Marky Blyth Great Transformations

Marky Blyth’s book mainly states that ideas should be accounted for when explaining economic behaviour. His these are that ideas provide stability and not institutions in situations of Knightian uncertainty (you don’t know the future or your own interests). This makes sense, it is not institutions that make us feel safe but our knowledge of the way the world works. To this end a large number of ideas are covered in the book comparing Sweden and the US. The other theses are that ideas are required to attack, dismantle, set up, and operate stabely new institutions of economic governance. In the US an Denmark both countries developed embedded liberalism where employment was valued over inflation and both business and labour were embedded in the state structure that mediated the two. There is then a shift in the 1970s towards the self regulating market liberalism using monetarism and other financial creeds that is continuing today. This is important because Blyth shows that economic change BEGINS with ideas. Agents actively try to win the debate of ideas and after the 1960s business was gaining ground because it redefined its own interests and how to achieve stability in the economy and organized itself in a way that it could use the concentrated influence of its wealth to change popular opinion in the US and elite opinion in Sweden. The ideas behind what is good for the economy (mainly low inflation and investment versus high employment and consumption) are therefore not natural economic processes that result from exogenous shocks but a result of internal dynamics. This book is somewhat  frustrating because it clearly shows how money talks and how it came to talk over the years, but it also shows how agents have power and can induce change (usually if they are well organized and have money and deal well with public relations). The current theory of chnage argues that domestic economic shifts towards conservatism occur because of technological developments, increased competition, or external shocks, Blyth shows that before any of these can have an effect the ideas for them to play out must be set. For Blyth there is a limit to what action governments can take set by the ideological environment. Therefore Swedish bourgeoise leaders acted as socialists in power because they had no alternative ideas before resuscitating monetarism and the current Neoliberals govern as conservatives because the limits of the possible choices of action are already set. This is worse in Europe because the highly conservative EU regulates economies from the center.

Some of the detailed analysis can be confusing at times, especially for the United States. Perhaps because Sweden had more clear lines and actors involved, and perhaps because Blyth as an American feels the need to take account of US intricacies, the US chapters were plodding at times. But still the general point comes across well. Most striking however is the depressing and continuous gains of business over labour. Blyth shows how wealth has increased while wages have remained stagnant, and how the social utopia that was Sweden contains centrifugal ideological elements among the elites (not the people who want the social state)  that is ripping the foundations of the caretaker state and causing the economy to worsen. In Sweden especially the case is disheartening because the economic policies of the conservatives cannot be reversed in the current climate and because it is clear that the emphasis on low inflation over social welfare is not only socially backwards, but is not working from an economic perspective either. Blythe seems to believe in the consumptionist theories of how economies work (high wages high employment high consumption) although he does at times show how these ideas also backfire in the American economy. This may stem from his social activism and his beliefe in some sort of economic justice and redistribution.

Low inflation as tax subsidy for the rich:

One very interesting point that Siba would love is how Mark Blyth calls the high rates of the Fed (for borrowing) as subsidies for those who own wealth. Inflation is nothing to be feared and when it is below 20% it has a redistributionary effect, it harms lenders and favors debtors. If you borrow a million dollars for a house and the value of those dollars decreases, you will owe less under the new value of money and the person that has the money will get less back from it.

(272-273) “In fact, once the effects of the ERA and TEFRA and changes in the eligibility and funding for social programs are taken into account, those with incomes under $30,000 actually increased their tax burden. In contrast the top quintile received an average tax break of $2,429 and an effective 15% tax reduction. By 1985 real take home pay was as much as 12.5% lower than it had been in 1972 for those earning less than $30,000 and by 1991 real mean family income had fallen by 5.3% for the lowest quintile of the income distribution from its 1977 level. Because of these changes, banking and finance became the most profitable sectors of the economy. Meanwhile the burgeoning federal deficit further compounded the regressive effect of these changes on incomes.

All in All “$120 and $160 billion per annum was transferred to the wealthiest 5 percent in America.” As William Greider put it,

“… if one viewed the Federal Reserve’s policy of high interest rates as an implicit government program for redistributing incomes, its magnitude by 1982 was approximately as great as all the government’s other income transfer programs  combined … the flow of money distributed through social security … welfare and the rest came to $374 billion … the income redistributed to the wealth-holders through high interest rates was $366 billion.”

A second great transformation?

Referring to Polanyi who Blyth believes argues that a great transformation took place after the Second World War to embedded liberalism, Blyth argues that we have seen and are seeing a second great transformation. One in which the free unregulated market reigns again and where the wealthy are once again pursuing asocial destructive economic policies. He is not as fatalistic as Polanyi and does account for the possibility of, at some point, a move away from such vicious capitalism but he is not very optimistic about the future. The free market economic policies will make the wealth holders have a clear advantage. Will it lead to another First World War because of interdependence? I think maybe.

Cause of US decline?

In the chapter of Disembedding US embedded liberalism Blyth shows how the Vietnam war was the beginning of the end for the United States. As Silver mentioned in class, the US had a trade deficit until the 1970s when the growing European economies made it untenable for it (or so they thought) to finance their foreign policy with Europe. In reality Europe was so ravaged by the War that the US could basically subsidize it through the fast domestic growth it was experiencing which was due to the embedded liberal order of more consumption. First under Ford and then under Carter the costs of the Vietnam war were not listed on the budgets. This meant the US had a war economy but was not aware of it. The FED acted as if they were at war but the state and treasury did not. This ignorance meant that all economic policies backfired. Because of the shocks of these developments and because of moves which helped consolidate business when they felt under threat new ideas began to take hold and were pushed that argued that the cause of the economic decline was not the war but bad monetary policies and return to slashing deficits and balancing budgets was in order. This led to spirals in which tax cuts and social service cuts came togethert to make the economic situation worse. This naturally had an impact on the relationship with Europe which in some places adopted American more (not France under Mitterand) and began the end of US economic dominance.

 

Related:

http://bilbo.economicoutlook.net/blog/?p=17923

On how unemployment is a result of too small a deficit and tight monetary policies.