The rediscovery of networks_ past and present – An economists by jrskeirwta

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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                                                                                                                                                  GAME
EQUILIBRIUM                                      Removing some key hypotheses                                 Strategic interplay
  THEORY                                                                                                       between agents                             THEORY



                                 No                       Asymmetric          Missing            Increasing               Imperfect         Alternative
                              auctioneer                  information      future markets          returns               competition         solution
                                                                                                                                             concepts

° Multiple equilibrium
° Unstable equilibrium
° Micro behavior does
not imply any definite
  aggregate regularity

                      Rational        Coordination of         No Walrasian       Intertemporal         Endogenous                           Repeate              Applied
                    expectations     monetary economies      equilibrium for      models with        technical change                       d games                game
                                                             credit or labor      overlapping           and growth                                                theory
                                                                 markets                                P. ROMER
                                                              J. STIGLITZ          D. CASS                 (1990)


 Statistical Representative    Temporary           New          The role of     Models with          Oligopolistic       Experi-          New          New      Credibi-    Interna-
 Theory of       agent       equilibrium or      Keynesian      norms and       overlapping          competition          mental        industrial     labor     lity of      tional
aggregation        +         disequilibrium       Theory       social justice   generations              and            economics      economics      econo-   economic      econo-
                Rational         theory                         on market                           unemployment                                       mics     policies       mics
              expectations
SONNENSCHEIN    R. LUCAS           J.P.          P. HOWITT          G.       P.                     J.P. BENASSY        C. PLOTT          J.           F.     D.              P.
      J.M.          T.         BENASSY             P. WEIL      AKERLOFF SAMUELSON                                      A. ROTH        TIROLE        LAZEAR COHEN          KRUGMAN
 GRANDMONT      SARGENT           J.M.                          R. SOLOW
W. HILDENBRAND              GRANDMONT
   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                          MORE
                                      Production      Accumulation        GENERAL
                                        Mode              law            CATEGORIES
    THE MARKET RELATION OF
    EXCHANGE



    WAGE-LABOR NEXUS

                                        A set of         An              INTERMEDIATE
    FORM OF COMPETITION             INSTITUTIONAL   ACCUMULATION
                                        FORMS          REGIME            CATEGORIES

    NATURE OF MONETARY
    CONSTRAINT



    WAGE AND PRODUCTIVITY
    DYNAMICS

                                        A                                 OBSERVED
    PRICE FORMATION                 REGULATION      Which makes viable
                                       MODE                               VARIABLES

    CREDIT, MONEY AND INTEREST
    RATE
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                                                                                        Reversal of
coupling of                                                                                         previous
institutions                                                                                       favourable
                                                                                                     trends
                                                                                       Emerging
                                                                                        inertia
  High

                                                             Sophistication of rules                                                         Entering into
                                                               and deepening of                                                              crisis and decay
                                                               complementarity                                                               of an institutional
                                                                                                                                             configuration

                                             Actors perceive a
                                             complementarity


                                 Uncertain                                         Change in the
                                 coherence                                           context


    Low              Series of
                   innovations
                                                                                                           Incentive for the search of new
                                                                                                                   configurations                         Time


                   New                        Maturation                          Aging                           Decay and
               configuration                                                                                      destruction
   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
United-                           American                Rise…
                                                                                 STRUCTURAL                                               Crisis of a
                                                                            CRISIS OF AMERICAN              Financialisation          finance-led growth
States                            Fordism             and maturation
                                                                                      FORDISM                                               regime



                                                 Endometabolism                                        Endometabolism
                                       Obstacles to                    Exacerbates                                             Exacerbates    Hybridization
                  Hybridization        the adoption                      American
                                                                                       Hybridization                             Japanese
                                                                             crisis                                                  crisis


                                       Adaptation
                                        process

                                                                            Rise                 STRUCTURAL
Japan                                           Invention
                                                                             and                                                  Slow and uncertain
                                                   of                                             CRISIS OF                            growth
                                                Toyotism                   success
                                                                                                   TOYOTISM

                                                                                      Endometabolism

1900’s        World War I          World War II                        Oil shocks                              Financial             2000’s
                                                                                                             globalization
The leading role of political alliances

                                  POLITY:


                        Sets the rules of the game
                                                              ECONOMY:
                        Makes strategic choices




                                                            It affects the bargaining
     Building a governmental                                power of groups and
      coalition                                              actors


                                                          It builds an economic
                                                          regime and its evolutions


            Consequences       for
             elections




                                 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   Principle of solidarity and mobility    Economic circuit shaped by public       Social partners negotiate rules
                    organising principle for almost      in an economic unit that is large in    interventions     in     areas like     governing most aspects of society
                    all of the institutional forms       size and diverse in output terms        production,        demand      and      and the economy
                                                                                                 institutional codifications
2. IMPLICATIONS FOR INSTITUTIONAL FORMS
Wage labour nexus   Significant decentralisation of      Wage compromise within large            Trend      towards      a   strong      Traditionally with a centralisation of
                    wage                bargaining,      companies but pay hikes are             institutionalisation of rules on        collective negotiations, under a
                    individualisation of pay and         synchronised                            employment,        working  hours,      constraint of short and medium-term
                    segmentation of labour market.                                               wages and social benefits               competitiveness
Competition         Concentration restricted by          Relatively intense in the product       Moderate seeing as it is channelled     Small number of big firms (that are
                    legislation, reshuffling from one    markets, involving big companies        by by public regulations or by          also highly internationalised and
                    oligopolistic type of competition    with activities in many different       professional associations, with         thus have to compete)
                    to another                           markets                                 high      degree     of      capital
                                                                                                 concentration
Money and finance   Central bank is independent,         Role of main bank and keiretsu in       State has tight control over credit     Most funding is by the banking
                    financial market logic prevails,     funding and capital allocation.         and         monetary       policies.    sector. Monetary policy aims to
                    financial innovations proliferate,   State     authorities  (financial       Traditionally the Central Bank has      enhance employment and at a later
                    companies are tightly run by a       supervisors/Central Bank) have          had little autonomy to speak of, the    date competitiveness
                    financial logic                      tight control                           financial sphere having played a
                                                                                                 crucial role
The State           Fragmented into series of            Ensures     provision of collective     Strong quantitative and qualitative     Multitude of public interventions
                    agencies and control entities,       services   plus coordinations that      development of State interventions:     lead to financial transfers and
                    growth possibilities are highly      the big    firms are incapable of       nationalised            companies,      extensive and restrictive regulations
                    restricted     because       of      running.   Small size but significant   regulations,     public  spending,
                    competition in the political         role                                    social benefits, etc.
                    marketplace
Insertion into      Adhesion       to   free     trade   Trade and finance-related choices       Traditionally with a a tight State      Acceptance      of   competitiveness
international       principles, degree of autonomy       are conditioned by imperative of        control over external relations         principle based on technological and
system
                    varies depending on status and       technological   and     economic        (tariffs, norms, quotas, restrictions   organisational innovation
                    size (differences Us vs. UK)         development.                            on financial flows).
                  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      market-   Large companies, the market and     State at heart of macroeconomic      Tripartite bargaining (employers-
                   oriented,      controlled     by    the State make adjustments at the   adjustments, with markets and        unions-State) lies at the heart of
                   sophisticated legal mechanisms      meso-economic level                 firms adapting to its rules          institutional reforms
4. EFFECTS ON:
  Innovation       Schumpeterian            waves      Aptitude to copy and adapt          Radical innovation supposing         Innovations are focused on resolving
                   predicated       on     radical     products and processes by           major investments and a long-term    social and economic problems, be
                   innovation, preponderance of a      operating      incremental yet      time frame. Adaptation of Fordist    they marginal or radical..
                   patent-based      logic    and      profitable innovations              (i.e.    relatively   centralised)
                   individualisation of benefits                                           innovations
                   derived from innovation
 Specialisation    Sectors     tied   to radical       Sectors       requiring     major   Sectors involved in major public     Sectors tied to social demand
                   innovation:      IT,   space,       coordination        efforts  and    infrastructures:   transportation,   (health, security, environment. etc.)
                   pharmacy, finance and leisure       mobilising a localised but          telecom, aeronautics, space, arms    or exploit natural resources through
                   industry.                           cumulative type of competency:      industry, etc.                       technological recovery
                                                       auto, electronics, robotics



                                     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                           Segmented                             Education
                                            scholar                            labor market                            System


Diagram 7 – Market led configuration
                                       Pressures toward                         Non skilled                        Few professional
                                           research                           workers relative                      and technical
                                                                               wage declines                            tracks

                                                                                                 Less demand for
                                                                  +                                low skilled
                                                                                                     workers
                                                                                                                   Implementing the
                                       Large patenting                              Rising                          new productive
                                                                                  inequalities                        paradigm is
                                                                                                                        difficult



                                           Diffusion/
                                           Protection



                                                                              Pharmaceuticals                      Fordist industries
                                         Specialization in                                                              decline
                                          activities with                         Publishing                          but sunrise
                                       codifiable knowledge                                                           industries
                                                                                  High tech
                                                                                                               -
                                                                                       +
                                                   Risk                   -         Growth                          External trade
                                                 Capital                                                               deficit
                                                           Reluctant Investment
                                                            in industries with
                                       +                    long run maturity

                                          Financial
                                           Market
                                        Close project
                                       assessment but
                                        short termism
  Meso corporatist capitalism: coordinating a
      series of incremental innovations
                               University                       Segmented and                        Secondary
                                selection                       interdependent                        education
                                 of elite                        labor market                           system
                                                                                                   Homogeneity of
                                                                                                      formation,
                                                                                                       selection
                                                                                                    of individuals
                               Few basic                         Large firm

Diagram 8 – The “meso-
                                research                       Sub-contractors

                                                                                                        Low
corporatist” configuration                                                                           inequality

                                            Little basic           Learning
                                             research              localized
                                             done by              knowledge                        Large diffusion
                                               firms                                               of new products


                             Anticipation of
                              forthcoming                         Incremental                       Quality based
                             specialization                        innovation                        competition



                                  Automobile

                                  Electronics                   Specialization in
                                                                 durable goods
                                   Robotics
                                                                                              +

                                                                   Permanent              Growth
                                                                upgrading of the      +
                                                               industrial structure
                                                           +
                               Financial
                                System
                             Control by main                                                        Constructed
                             bank, loose but                    Internal capital                    competitive
                              long termist                         Mobility                          advantage
                               Public Research                                 Labour                           Education
                               and University                                  Market                             System
                                                                           ° Homogenous                    Good basic education

Social-democratic                                                         ° Centralised
                                                                             bargaining
                                                                             (    1989)
                                                                                                           Retraining of workers

                                Concern for

     capitalism:                   basic
                                 research
                                                            Social


 innovations related
                                                         justice, and
                                                     solidaristic values

                                  Patenting for                                 High                     Rather reduced


to public goods and
                               resources intensive                             wages                        income
                                sectors, transport,                           economy                     inequalities
                                equipment goods,
                                   biomedicine
                                                          Natural                                           Small

     education                                           Resources

                                                                             High Value
                                                                           Added Industries
                                                                                                            open
                                                                                                          economy




                                                Internatio-             Periodic              Competitiveness
                                               nalisation of           industrial              by quality and
                                                    SSI              restructuring                service




 Diagram 9 – Social democrat          Few
                                                                                      Specialisation in resources,
                                                                                     intensive sectors, equipment,

         capitalism                   risk
                                     capital
                                                                                              information

                                 -

                                 Financial
                                  System
                                 Not very                                               Growth constrained by
                               sophisticated,                                              competitiveness
                               bank centred
                               Public Research                                Organized                               Education
                                  Institutes                                 Labor Market                              System
                                                                            Minimum wage                       Basic education is

    State led                      Public
                                                                            Extended welfare
                                                                            State
                                                                                                               public

                                                                                                               Selection of elite


  economy: the                     spending
                                      led
                                 innovations


overwhelming role
                                                               Public
                                                          interventions:
                                                           codifying the
                                                         rules of the game


    of public
                                                            in quite all
                                                               sectors

                                 Scientific                                      Firms :
                              discovery rarely                            Their organization is                       Congruent


  interventions
                                  linked to                                 related to public                       with the Fordist
                              potential market                                interventions                              model
                                   demand


                                                        Public sector                             Private Sector
                                                              or                                   in charge of
                                                       public spending                            mass production
                                                        related sectors

                                                                            Specialization :                   +
                                                                                transport
                                                                               equipment,
                                                                            aircraft, weapon,
 Diagram 10 – The State led                                                 pharmaceuticals

        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
                                                                                    DISTRIBUTION OF POWER

                                                                            HORIZONTAL                    VERTICAL




                                       MOTIVE FOR THE ACTION

                                                               INTEREST
                                                                                1 Market                    2 Firm
Diagram 15 – A taxonomy of the
                                                                                                6
different coordination principles                                                           Association

                                                                                                5
                                                                                             Network
                                                               OBLIGATION



                                                                                  3                         4
                                                                            Community,                    State
                                                                            Civil Society




                                    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                                       Technological                    Leader country
                                 trajectory                                          trajectory

    Repertory of                                                                                                  Repertory of
    coordination                                Specialisation                                                    coordination
     procedures                                                                                                    procedures

                      Institutional forms and                                Institutional forms
                        mode of regulation                                    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


                          Rating Agencies                                           Financial Analysts



                                                                 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
                                        Demand addressed
 International       Regained power                                         Surge of CEO
                                         to managers =
   opening            of managers                                           compensation
                                        shareholder value



                   Erosion of wage-     Acceptance of       Inflow on the     Financial
                   earners bargaining   pension funds       stock market       bubble
                         power



  Crisis of the        Conservative       Financial           Multiple
 Fordist growth         backlash         deregulation       innovation in
    regime                                                     finance
  • P2: An accumulation regime at odds with
    Fordism: the centrality of the stock market
                                                                         +
 Dividends        +   High stock    +    Easy access                               Profit
     and               market                to
Pension funds           price              credit                +


                                                                         +
                                                           Consumption           Production


                                                       +                 +
                                                                                Employment
  Diffusion of        -    Careful management
Financial norms               of investment
                                                       +

    Globalised              Shareholder value as a                           Highly reactive
    Financial              new form of competition                            wage labour
     regime                 and governance mode                                  nexus
• The multiple channels of financialization

          +   Monetary policy,
              Financial market         +                         Limitation of        -         Public               +                        Stock Market
                  stabiliser                                   public borrowing               expenditure                                         prices
                                            G          F


                                     Credibility           E    Tax system favour-                                                                      +
                                 of Government ac-               able to the most         +
                                       tions                      mobile factors
                                                                                                                                          +


                            Industrial specialisa-                Raising the         -        Productive             +                            Profit
                            tions, Financial con-                required rate                 investment
                                 centration                        of return
                                                           A                                                 +                            +             -



                                 Management                B    Labour con-                    +                 Productive   Effective de-     Employment,
  FINANCIAL SYSTEM         of firms for sharehold-              tract flexibil-                                   capacity       mand             wages
                                     ers                              ity
                                                                                      -                                                                +
                                                                                                                      +

      +                       “Patrimonial” Eq-            C      Wealth effect on    +       Current con-
                            uity based Household                        Sav-                   sumption
                                  behaviour                      ings/Consumption
                                                                     Allocation

  +                                                                                   +
                                    Privatisation          D    Pensions via                  Purchase of             +
                                     of elements                stock market                  housing and
                                  of social security                                            durable
                                                                                                 goods
                                                           +                                        +


                                                                                  +           Secured bor-
                                                                                                 rowing
• 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      Regulation by the
  New cycle                 regulated            government
                           innovation

                                                                     Lender as a
                                                                      last resort


               Success                          Entry in the
  Private                            Rapid        zone of
               / High
innovation                          adoption     financial
                profit
                                                  fragility
                                                                     No public
                                                                   intervention:
                                                                   collapse of the
                                                                     innovation
          Figure 2 – A first example: energy derivatives and the

                            ENRON collapse




     Energy         Unprecedented                 Creative
                                                              Bankruptcy
    derivatives         profit                   accounting


                               Prevention from
Potential for
                              any public control
 new crisis
                                 by lobbying
                                                                   New rules of
                         But not any reform of                     accountability
   A structural
                            accountability                          for CEO and
    weakness
                              principles                                CFO
  Figure 3 – A second example: rise and collapse of Northern Rock


                 High profit /
 Financing by                                                    Initially, Bank
                 Rapid capture       More bonds     Banking
   bonds of                                                       of England
                  of market            issued         run
mortgage loans                                                    did not bail
                    shares
                                                                       out


                           No reaction
                                                                  Worsening
                           of Financial
                                                                  of the crisis
                              Service
                              Agency

   A failed                          Conflict between Bank of       Systemic
 innovation                           England, Treasury, FSA          crisis


                   Nationalization
                                               Search for self
                    of Northern
                                                 regulation
                        Rock
    Figure 4 – A third example: the sub-prime mortgage


                       New and                            Reversal   Melting down
  Sub-prime                             Securitization     of the
                       growing                                        of the sub-
  mortgage                               shift the risk   housing
                        market                                       prime market
                                                          market


                                 Absence of
                                                                        Limited
Searching for                      public
                                                                          FED
    new                          regulation
                                                                      intervention
 regulations
                         Unlimited access to
                         liquidity from FED

          A systemic                                  A creeping      Diffusion of
                            Mergers among
           financial                                   banking            Non
                                banks
             crisis                                      crisis        Performing
                           Recapitalization                           Assets (NPA)
                            by sovereign
                               funds
        Figure 5 – The impact of globalization and financial

                deregulation on emerging countries crises




                   Deregulation
Easier access                       Strengthening         From        Brutal
                   of domestic
 to external                        of the financial     boom to    reversal of
                     financial
  financing                           accelerator         crisis   capital flows
                      system


                                                                   Major crisis
                 IMF orthodoxy
                  is challenged
                                          Search for
                                                                    Structural
                  Large Central     alternatives to foreign
                                                                     reforms
                  Bank reserves     saving driven growth

                Possible regional
                    financial
                 intermediation
• P4: The financial led regime cannot be
  universal
        COUNTRIES            United    Great     Canada    Japan       Germany    France
      PARAMETERS             States    Britain
1.Average propensity to       0.95     0.926     0.956     0.869        0.884     0.908
consume (1996)
1.Wealth     in   shares/       145       75        95          30         25      20
disposable income (1997)
%
3. Extent of capital gains      35.5      15        11          -7         7        5
/disposable income (%)
4. Proportion of shares         28.4      52.4      n.a.        25.3       21.3    14.5
and bonds in households’
financial assets
1.Monetary market rate         5.34      7.38    5.20      0.32          3.5       3.46

1.Return on bonds             6.51     5.59      7.30      1.06         3.97      4.23

1.Reference profitability    12%-16%   12%-16% 12 - 16%    5%           6% -7%     9%
  • Actually, in other OECD countries alternative
    alliances may exist and govern different
    accumulation regimes

                              Managerial
                               expertise

  THE      Governance                            The firm as a     THE
AMERICAN      under                                bundle of     JAPANESE
  FIRM     shareholder                           competences      FIRM
              value

               Financial                     Firm specific
                capital                      competences

                                ESOP
                               Employee
                              ownership/
                            co-management

                           THE GERMAN 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 : boyer@pse.ens.fr
web site : http://www.jourdan.ens.fr/~boyer/

								
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