Markets are Politically constructed and Politically maintained Critically Discuss.

NAME: Jepter Y Lorde COURSE NAME: International Politics and Political Economy COURSE #: GOVT 3015 INSTRUCTOR: Dr. Wendy C. Grenade UNIVERSITY: University of the West Indies Cave Hill Campus. DATE: 13th April 2012.

ABSTRACT
The study of International Political Economy engages both state and non state actors, it is however this engagement and the results of this engagement that determine equity, justice and liberty in the system. The outcomes, however, are not always equitable or for that matter just, this essay will seek to analyse the contribution of a main actor namely the state in this complex relationship. An examination will be made of the circumstances that contribute to the political construction and maintenance of the market. Areas to be discussed are rules and regulation, coercion, control, the theoretical perspectives that govern the discipline neo-liberalism and globalisation, power and the impact of power in the determination of influence among others. The link drawn with respect to power and influence is cogent to the discussion as this shows a natural progression to the real determinants in the construction and maintenance of markets. The essay will also seek to highlight the impact of the ongoing battle between the actors by drawing on experiences in the USA as well as the Caribbean post 2008, it is hoped that by drawing these parallels a clear determination can be made as to how markets are constructed and maintained.

INTRODUCTION

The U.S and by extension the world economy since 2008 has experienced what is referred to as variation to the business cycle. This cyclical and at times adhoc movement in which the government plays a crucial role in deciding the strategic position of the economy by the use of macroeconomic policy has been studied my economist in an attempt to smoothen the variability (Krugman 2009). The Great Moderation lulled macroeconomist and policymakers alike into the belief that they knew how to conduct macroeconomic policy therefore giving the impression markets are politically constructed and politically maintained. According to (Blanchard and Simon 2001) The Great Moderation is the steady decline in the variability of output and of inflation over the period in most advanced economies or what is seen as the taming of the twin evils they being unemployment and inflation. Once achieved the state therefore was comfortable with market performance. It would appear, however, since the period between 2008 and the present a rethink of the theory is necessary. There is a belief, in some quarters, that a change to the role of the state is necessary. What is not so obvious however are the ways in which that role has to be configured in the context of in whose interest are the changes made and to what ends are these changes to be pursued and will there be a repeat of the collapse of 2008. This essay will seek, by way of critical discussion, to distil these issues by considering some of the different ways in which the state intervenes in the economy, the relationship between the state and capital, examining the impact of powerful non state actors like the IMF, World Bank, European Central Bank as well as the impact of powerful Supra National, Multinational and Transnational interest in the milieu of political and economic domination. The essay, although global in its assessment, will also highlight the impact of market creation and maintenance in the Caribbean and the
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impact these decisions have had on the players. Focus to a greater extent will be placed on the United States as this was the epicentre of the global financial crisis, the attempt therefore is an assessment of the political economic landscape using the United States as a test bed after which an answer will be given to the statement Markets are politically constructed and politically maintained.

A BRIEF HISTORY
In a market economy, the utility of millions of firms and households is paramount. The firm owns the factors of production and decide whom to hire and what to make. Households decide which firms to work for and what to buy with their incomes. These firms and households interact in the marketplace, where prices and self-interest guide their decisions (N Gregory Mankiw 2003). At first glance it would appear as if the market model would solve the convergence of suppliers and consumers of goods and services ensuring the exchange by way of price, however as Mankiw 2003 further explains market transactions create externalities which can be either positive or negative and as a result affect a third party who was not part of the original transaction. These spin offs cause what is referred to as market failure resulting in tensions that must be regulated thus resulting in the involvement of the state. Intervention by the state occurred in the period after the great depression in the United States and Post World War 2 Europe. Many states did not want a repeat of the events. The crash of the stock market and the loss to firm and household as well as reconstruction in Europe had to be addressed. Government went about the task of intervention and control utilising the Keynesian construct of fiscal policies geared toward the alleviation of high unemployment and inflation. The results were growth in the US and by extention the world economy for 40-50 years without
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major financial dislocation and this was to a greater extent dependent on an international monetary and financial system evolving incrementally, from the gold standard to the gold exchange standard, to the Bretton Woods gold-dollar standard highlighted the reality markets were managed in an attempt to prevent and minimise the effects of war and abject greed that had presented itself during the great depression (Eichengreen 2002).

MARKET CREATION - REGULATION

The process of constructing an economy requires the government developing and enforcing regulations in an attempt to influence and control the growth of the economy. These regulations can be divided into two categories, Economic regulations and Social regulations. An Economic regulation covers sectors of the economy such as utilities, transportation, aviation, agriculture, and banking. These regulations usually include barriers to entry and exit, licensing and tariff laws, and the control of prices and wages. Social regulations on the other hand, are there to protect the consumers. These regulations are directed toward such things as health and safety of workers, environmental, civil rights and gender issues (R Vietor 1994). It must be understood however regulations governing the market can significantly affect both the strategies available to market participants and are not the sole purview of government. The rules or regimes, therefore, can be or are important determinants of the outcome of economic activities. (Robert Gilpin 2001) was accurate in his assessment: Although liberals would argue that the rules and regimes can result from cooperative processes, more powerful actors frequently impose rules or regimes on other players in the market. Since the rules and institutions governing
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economic activities may reflect the interests of the powerful actors, market outcomes are profoundly affected by political, institutional, and other noneconomic factors. It is clear from Gilpins assessment the government, although a major actor is not the only institution competing for the right to influence. As previously mentioned the United States post the Wall Street crash of the thirties and post World War 2 had kept a tight rein on the financial system with highly regulated investment banks being described as small partnerships that were distinct and separate from the commercial deposit business, essentially speculation with the funds of depositors was frowned upon and prosecuted to the fullest extent of the law. From 1930 through to the 1960 the United States economy grew, low inflation rates averaged 3.8 percent over that thirty year period. Bank failures were virtually non-existent. As the sixties came to an end the growth slowed and problems in the economy started to show. In 1974 the banking failure rate had ballooned to unprecedented levels dwarfing past successes. The reasons proffered for the downturn in the economy and the uptick in failure within banking was twofold encapsulating a lapse in the control, which the government had exercised consistently within the industry by way of developing and enforcing the regulations and almost counter intuitively as these rules were accused of causing higher than necessary costs, distorted the patterns of supply and demand and were creating inefficient capital allocations. These problems needed a solution and deregulation was seen as a viable solution. It is defined as a reaction to a generalised crisis of capital accumulation coupled with a serious challenge to capitalist class power (David Harvey 2006). Harvey, essentially, described the action as lacking the empirical data necessary to draw the conclusion and highlighted strong social and geopolitical indicators such as the ending of the

cold war, internet proliferation and discontent at home as strong indicators that had gone unnoticed by the state. The period of deregulating in the early 80s is stated by many economists as being crucial in the affect on the global economy.

MARKET CREATION - DEREGULATION

The greatest challenge and highest priority to the nation is to restore our economic prosperity. with those words Ronald Reagan former President of the United States ushered in what is now known as the Neo liberal construct. The process of market creation via deregulation was very different from the process of market creation via regulation. The Neo Liberal ideology is premised on the empowered market ability to determine its destiny without the oversight of the government as a regulator. David Harvey was comprehensive in his assessment: Neoliberal theory makes the assumption that individual freedoms are guaranteed by freedom of the market and of trade (Global marketing and free trade). The freedoms it embodies reflect the interests of private property owners, businesses, multinational corporations, and financial capital. This would include reversal of nationalisations, privatising public assets, opening up natural resources (fishing, etc.) to private and unregulated exploitation (of assets even belonging to indigenous inhabitants), and facilitating foreign direct investment and freer trade. The doctrine is very much related to the laissez-faire theory of Scottish economist Adam Smith (1723 - 1790), which was the belief that if

mankind were given the freedom to act out of self-interest (selfishness?) and pursue maximum personal gain (profit), the consequences would be "most agreeable to the interests of the whole (elite) of society". Clearly the attempt by President Reagan at the time was to forge a new paradigm eclipsing the effort to constrain and regulate an impatient participant in the name of the market. To what end, therefore, were these new policies pursued and the results known? For this attention is turned to the Symbol Economy and the major players that have for years influenced it meteoric rise to world financial domination. (Bruce Coggins 1998) The process of deregulation was deliberate on the part of the state, Donald Regan former CEO of the investment firm Merrill Lynch was appointed by the then Reagan administration to the position of Treasury Secretary, Mr. Regan had to say: We on Wall Street are behind the president one hundred percent, I have talked to a number of people and they are in full agreement with the actions of the president. The actions to which secretary Regan refers encompass over thirty years of deregulation in the private sector with disastrous consequences. The engagement of a representative of the symbol economy is but one of the many changes made by the administration to enable change. What can be observed is the ideology taking root almost immediately. A CEO in the private sector driven by a profit maximising code in a position to influence legislation within the public sector will by rational choice seek to make decisions and enable policy to benefit himself and the firms from where he originated. This benefit is achieved by a framework of legal and moral rules set in the

continually contested terrain of finance. Rules and markets are structured by and give effect to business and other interests seeking to enhance their advantages. One major rule change made by the Reagan administration was the deregulation of what is termed cooperatives in the Caribbean. These allowed managers to gamble with the deposits of members the result were losses amounting to one hundred billion dollars in the industry and the arrest of Charles Keating. To most observers this was a logical end to a sordid affair but the facts show different. Alan Greenspan an economist testified on behalf of Mr. Keating and indicated he found nothing wrong with his decisions that resulted in losses to individuals and taxpayers in the United States, what resulted was nothing short of scandalous. Mr. Keating went to jail and Mr. Greenspan was appointed by President Reagan as Head of the Federal Reserve Bank and reappointed by Clinton and Bush Jr to continue the process of deregulation and the ultimate collapse of the economy in 2008. With the hijacking of the regulator by special interest the question is raised as to Markets are politically constructed and politically maintained. The infiltration of the real economy by the symbol economy via regulatory means equates to setting the cat amongst the pigeons. Is it therefore accurate to maintain that markets are politically created when the influence of special interest is so great? A closer examination of the social dynamics necessary to influence decision making is required.

POWER AND COERCION

"Power" and its participation in the creation of the market should not therefore be discounted, externalities as previously discussed is the impact on an agent by the decisions made by other agents. Labour therefore is seen as the unwitting agent of the Reagan and Thatcher legacy. This coercion was achieved by the assertion of economic power which refers to the capacity to get what one wants by giving something else in exchange. The more that one has that can be given to someone else, the more economic power one has. It should be noted reference to the material possessions one owns is not the only contributing factor but also any talents and skills that others might want to have. (Kenneth Boulding 1956). The exchange of the services however was for the benefit of an elite group, the analysis is simple, campaign contributions fuel the continuation of political parties, these firms have the ability to offer their finance in order to secure the administrative influence required to satisfy their insatiable profit seeking imperative, the process however is not yet concluded as that result is hinged on the removal of necessary checks and balances in the system. Destructive power refers to the capacity to destroy something or someone. Its use can be constructive getting rid of something unwanted and making room for something wanted, however it is often used to enforce a threat which has been ignored. This use of threats, either explicit or implicit, to try to keep others from doing something is the main focus of discussion.(Boulding 1956) Out sourcing and the transferral of jobs to locations where labour is cheap and offers greater reward for the firm was the solution. This action ushered in a movement of capital or finance via TNC and MNC around the globe, Nike, Adidas, J P Morgan, Goldman Sachs all joined suit in the subjugation of labour through the dismantling of labour unions and exploitation of labour in areas where organised labour was absent or muted. The objective was simple, maximise profit by seeking the cheapest resource while at the same time influence and

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control the enabling state actor. David Harvey was livid in his assessment after identifying human frailty, lapsed regulation, improper economic theory and culture as being some of the contributing factors to the 2008 debacle. He narrows the focus to capital especially finance capital and the internal contradictions of capital accumulation. He posits that capital never solves its problems it moves it around; on reaching a barrier instead of abiding with its limit according to Marx it uses financial innovation to achieve growth. This innovation in turn empowers the financiers who get greedy, by this time finance is able to earn substantial profits via innovation of products within its sector clearly at the disadvantage of the state and great instability to the financial system. (Hyman Minsky 1986)

MARKET MAINTAINANCE THE CARIBBEAN

The essential elements of the market have been identified; state as well as non state actors vie for influence within the contentious milieu of the market. Once established however, like any other construction, maintenance of the structure is needed for continued long run use. The techniques used for the purpose of market maintenance are now examined. The Caribbean can be described as the most impressionable group of islands based on geography, size and vulnerability. It can therefore be of no surprise that the continued tension between state and market is at its most viral for control. Financial globalisation, according to Dr. Don Marshall, can loosely be described as the process through which money, value and credit constitute a capital sphere sufficient enough to spawn networks and centres offering financial services. The US-led campaign for capital mobility in the 1980s under the neo liberal construct
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of President Reagan and Prime Minister Thatcher and the subsequent coercive pressure applied to Caribbean governments by international financial institutions (IFIs) to so deregulate their capital markets merged well with parallel advances in communications technology marked by the proliferation of Internet and high-tech stock. Finance-capital is often conceptualised as largely autonomous and self-activating. (Marshall 2008-09) A closer examination would reveal the ability of these Caribbean states to access capital is dependent on the International Monetary Fund being satisfied that the market is so compromised by way of lapsed rules thus enabling the finance capital to operate with impunity. Essentially the market must be investment ready to allow the execution of projects on the terms of the TNC. What is more confounding about the situation is the contradiction to the process. Marshall goes on to explain that a highly regulated Caribbean is being asked to deregulate in the context of the maintenance of a market in a highly globalised forum on the one hand and on the other being branded as tax havens by the supranational institutions like the OECD. The constraint does not end for a group of islands that have endured 400 years of colonial domination. (Thomas Friedman 2007) describes the Golden Straight Jacket and the Electronic Herd, two post colonial evils, according to this essay, of epic proportions. The Jacket is a one size fits all, pinching certain groups, squeezing others and generally keeping the economy of interest under constant pressure to streamline its economic institutions and streamline performance for the exploitation of a neo-colonial master. The rules to be adopted for a good fit are as follows, the private sector is centre as the main engine of economic growth, low rate of inflation and price stability, shrinking the size of the state bureaucracy, maintaining a close to balanced budget as possible, eliminating and lowering of tariffs and import duties on imported goods, removing restrictions on foreign investments, privatising state owned industries and

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utilities, deregulating capital markets, deregulation of economy to promote as much domestic competition as possible and eliminating government corruption as much as possible. A system of rules and regulation is limited without a means of enforcement; this is where the electronic herd is most effective. It is in effect a group of international investors who can with draw capital at the flick of a switch. Just as Massa was able to command and get obedience at the crack of the whip and use of his dogs to enforce the legacy of perverse domination continues with a flick of the switch and the use of Standard and Poors as well as Moodys as the electronic blood hounds. (Friedman 2007) elaborates: The electronic herd is made up of all the faceless stock, bond and currency traders sitting behind computer screens all over the globe, moving their money around. From mutual funds to pension funds to emerging market funds consisting of MNC who spread their factories around the world and constantly shift them to the most efficient low cost production. It is this contradiction that lends to a reassessment of the statement markets are politically constructed and politically maintained. The refinement is made by (Susan Strange 2007): The impersonal forces of world markets, integrated over the post war period more by private enterprise in finance industry and trade than by the cooperative decisions of governments, are now more powerful than the states to whom ultimate political authority over society and economy is supposed to belong. Where states were once the masters of markets, now it is the markets which, on many critical issues, are the masters over the governments of states.' The facts concerning the relationship between capital and the state are there to be assessed; the Caribbean by its size and strength can be forgiven for capitulating to the might of Globalisation

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but what of the mighty United States of America? The Bush administration was surrounded with less ideological types, veterans of the corporate establishment. At the top, four of his cabinet secretaries were former chief executives of large American companies. Vice-President Dick Cheney ran Halliburton, an oil-services firm; Paul O'Neill, the treasury secretary headed Alcoa an aluminium giant; Donald Rumsfeld at Defence ran General Instruments; Don Evans, the commerce secretary, ran Tom Brown, an oil and gas company. No president since Eisenhower has had more than one ex-chief executive in the cabinet, and Eisenhower had only two. Less well known is the infusion of corporate types at lower levels. At the Defence Department, Thomas White, the secretary of the army, was formerly head of the energy-trading arm at Enron; James Roche, secretary of the air force, came from Northrop Grumman; Gordon England, secretary of the navy, was with General Dynamics. Yet more junior ex-corporate staff has come into the administration with them. It was never the intent of this essay to dwell on the incestuous relations of the Bush administrations with special interest, capital and the debilitating results spawned by the aforementioned relations. For this assessment attention is paid to (Gore Vidal 1992) who was empirical, frank and forthright in his analysis as to the true victims and not actors in this viral game: From time to time it is shyly suggested that taxes be raisedfor individuals but never for corporations. To those who maintain that our political life is not controlled by corporations, let me offer a statistical proof of ownership the smoking gun, in fact. In 1950, 44 percent of federal revenues came from individual taxpayers and 28 percent from a tax on corporate profits. In 1991, 37

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percent came from individuals and only 8 percent from the corporations. The rest, of course, is borrowed. In an equitable, just and liberal world maybe this occurrence would be impossible but the world that we live in is far from equitable and just. The possibility of reconfiguring a society to benefit a select few does not happen in a vacuum and almost always will impact negatively those who were not part of the original transaction. The imperative, therefore, is for an apolitical environment in which decisions can be made in the best interest of individual, market and the firm without undue influence.

CONCLUSION

Economic agents with unlimited, concentrated, intensive interests tend to have greater reach and impact on the determination of rules and regulation as opposed to agents with limited, diffuse interests. It is a necessary imperative on the part of the economic agents to identify the Gate Keeper and secure easy entrance and exit. Government is therefore an object of control; the non state actors seek to use government to enhance their utilities and chances toward market creation. Government and business mutually influence each other within a legal-economic nexus in which opportunities for gain or other advantage accrue to economic actors with political agendas. It is therefore not surprising government and businesses seek to secure maximum utility with respect to constraints imposed because of pressures placed upon the other. It is clear the governmental determination of rights through regulation influence opportunity through relative mutual coercion and the power dynamic. That mutual coercion is not always

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prevalent as the role of government in the formation and structure of markets is a function of both the strength and weakness of government. The long-term successful attack on a weak government by business enables business to secure its desired market forms. Governance is the sum of nominally private and public governing institutions. Noninterventionist sentiments notwithstanding, western governments have been strong enough under business influence to produce, ratify, and reinforce certain consolidations of social power of a business society (Seider 1974). Although the argument made by (Seider 1974) does not easily lend itself to the assessment of this essay it is not entirely without merit. The assessment, however, fails to consider the states of the Caribbean which are considered weak and susceptible to adverse influence. It is the assertion therefore of this essay that Markets are Politically Constructed and Politically Maintained only insofar as the influence of non state actors impinges on the state and compromises its ability to act as sovereign.

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Eichengreen, Barry. FINANCIAL CRISES: and what to do about them, Oxford: University Press, 2002.

Friedman, Thomas The Lexus and the Olive Tree: Understanding Globalisation in The Politics of Globalisation: A Reader edited by Mark Kesselman, Boston and New York: Houghton Mifflin Company, 2007.

Friedman, Thomas Its a Flat World after All in The Politics of Globalisation: A Reader edited by Mark Kesselman, Boston and New York: Houghton Mifflin Company, 2007.

Gilpin, Robert. Global Political Economy: understanding the international economic order, Princeton: University Press, 2001.

Harvey, David. The Limits of Capital, New York: Verso, 2006.

Krugman, Paul How Did Economist Get It So Wrong Published: September 2, 2009 http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all

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Marshall, Don. Gender and Otherising Discourses in the Construction of Financial Globalisation Shibboleths: a Journal of Comparative Theory 3.1(2008-2009): 34-44 Seider, Maynard S. American Big Business Ideology: A Content Analysis of Executive Speeches American Sociological Review, Vol. 39, No. 6 (Dec., 1974), pp. 802-815

Strange, Susan The Retreat of the State: The Diffusion of Power in the World Economy in The Politics of Globalisation: A Reader edited by Mark Kesselman, Boston and New York: Houghton Mifflin Company, 2007.

Vidal, Gore. The Decline and fall of the American Empire, Berkley California: Odonian Press, 1992.

Vietor, R. Contrived Competition: Regulation and Deregulation in America, Cambridge, Massachusetts: President and Fellows of Harvard College. 1994

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