Who Now Controls the Commanding Heights?

Yergin and Stanislaw

Financial market ascendancy

Market versus society

All great changes come with hidden curses, said Socrates. This proved true of the worldwide move after World War ll away from laissez-faire to state intervention. It is proving true again of the laissez-faire counter-revolution that replaced it.

At the end of the war the state was the only instrument considered capable of meeting the massive tasks of reconstruction. Only the state, it was thought, would adopt the social values and command the resources necessary to respond effectively to post-war aspirations. People who had fought and endured so long wanted a better life, a fairer share of the national output than before. Confidence in Big Business was minimal. Images of the Great Depression, unemployment, poverty, squalor, slums, instability, exploitation and trade wars still burned in people's memories. It is  hardly surprising that hope was invested in the state and not the private sector and laissez-faire.

For the next three decades the statist strategy delivered the goods. The mixed economy and Keynesian macro-economics saw full and stable employment, more equity, rising real wages, higher living standards and upward social mobility. Western Europe recovered. Germany and Japan boomed. 

Time and complex new developments, however, eventually brought the fault lines in the statist system to the surface. Regulatory bureaucracy was beginning to stifle wealth creation. Centralised state agencies were providing special interests with opportunities to exert disproportionate influence on public policy. Patronage, pump-priming and privilege rather than equitable redistribution drained the public purse and fed the national debt. Welfare programs for legitimate social security and relief also engendered dependency. At the extremes, states devolved into tyranny - authoritarian corruption spread in the decolonised states and totalitarian corruption gripped the communist empires.

The oil shocks of the 1970s accelerated inflation and turned national debt problems into crises. Statism's capacity to produce the jobs to maintain full employment and real wages began to falter. The spur and conditions for a counter-revolution had arrived. Thatcherism and Reaganism registered the shift to deregulation, privatisation, globalisation. The politico-economic strategy pendulum swung sharply from statism to the market and from national to transnational orientation. 

Like statism the new orthodoxy had its honeymoon period. It too began to deliver. Inflation and deficit funding were checked. Export industries were rejuvenated. Share markets boomed. Multinational corporations multiplied and expanded. Some emerging Third World economies began to grow faster and diversify.

Before long, however, the latest hidden curses began to reveal themselves. Mixed with the energising good of the market came downsizing, structural unemployment, falling middle class standards, a widening gap between the rich and the poor, spreading personal and family insecurity, neglected infrastructure, threats to national sovereignty and culture, and contagious regional financial crises which threatened global stability.

Commanding Heights: The battle between Government and the Marketplace that is remaking the modern world  examines these crucial changes in detail. Written by economic analysts Daniel Yergin and Joseph Stanislaw, this 457 page book is a celebration as well as a record and analysis of the victory so far of the market over statism. But the book is no less credible and instructive for the unconcealed commitment of its authors to market principles. 

Yergin and Stanislaw are respectively president and managing director of Cambridge Energy Research Associates and board members of Global Decisions Group. CERA is described as the foremost analytic firm in the energy industries. GDG provides economic analyses of major global markets. Yergin has two previous international best-selling and prize-winning books of economic history and analysis to his credit. 

Two aspects of the book in particular make for its credibility. First, it gives a detailed account of the altruistic reasons for the adoption of post-war statism and its achievements. It avoids the temptation to dwell only on the limitations and  corruptions of the welfare state. Secondly, the book refuses to adopt the old closed theory trick. It does not try to insulate liberal economic theory from contradictory evidence. On the contrary, it states five clear tests that the new orthodoxy must pass in order to establish its legitimacy. Failure to do so, in the authors' view, will cause the new orthodoxy to suffer its own counter-revolution. The book contains no trace of the dismissive dogmatism and indifference towards the insecure and the left-behinds that sometimes marks the advocacy of  economic rationalist true believers. 

The tests which Yergin and Stanislaw propose are:

Delivering the goods: 

If privatisation, deregulation and the opening up of economies in the industrialised countries to competition are seen as job-destroying rather than job creating, then "free-market policies will surely be subject to continuous attack and constant revision".  What made both socialism and the mixed economy and then discredited both, the authors argue, will also make or break the commitment to markets.

Ensuring fairness:

Will the success of the market be widely shared? Is the system proving fair and just? Or does it disproportionately benefit the rich and the avaricious at the expense of the hardworking?  Does it treat people decently, and does it include the disenfranchised and the disadvantaged?

Yergin and Stanislaw believe Tony Blair's major electoral asset was his declared intention to fuse social-democratic values of fairness and inclusion onto the Thatcherite economic program. "Excessive concentration of wealth will under-cut the legitimacy that a market-oriented system requires... What a market advocate describes as 'incentives' is translated into 'greed' in the vocabulary of the a market critic."

Upholding national identity: 

For many countries, participation in the new global economy promotes economic growth. It brings new technologies and diversifies opportunity. But, as the authors acknowledge,  it also "challenges the values and identities of national and regional cultures".  For example, it undermines job security in Europe and social rules in Asia, "or indeed values about family and co-operation, and to what the young ought to be exposed." 

Should Asian or European companies be subjected, the authors ask, to what has been called the 'Anglo-Saxon cult of shareholder value' which would "ruthlessly cut away what are seen in other societies as social obligations and responsibilities."

The fourth and fifth tests are whether private sector companies operating on laissez-faire principles will prove capable of responding effectively to demographic and environmental challenges - including the massive negative inheritances of the Soviet and Chinese totalitarian state systems. 

Financial market ascendancy

The swing from government to market pre-eminence - more particularly financial market pre-eminence - was registered in a widely-reported remark by  interventionist-inclined US President Bill Clinton when he realised that his national executive power was shared with "the (blank) bond market". Yergin and Stanislaw agree that America's economic policies are affected now "not only by public opinion but also by the judgement that the financial markets, including trillions of dollars in pension assets, made on the  probity of those policies".

The important question is, who or what are the "financial markets"? Is their increased  influence over public policy democratic and beneficial? Or is it disproportionate and directed more to the special interests of the rentier class? Are the financial markets servicing and facilitating the real economy - the role on which they base their claim to legitimacy - or are they de-stabilising nations which are now interlocked by globalisation? 

According to the more fundamentalist of laissez-faire advocates, the financial markets are nothing more than a widely-based unco-ordinated market response - the collective outcome of individual judgements by countless actors in the free market, operating rationally to the ultimate good of the productive economy through the invisible hand. But others suspect that financial markets are more tightly linked and more prone to the herd instinct and the latest economic correctness than current theory would have it. Flights of capital can be abrupt, massive, and indifferent to their catastrophic impact on whole nations. Recently re-impoverished Indonesia provides one example. Yergin and Stanislaw write:

"The interconnection of financial markets, while promoting investment flows, also makes national economies vulnerable to major shocks and turbulence that call into question what participation in the global economy actually means. Leaders are stunned to see how 20 or 30 per cent of a country's economic value, built up over decades by the hard work and sacrifice of the nation, can be destroyed in a matter of weeks..." 

The danger now "comes from the capital markets not from multinationals" in the authors' view. When arguing that the American economy was "governed by the bond market", New York Times  financial correspondent Louis Uchitelle described financial markets as "a loose confederation" of bankers, financiers, money mangers, and executives of life insurance companies and the mutual funds (International Herald Tribune, 13.6.94). "Group-think" can be as much a factor in the actions of the "financial markets" as the so-called autonomous, rational competitive individual on which liberal theoretical models are based. The London Economist  (21.6.97) noted that eight financial firms hold 37 per cent of the wholesale and investment bank market: Merrill Lynch, Chase Manhattan, J.P. Morgan, Goldman Sachs, Morgan Stanley, First Boston, Salomon Brothers and Lehmann Brothers. Nearly all are headquartered in Wall St.

Market versus society

Shortly after Labor's landslide electoral victory in Britain, Prime Minister Blair told a Socialist Conference in Sweden that nations today had no alternative but to "modernise or die". But,  he added, "if there is no attempt to control them, market forces will threaten our very idea of civilisation". 

Former US Secretary of State and of Treasury George Shultz echoed Blair's judgement.  "Markets are relentless", he said. In his view, people's underlying mistrust of markets will persist. People will continue to turn to government to provide shelter from the constant demands of the market for change. Only so much insecurity and stress will be tolerated by those who bear the main burden of change - especially when that change is determined by elites who tend to be either immune  from its effects or beneficiaries. 

One conclusion readers may draw from Yergin and Stanislaw's book  is that it is time now for balance, pragmatism and objective discussion. Ideological and special interest barracking for either the state or  the market leads to dissension rather than resolution. It is time to look closely and objectively for the good and bad of both state and market and review and improve specific policies accordingly. It is not whether the cat is black or white but whether it catches mice.