January 10, 2017
With Responses From
Jan 10, 2017
6 Min read time
Markets separated from the social order undermine stability.
In 1944 the Hungarian-American economic historian Karl Polanyi published The Great Transformation, a path-breaking analysis of the inner workings of market liberalism. Using the example of nineteenth-century England, he explored the conviction that the free market should be the core organizing principle of society. He sought to explain how this became a “crusading passion” and “militant creed,” how we came to a “veritable faith in man’s secular salvation through a self-regulating market.” Describing the first bout of economic liberalism, Polanyi wrote:
There was nothing natural about laissez-faire; free markets could never have come into being merely by allowing things to take their course. Just as cotton manufactures—the leading free trade industry—were created by the help of protective tariffs, export bounties, and direct wage subsidies, laissez-faire itself was enforced by the state.
Polanyi acknowledged that the creation and enforcement of laissez-faire could make societies richer. He also observed, however, that markets tend to undermine social, political, and cultural stability if they are willfully separated from the social order—if they are regarded as autonomous and self-governing. Polanyi described such markets as “dis-embedded.”
New technology, not trade, is responsible for most of the seven million manufacturing jobs lost in the United States since the 1980s.
He also understood that otherwise-opposing factions would form unusual coalitions and begin to resist market forces if they were relied upon excessively. Polanyi would not have been surprised by the simultaneous popularity of Bernie Sanders’s and Donald Trump’s political movements. Though sympathetic to the democratic socialism of the former and wary of the totalitarian tendencies of the latter, Polanyi would have understood both as manifestations of the same phenomenon: a reaction against the tendencies of markets to diverge from social realities. Sanders and Trump have little else in common, but both recognize that international markets care little for the economic pain of American workers.
Dean Baker makes a forceful argument along Polanyian lines. Baker’s main point is that four decades of avoidable policy choices on trade, services, and intellectual property rights—choices whose effects were both foreseeable and foreseen—have skewed globalization against American workers. “Markets are never just given,” he writes in Rigged. “Neither God nor nature hands us a worked-out set of rules determining the way property relations are defined, contracts are enforced, or macroeconomic policy is implemented. These matters are determined by policy choices.” American policymakers’ choices with respect to globalization shielded higher-end professional services in the United States and placed labor-intensive manufacturing in direct competition with lower-wage industries in emerging economies.
The ordinary political economy of international trade holds that losses are concentrated while gains are dispersed. Those who lose from international trade—those who lose their jobs or take pay cuts because of import competition—are usually visible and vocal. In contrast, the gains from trade are more difficult to measure and beneficiaries tend not to be clearly identifiable. Society at large is supposed to do better: we all increase our purchasing power, and we all profit from the diversity of available products. In most cases, we are collectively, though not necessarily individually, better off with world markets.
Markets separated from the social order tend to undermine social, political, and cultural stability.
This tension between concentrated losses and dispersed gains makes free trade a difficult political proposition. After World War II, the international economic system solved this problem with a compromise that political scientist John Ruggie, inspired by Polanyi, called “embedded liberalism.” Countries allowed their economies to reap the gains from international trade but used interventionist domestic policies to provide citizens’ a safety net: the welfare state. The arrangement stabilized postwar economies and earned them legitimacy. It was a delicate balance, hard to achieve and maintain even in times of prosperity.
Baker shows us that this arrangement is now in shambles. Economic policy has become ruinously asymmetric. Trade regimes, anti-inflation policies carried out at the expense of full employment, monopolistic patent and copyright rules, and broken executive-pay and governance structures have undermined the middle-class, done little for the poor at home, and further enriched the rich. Polanyi would probably have recognized this sort of economy as partially embedded (for the rich) and partially dis-embedded (for the poor)—or, in today’s populist parlance, rigged.
The analysis is unsettling but also empowering. Baker’s critique reclaims areas of the economy for politics. Upward redistribution was a choice, and it can be reversed. Politicization of the economy has another important consequence: since market distributions are not products of nature, we cannot use the market as a moral tool with which to determine individual desert. Corporate CEOs do not deserve their high pay, nor do import-competing workers deserve their low pay just because “the market says so.” Once we recognize that wages are influenced by rules subject to political control, we can begin to envision better rules. We can think creatively about how to re-embed markets in light of contemporary economic challenges.
Once we recognize that wages are influenced by rules subject to political control, we can begin to envision better rules.
How can we do so in an effort to overcome the asymmetric distributional effects of trade? One option is to dramatically expand existing programs such as Trade Adjustment Assistance. President Kennedy proposed TAA in 1962 as compensation for workers hurt by international trade. “Those injured by . . . competition should not be required to bear the full brunt of the impact,” Kennedy argued. “Rather, the burden of economic adjustment should be borne in part by the Federal Government.” Kennedy understood free trade as economists do, in terms still found in today’s textbooks: liberalized trade policy is Kaldor-Hicks efficient—that is, the winners from free trade can compensate the losers.
TAA has been used to help workers—predominantly those who have lost manufacturing jobs—to retrain and find apprenticeships. The program also provides some unemployment benefits. TAA is one of the few success stories in the era of trade liberalism, having found bipartisan support nearly every time its duration was extended. It is also very small. While nearly 5 million people have been certified for TAA since its inception, annual federal spending on the program is less than $1 billion. (In general, the United States is extremely stingy with public spending on the labor market.)
Aside from TAA, American policymakers have made few earnest attempts to turn hypothetical into actual compensation, and voters are no longer satisfied with the utopias of neoclassical economists. Everyone can see that the rising tide of trade does not lift all boats, even if, in theory, it could. We know from recent research how persistent and harmful the distributional effects of trade can be, how it can permanently erase entire regional industrial hubs. The resulting decline severely affects individual health and well-being, as any worker on the losing end of globalization could tell you. Studies show that losing one’s job is, for many, more traumatic than divorce or separation.
More could be done with TAA to help those displaced by trade. But why stop there? New technology, not trade, is responsible for most of the seven million manufacturing jobs lost in the United States since the 1980s. Many of the remaining manufacturing jobs will soon be done by robots, not foreigners. And some firms are simply outcompeted or have become unproductive for other reasons, leading to more pain for workers. Better compensation for trade-induced job loss is worthwhile, but, ideally, we would have social programs that take effect regardless of why a job is displaced. In addition, these programs shouldn’t be framed as compensation or handouts but should instead be thought of as empowering individuals to share the gains of increasing productivity.
The promise of widespread profit from trade and automation is fulfilled only if mechanisms of redistribution or predistribution enable everyone to share the gains. Basic income—a cash sum given to all citizens unconditionally—could fulfil this promise. There are good empirical and normative reasons to try it. A state with guaranteed basic income can still take advantage of productivity gains from trade and technological innovation. The difference is that, by re-embedding markets, that state will also empower its citizens economically, curbing the harms of upward redistribution.
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January 10, 2017
6 Min read time