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REGULATION THEORY IN A NUTSHELL And a brief comparison with SSA Robert Boyer Paris-Jourdan Sciences Economiques (PSE, CNRS-EHESS-ENS-ENPC) Political Economy Research Institute (PERI, Thompson Tower, 9th floor, University of Massachusetts, Amherst March 26, 2008 INTRODUCTION 1.The origin : surprising structural evolutions of the 70s: - Productivity slow-down in the US - Rising unemployment in Europe - Stagflation: inflation and recession ..At odds with conventional theories: - Keynesian macroeconometric models - Neoclassical labour market theory - Marxian prognosis 2.The intellectual inspiration: - Kaleckian macroeconomy of capital accumulation -The Annales school of economic and social history -Theory of habitus as alternative to homo oeconomicus rationality 3. An eclectic but controlled use of methods: - Diagnose the key social relations of the society under investigation - Analyse the precise form taken by these social forms via the emergence, maturation and crisis of the related institutional forms -Explicit the logic implied for individual and collective behaviour - Collect the relevant statistical indexes and look for regularities by econometric methods - Check if partial régulations define a viable macroeconomic regime A SYNOPTIC VIEW OF THE PRESENTATION 1. From general equilibrium theory (GET) to the diversity of imperfect market economies 2. Régulation theory (RT) in a nutshell: an analysis of economic institutional architectures 3. An analysis of crises and changing patterns through time and space 4. How many régulation modes ? 5. The era of globalization: a renewed diversity of institutional configurations 6. The era of financialization: RT and SSA II. FROM GENERAL EQUILIBRIUM THEORY (GET) TO THE DIVERSITY OF IMPERFECT MARKET ECONOMIES The generalization of GET has failed Table 1 – In real economies, as many market failures as efficient markets The belief in self regulated markets has been eroded Table 2 – The promises and the deliveries of the free marketers The interest and limits of game theory: ad hoc rules of the game Diagram 1 – From general equilibrium theory to game theory: analyses by domains but not any theory for the complete economic system GENERAL EQUILIBRIUM THEORY GAME Removing some key hypotheses No auctioneer Asymmetric information Missing future markets Strategic interplay between agents Increasing returns Imperfect competition THEORY Alternative solution concepts ° Multiple equilibrium ° Unstable equilibrium ° Micro behavior does not imply any definite aggregate regularity Rational expectations Statistical Theory of aggregation Coordination of monetary economies Representative Temporary agent equilibrium or + disequilibrium Rational theory expectations SONNENSCHEIN R. LUCAS J.P. J.M. T. BENASSY GRANDMONT SARGENT J.M. W. HILDENBRAND GRANDMONT No Walrasian equilibrium for credit or labor markets J. STIGLITZ Intertemporal models with overlapping D. CASS New Keynesian Theory The role of norms and social justice on market Models with overlapping generations P. HOWITT P. WEIL G. P. AKERLOFF SAMUELSON R. SOLOW Endogenous technical change and growth P. ROMER (1990) Repeate d games Oligopolistic competition and unemployment Experimental economics New industrial economics J.P. BENASSY C. PLOTT A. ROTH J. TIROLE Applied game theory New labor economics Credibility of economic policies F. D. LAZEAR COHEN International economics P. KRUGMAN A basic issue: what are the actual institutions and the rules of the game? III. RÉGULATION THEORY IN A NUTSHELL The macroeconomic consequences of institutional forms Diagram 2 – Starting from Marxian theory to understand the institutions of capitalism : « regulation theory » in a nutshell THE CAPITAL/LABOR RELATION OF PRODUCTION Capitalist Production Mode Accumulation law A set of INSTITUTIONAL FORMS An ACCUMULATION REGIME A REGULATION MODE Which makes viable MORE GENERAL CATEGORIES THE MARKET RELATION OF EXCHANGE WAGE-LABOR NEXUS FORM OF COMPETITION INTERMEDIATE CATEGORIES NATURE OF MONETARY CONSTRAINT WAGE AND PRODUCTIVITY DYNAMICS PRICE FORMATION CREDIT, MONEY AND INTEREST RATE OBSERVED VARIABLES The post WWII institutional architecture and growth regime: the Fordism Diagram 3 – The post WWII capital labor accord shaped most other socio-economic institutions IV. NO INSTITUTIONAL ARCHITECTURE IS STABLE FOR EVER: three sources of crisis The success leads to institutional obsolescence: endogenous structural crisis Diagram 4 – From emergence to maturation and crisis Degree of coupling of institutions Reversal of previous favourable trends Emerging inertia High Sophistication of rules and deepening of complementarity Entering into crisis and decay of an institutional configuration Actors perceive a complementarity Uncertain coherence Low Change in the context Series of innovations Incentive for the search of new configurations New configuration Maturation Aging Decay and destruction Time Competing with other economies and adapting foreign institutional forms: hybridization Diagram 5 – Hybridization and endometabolism, two factors of institutional change: the joint evolution of American and Japanese trajectories Henry Ford’s vision Obstacles to its implementation (1913) Actual American Fordism UnitedStates STRUCTURAL Rise… and maturation CRISIS OF AMERICAN Endometabolism Hybridization Obstacles to the adoption Financialisation FORDISM Crisis of a finance-led growth regime Endometabolism Exacerbates American crisis Exacerbates Japanese crisis Hybridization Hybridization Adaptation process Japan Invention of Toyotism Rise and success STRUCTURAL CRISIS OF Slow and uncertain growth TOYOTISM Endometabolism 1900’s World War I World War II Oil shocks Financial globalization 2000’s The leading role of political alliances POLITY: Sets the rules of the game Makes strategic choices ECONOMY: It affects the bargaining power of groups and actors Building a governmental coalition It builds an economic regime and its evolutions Consequences elections for Impact upon political support The emerging new institutional architecture of the 90s The Hierarchical position of the international economy and the financial regime Diagram 6 – The new hierarchy of institutional forms in contemporary Europe IV. HOW MANY REGULATION MODES? FOUR REASONS FOR CONTRASTED BRANDS OF CAPITALISM The recent advances of micro economic theory of imperfect information: as soon as no complete contract can be drafted, nor all contingent markets organized, many second best solutions can be given to the same economic issue (J. Stiglitz, 1987). Since the functional role of economic institutions is not explaining their origin, their variety explicitly derives from the intricacy of the political process (D. Hibbs, 1987) which leads to institutionalized compromises. Specialists of technical change and evolutionary economists have developed fairly sophisticated models built upon the role of increasing returns to scale (G. Dosi, 1988; 1991). Then, initial choices, which seemed marginal and reversible, turn out to propel the economic system along a trajectory, featuring strong a path dependency (B. Arthur, 1994). The same evolutionary framework can be extended to the analysis of co-evolution and the complementarity of institutions, organizations and economic specialization (M. Aoki, 1995). The central issue is the compatibility of a complete institutional architecture. Régulation theory findings (RT): at least four institutional architectures Table 4 – The diverse nature of capitalism in Regulation Theory REGULATION MARKET-ORIENTED MESO-CORPORATIST STATIST SOCIAL-DEMOCRATIC 1. OVERALL LOGIC AND HIERARCHICAL PRINCIPLE Commercial logic is the organising principle for almost all of the institutional forms Principle of solidarity and mobility in an economic unit that is large in size and diverse in output terms Economic circuit shaped by public interventions in areas like production, demand and institutional codifications Social partners negotiate rules governing most aspects of society and the economy 2. IMPLICATIONS FOR INSTITUTIONAL FORMS Wage labour nexus Significant decentralisation of wage bargaining, individualisation of pay and segmentation of labour market. Wage compromise within large companies but pay hikes are synchronised Trend towards a strong institutionalisation of rules on employment, working hours, wages and social benefits Traditionally with a centralisation of collective negotiations, under a constraint of short and medium-term competitiveness Competition Concentration restricted by legislation, reshuffling from one oligopolistic type of competition to another Relatively intense in the product markets, involving big companies with activities in many different markets Moderate seeing as it is channelled by by public regulations or by professional associations, with high degree of capital concentration Small number of big firms (that are also highly internationalised and thus have to compete) Money and finance Central bank is independent, financial market logic prevails, financial innovations proliferate, companies are tightly run by a financial logic Role of main bank and keiretsu in funding and capital allocation. State authorities (financial supervisors/Central Bank) have tight control State has tight control over credit and monetary policies. Traditionally the Central Bank has had little autonomy to speak of, the financial sphere having played a crucial role Most funding is by the banking sector. Monetary policy aims to enhance employment and at a later date competitiveness The State Fragmented into series of agencies and control entities, growth possibilities are highly restricted because of competition in the political marketplace Ensures services the big running. role provision of collective plus coordinations that firms are incapable of Small size but significant Strong quantitative and qualitative development of State interventions: nationalised companies, regulations, public spending, social benefits, etc. Multitude of public interventions lead to financial transfers and extensive and restrictive regulations Insertion into international system Adhesion to free trade principles, degree of autonomy varies depending on status and size (differences Us vs. UK) Trade and finance-related choices are conditioned by imperative of technological and economic development. Traditionally with a a tight State control over external relations (tariffs, norms, quotas, restrictions on financial flows). Acceptance of competitiveness principle based on technological and organisational innovation Table 4 – The diversity of economies nature in Regulation Theory REGULATION MARKET-ORIENTED MESO-CORPORATIST STATIST SOCIAL-DEMOCRATIC 3. CHARACTERISTICS OF THE MODE OF REGULATION Regulation very marketoriented, controlled by sophisticated legal mechanisms Large companies, the market and the State make adjustments at the meso-economic level State at heart of macroeconomic adjustments, with markets and firms adapting to its rules Tripartite bargaining (employersunions-State) lies at the heart of institutional reforms Innovation Schumpeterian waves predicated on radical innovation, preponderance of a patent-based logic and individualisation of benefits derived from innovation Aptitude to copy and adapt products and processes by operating incremental yet profitable innovations Radical innovation supposing major investments and a long-term time frame. Adaptation of Fordist (i.e. relatively centralised) innovations Innovations are focused on resolving social and economic problems, be they marginal or radical.. Specialisation Sectors tied to radical innovation: IT, space, pharmacy, finance and leisure industry. Sectors requiring major coordination efforts and mobilising a localised but cumulative type of competency: auto, electronics, robotics Sectors involved in major public infrastructures: transportation, telecom, aeronautics, space, arms industry, etc. Sectors tied to social demand (health, security, environment. etc.) or exploit natural resources through technological recovery 4. EFFECTS ON: Source: Amable, Barré, Boyer [1997: 194-195] They display quite contrasted sources of innovation and growth Market-led capitalism: linking basic science with business University High Quality Market for scholar Segmented labor market Education System Pressures toward research Non skilled workers relative wage declines Few professional and technical tracks Diagram 7 – Market led configuration Less demand for low skilled workers + Large patenting Implementing the new productive paradigm is difficult Rising inequalities Diffusion/ Protection Pharmaceuticals Specialization in activities with codifiable knowledge Fordist industries decline but sunrise industries Publishing High tech + Risk Capital + Financial Market Close project assessment but short termism Reluctant Investment in industries with long run maturity Growth External trade deficit Meso corporatist capitalism: coordinating a series of incremental innovations Diagram 8 – The “mesocorporatist” configuration University selection of elite Segmented and interdependent labor market Few basic research Large firm Sub-contractors Secondary education system Homogeneity of formation, selection of individuals Low inequality Little basic research done by firms Learning localized knowledge Anticipation of forthcoming specialization Large diffusion of new products Incremental innovation Quality based competition Automobile Electronics Specialization in durable goods Robotics + Permanent upgrading of the industrial structure Growth + + Financial System Control by main bank, loose but long termist Internal capital Mobility Constructed competitive advantage Public Research and University Social-democratic capitalism: innovations related to public goods and education Labour Market ° Homogenous ° Centralised bargaining ( 1989) Education System Good basic education Retraining of workers Concern for basic research Social justice, and solidaristic values Patenting for resources intensive sectors, transport, equipment goods, biomedicine High wages economy Rather reduced income inequalities Natural Resources Small open economy High Value Added Industries Internationalisation of SSI Diagram 9 – Social democrat capitalism Few risk capital Periodic industrial restructuring Competitiveness by quality and service Specialisation in resources, intensive sectors, equipment, information Financial System Not very sophisticated, bank centred Growth constrained by competitiveness Public Research Institutes State led economy: the overwhelming role of public interventions Organized Labor Market Minimum wage Education System Basic education is public Extended welfare State Selection of elite Public spending led innovations Public interventions: codifying the rules of the game in quite all sectors Scientific discovery rarely linked to potential market demand Firms : Their organization is related to public interventions Public sector or public spending related sectors Congruent with the Fordist model Private Sector in charge of mass production Specialization : transport equipment, aircraft, weapon, pharmaceuticals Diagram 10 – The State led capitalism Competitiveness + Growth Financial market Bank credit Heavy State control Public finance circuit International System Stable VI. THE ERA OF GLOBALIZATION: STILL RENEWED DIVERSITY OF INSTITUTIONAL ARCHITECTURES A multiplicity of coordinating mechanisms, on top of the conventional opposition State versus market MODE OF COORDINATION AND INTEREST HORIZONTAL VERTICAL 1 Market 2 Firm 6 Association 5 Network OBLIGATION Diagram 15 – A taxonomy of the different coordination principles MOTIVE FOR THE ACTION DISTRIBUTION OF POWER 3 Community, Civil Society 4 State Source: as per Hollingsworth, Boyer [1997] None of these mechanisms is perfect: compensating the imperfection of one mechanism by the strength of another is a source of institutional resilience • Viable régulation modes instead a mythical perfect configuration Correct the limits of each institutional arrangement by another one: Markets monitored by associations or regulatory authorities State under the scrutiny of civil society (NGO) Associations operating under the surveillance of State The need for a complete architecture with checks and balances Within such a hierarchical system, the political order plays a key role: In overcoming discrepancies, conflicts, economic disequilibria The success of a régulation mode is up to the coherence of an institutional configuration Hence a multiplicity of capitalism brands Diagram 16 – Analysis of the variety of capitalisms as the expression of a combination of the four main principles of coordination The opening of national economies usually reinforce institutional diversity Diagram 17 – A mode of regulation’s different levels of adjustment in an open economy Follower countries Technological trajectory Repertory of coordination procedures Leader country Repertory of coordination procedures Specialisation Institutional forms and mode of regulation Technological trajectory Institutional forms and mode of regulation 1 Stability: Homeostatic equilibrium 2 Revision of market share 3 .Adjustment of institutional forms 4. Structural crisis: need to revise repertory Unless financial instability promotes short run flexibility Diagram 18 – A general evolution towards short run efficiency at the cost of long run performance and social justice? The social constraints imposed by polity may tame the destabilizing trends of pure market mechanisms Diagram 19 – A third vision : the market mechanism is stabilized by social constraints imposed by polity VII. THE ERA OF FINANCIALIZATION AND ITS CRISES: RT AND SSA COMPARED SSA And RT: A new epoch for class alliances • H1 – Back to social history The 60s: a de facto compromise between managers and wage earners Consumers Patient financial market Managers Permissive international regime Wage-earners Strong links Weak links Direction of influence The 80s: An international competition led regime weakens the bargaining power of wage earners Consumers Gain from trade Managers More international competition Discipline Erosion of past compromise Wage-earners Strong links Weak links Direction of influence The 90s: The ex post alliance of investors and managers Consumers Transparency Managers Large and powerful financial markets Share holder value More risk Financialisation of income and pensions Wage-earners Strong links Weak links Direction of influence The 2000s: The emerging tensions within the finance industry and the rise of the lawyer State, as the last resort THE LAWYER Institutional Investors Managers Auditors Financial Analysts Rating Agencies Fund Mangers Pension funds Flow of information Financial flow Intermediation of conflicts and related income SSA And RT : A finance led accumulation regime • P1: Financialization is part of a long term structural transformation of contemporary capitalism, after the crisis of Fordism International opening Regained power of managers Erosion of wageearners bargaining power Crisis of the Fordist growth regime Conservative backlash Demand addressed to managers = shareholder value Surge of CEO compensation Acceptance of pension funds Inflow on the stock market Financial deregulation Multiple innovation in finance Financial bubble • P2: An accumulation regime at odds with Fordism: the centrality of the stock market + Dividends and Pension funds + High stock market price + Easy access to credit Profit + + Consumption + Production + Employment Diffusion of Financial norms - Careful management of investment + Globalised Financial regime Shareholder value as a new form of competition and governance mode Highly reactive wage labour nexus • The multiple channels of financialization + Monetary policy, Financial market stabiliser + Limitation of public borrowing G Credibility of Government actions - Public expenditure + Stock Market prices F E Tax system favourable to the most mobile factors + + + Industrial specialisations, Financial concentration Raising the required rate of return - Productive investment A FINANCIAL SYSTEM Management of firms for shareholders B + + Labour contract flexibility + + Productive capacity “Patrimonial” Equity based Household behaviour C Privatisation of elements of social security D Wealth effect on Savings/Consumption Allocation + + Current consumption + Pensions via stock market Purchase of housing and durable goods + + + Effective demand - Employment, wages + + + Profit Secured borrowing + • P3: This regime is generating speculative bubbles that burst out… • …But are cured by an active monetary policy… • …And the positive impact of financial innovations… • …For instance the securitisation first prevents the fragility of banks A strong paradox: an unstable accumulation regime rescued by the deepening of financial innovations • …But private innovations, such as subprime loans, exploit this opportunity to shift the risk… • …The boom of this market reaches its limits, the reversal of confidence challenges macroeconomic stability… • …And again the Central Bank is the rescuer of last resort in order to preserve the viability of the financial system Figure 1 – A typical sequencing of financial crises Viability of the regulated innovation New cycle Regulation by the government Lender as a last resort Private innovation Success / High profit Rapid adoption Entry in the zone of financial fragility No public intervention: collapse of the innovation Figure 2 – A first example: energy derivatives and the ENRON collapse Energy derivatives Potential for new crisis A structural weakness Unprecedented profit Creative accounting Bankruptcy Prevention from any public control by lobbying But not any reform of accountability principles New rules of accountability for CEO and CFO Figure 3 – A second example: rise and collapse of Northern Rock Financing by bonds of mortgage loans High profit / Rapid capture of market shares More bonds issued Banking run No reaction of Financial Service Agency A failed innovation Worsening of the crisis Conflict between Bank of England, Treasury, FSA Nationalization of Northern Rock Initially, Bank of England did not bail out Search for self regulation Systemic crisis Figure 4 – A third example: the sub-prime mortgage Sub-prime mortgage Searching for new regulations A systemic financial crisis New and growing market Securitization shift the risk Reversal of the housing market Absence of public regulation Melting down of the subprime market Limited FED intervention Unlimited access to liquidity from FED Mergers among banks Recapitalization by sovereign funds A creeping banking crisis Diffusion of Non Performing Assets (NPA) Figure 5 – The impact of globalization and financial deregulation on emerging countries crises Easier access to external financing Deregulation of domestic financial system Strengthening of the financial accelerator From boom to crisis Brutal reversal of capital flows Major crisis IMF orthodoxy is challenged Large Central Bank reserves Possible regional financial intermediation Search for alternatives to foreign saving driven growth Structural reforms • P4: The financial led regime cannot be universal COUNTRIES PARAMETERS 1.Average propensity to consume (1996) United States Great Britain Canada Japan Germany 0.95 0.926 0.956 0.869 0.884 France 0.908 1.Wealth in shares/ disposable income (1997) % 145 75 95 30 25 20 3. Extent of capital gains /disposable income (%) 35.5 15 11 -7 7 5 4. Proportion of shares and bonds in households’ financial assets 28.4 52.4 n.a. 25.3 21.3 1.Monetary market rate 1.Return on bonds 1.Reference profitability 5.34 6.51 12%-16% 7.38 5.59 5.20 0.32 3.5 7.30 1.06 3.97 5% 6% -7% 12%-16% 12 - 16% 14.5 3.46 4.23 9% • Actually, in other OECD countries alternative alliances may exist and govern different accumulation regimes Managerial expertise THE AMERICAN FIRM Governance under shareholder value The firm as a bundle of competences Financial capital Firm specific competences ESOP Employee ownership/ co-management THE GERMAN FIRM THE JAPANESE FIRM CONCLUSION C1 Actually existing economies drastically differs from pure market economies. C2 Thus many mechanisms explain significant institutional differences: imperfection of information, increasing returns, coevolution of technology and institutions, and the role of polity in the emergence of most economic institutions. C3 International trade reinforces institutional competitive advantage of each economy but financial globalization may affect adversely non market led economies. C4 Market led economies should not be the benchmark since at least four or five distinctive configurations coexist among OECD countries (probably much more among emerging countries) and generally do not deliver Pareto inferior outcomes. C5 Each configuration has significant margins of development and flexibility, but conversely sources of weaknesses and fragilities. The task of the economist is to diagnose them. C6 Financialization is diffusing all over the world, but only the US experienced a finance-led accumulation regime. C7 The present sub-prime crisis is an evidence for a general interpretation of financial crises: private innovation but lagging surveillance and public control. Thank you for your attention Robert BOYER PSE (Paris-Jourdan Sciences Economiques) 48, Boulevard Jourdan 75014 PARIS, France Tél. : (33-1) 43 13 62 56 – e-mail : [email protected] web site : http://www.jourdan.ens.fr/~boyer/