At the same time, is a bad political economy, as occurs in a corporatist economy, promoted by government officials because it allows their perpetuation in government? A corporatist economy could be the basis of a perverse political culture where utility-maximizing leaders will embark on destructive economic policies to enhance their own personal power unless they are appropriately constrained. The Argentine Constitutional economy has both poor incentives and a poor Constitutional culture, which prevent the development of both dynamism and inclusion. Strategic political considerations push rulers into bad economic policies. At the same time, a strong corporate culture favours the resulting mix of authoritarianism, stagnation and social exclusion.

Corporatism and the Ghost of the Third Way

Randall K. Morck et al. — Tue, 14 Dec 2010 17:09:49 PST

An economic system called corporatism arose in the late 19^th century, promoted by Anti-Cartesian French intellectuals dismayed with the “disenchantment of the world” Weber attributed to capitalism, and by a Roman Catholic church equally dismayed with both liberalism and socialism. Corporatism recognizes the innate inequality of human beings and their need for secure places in a legitimate hierarchy and thus puts the police power of the state behind officially sanctioned Corporations, elite-controlled industrial group cartels empowered to set wages, prices, employment, and quotas, to regulate entry, and to limit imports. Corporatism was to end the class struggle by guaranteeing workers their accustomed jobs and incomes and by delegating traditional authority through a principle of subsidiarity. We argue that countries that adopted corporatism most fully — those with Roman Catholic majorities or French-educated elites — experienced substantial financial development reversals and retain legacy Corporatist institutions that continue to retard financial development and growth.

Promoting Innovation: The Law of Publicly Traded Corporations

Merritt B. Fox — Tue, 14 Dec 2010 17:09:45 PST

Improving economic welfare requires that society’s scarce savings be allocated among proposed real investment projects in a way that appreciates the prospects of promising new innovations. Corporate and securities law help structure important elements of this process of allocation. This article sketches out an approach based upon a seemingly paradoxical analogy of a market economy’s overall finance process to the way a hierarchical organization gathers and processes relevant bits of information dispersed among many individuals in order to make decisions. It thereby takes advantage of important thinking in communications and organizational theory about how to make organizations sensitive to the potentialities of new information and ideas.

The analysis suggests that established firms should pay out a relatively high portion of their cash flows. There should be a substantial venture capital sector and an active market for IPOs. Primary and secondary market prices should be relatively accurate. Incumbent managers of established firms should be judged in part by the medium term share price performance of their firms and poor performers should be under threat of replacement.

A comparison of four moments in economic history—the United States in the 1970s and 1980s, Japan since 1995, continental Europe since the 1995, and the United States since the 1995—supports these conclusions. The United States since 1995, relative to the other three moments in economic history, has had the least capital deepening and the fastest rate of growth in productivity per hour worked. It has also had, relative to the other three moments, a finance system most closely resembling what is called for here.

Achieving such a system requires rigorous, effectively enforced securities disclosure and anti-fraud laws. Corporate law must leave poorly performing incumbent management vulnerable to removal by hostile tender offer, or shareholder or independent board vote. Share price based compensation must be legally practical. And there must be serious constraints on non-pro-rata distribution among shareholders of the wealth created by the firm.

Commentary on Three Papers

Andrew J. Oswald — Tue, 26 Oct 2010 15:49:16 PDT

The Financial Crisis: Joblessness and Investmentlessness

Gylfi Zoega — Tue, 26 Oct 2010 15:49:15 PDT

Financial crises follow a pattern that consists of changes in asset prices, real exchange rates, investment and employment. One noteworthy feature of this pattern is the “jobless recoveries” that often follow such crises. This was the experience of Finland and Sweden in the aftermath of their financial crises in the early 1990s and currently appears to be the case in the United States and many other countries. The behavior of unemployment during the crises mirrors that of investment, which is consistent with models of the natural rate of unemployment that make labor demand depend on investment in physical capital, new workers and customers. The implication is that the natural rate of unemployment falls during the investment boom that precedes a crisis and rises in its aftermath.

The Slump, the Recovery and the “New Normal”

Edmund S. Phelps — Tue, 26 Oct 2010 15:49:13 PDT

Macroeconomic Effects of Over-Investment in Housing in an Aggregative Model of Economic Activity

Hian Teck Hoon — Tue, 26 Oct 2010 15:49:11 PDT

Is there a theoretical basis for the view that the end of a period of over-investment necessarily leads to a period of below-normal employment as the excess capital stock is run down? We study the repercussions of a false boom in housing driven by prior expectations of future housing prices not justified by fundamentals. When these expectations are corrected, the result is a precipitous drop in housing prices and, on that account alone, some drop in employment. There is also a bulge in the housing stock. In the case of a closed economy, the downward shift of the term structure of interest rates due to the excess housing stock props up housing prices above the normal steady-state level, so the drop of housing prices “undershoots.” Although this transient elevation of housing prices has a positive demand-wage effect on employment, we show that the wealth effect from owning a higher housing stock and a negative Hicks-Lucas-Rapping effect of lower interest rates dominate, so employment drops initially to a below-normal level. The slump gradually subsides as the housing overhang wears off. In the case of a small open economy that faces a world of perfect capital mobility and takes as given the world interest rate, there are two possibilities. If housing services are instantaneously tradeable and perfect substitutes for foreign ones so that purchasing power parity holds, the end of the bubble causes housing prices to drop precisely to the steady-state level. Since there is no undershooting, the wealth effect of the housing overhang is unopposed and the slump is deeper. If domestic and foreign housing services are imperfect substitutes, the country will suffer a period with a weak real exchange rate, thus leading to a drop of housing prices that “overshoots” the normal level. Here, the slump in employment is worsened by the exaggerated fall in housing prices below the steady-state level.