Globalization and theories of regulation

Michael DunfordSchool of European Studies

University of Sussex, Falmer, Brighton BN1 9QN Tel : (44) (0)1273 606755

Email : M.F.Dunford@sussex.ac.uk

IntroductionThe ambition of theories of regulation is to explain the trajectories of capitalist economies. Theobject of analysis is not the political economy of the international system, though, as I shallexplain, these theories have had to address phenomena associated with processes ofglobalization, and as a result do intersect with the literature on global political economy. Theaim of this chapter is to outline the main characteristics of regulation theory, to explain whyhistorically it operated with a conception of the world economy as a mosaic of national socialformations, and to outline the ways in which it has sought to explain the trajectories of capitalistsocieties since the crisis of the Fordist model and in particular how it seeks to analyseglobalization. I agree that insufficient attention is paid to the nature and role of internationalinstitutions (Palan, 1998). I shall suggest however that the insistence on the centrality ofnational economies in the post-war 'golden age' and the addition of a concept of insertion ofnational social formations into an international order were largely warranted. I shall also arguethat the more recent transition to a new global-finance dominated regime of growth raises anewthe core questions that theories of regulation seek to answer concerning the speed and regularityof growth and social progress. This transition also requires, however, a fundamental re-assessment and revision of earlier ways of analysing the role of the international order andimplies an internationalisation of the mediation mechanisms that are essential if accumulation isto be reconciled with social progress.

Theoretical foundationsAt the outset regulation theory rested on a critical assessment of Marxist political economy.More specifically, it grew out of a critique of the empirical and conceptual adequacy of someaspects of Marxist theories of value, distribution and growth and, in particular, of the view thatthese theories were incompletely specified, over-generic and insufficiently concrete. MichelAglietta's Rgulation et crises du capitalisme (1976), which founded this approach, rested on arecognition of the fact that capitalist economies sometimes function well, in particularreconciling capital accumulation with rapid growth and/or social progress, and sometimesexperience phases of turmoil and crisis. The fundamental question that Aglietta asked was whydo capitalist economies sometimes function well and why are they sometimes crisis-ridden. The

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essence of the answer is implicit in the title of his study. Capitalism functions effectively whena set of mediations, called a mode of regulation, is put in place which ensures that thedistortions and contradictions created by competition and the accumulation of capital are keptwithin limits that make them compatible with social cohesion and growth in each nation state.As the sets of mediations and the trajectories that reflect the compatibility/incompatibility ofaccumulation and social and economic progress are context dependent and specific to particularplaces and particular historical moments, the analysis of social change requires the inclusion ofintermediate determinations excluded from more abstract economic theories.

As Boyer (1996) has indicated in a paper entitled 'The seven paradoxes of capitalism', theunderlying question is one with deep roots in social, political and economic thought. For severalcenturies social scientists and philosophers have asked a simple question: why do societiesfounded on competition and conflict not lead to chaos? Essentially there are two sets of answersto this question.

The first is rooted in the work of political philosophers who concentrate on the role of the statein governing the interaction of human individuals. Hobbes, for example, argued that humanbeings were naturally selfish and self-interested. In their quest to acquire new power andprestige and to guard what they already possess, he argued, they would do anything. The 'stateof nature' in which human life is not guided by external authority is a 'state of war', a 'war of allagainst all', in which life is 'solitary, poor, nasty, brutish and short'. These precepts underpinHobbes' justification of the 'great Leviathan' or omnipotent state : individuals must transfer orgive up their liberty to a 'sovereign' which will guarantee social and economic order. Hobbesalso felt that nations were selfishly motivated and were in a constant battle for power andwealth. This conception of the state of nature was taken up by Kant in his essay on Perpetualpeace in which he seeks to identify the nature of the national and international frameworknecessary for the attainment of perpetual peace (though states in a state of nature with eachother differ from individuals in a similar situation).1 In a similar way Locke argued that humanbeings start in a state of nature in which all are equal. A competitive struggle for existencesubsequently gives way to the creation of a civil society (a social contract) to 'protect unequalpossessions, which have already in the state of nature given rise to unequal rights'.

In the political economy tradition the answers were somewhat different. Adam Smith starts withthe view that human acquisitiveness entails a propensity to truck and barter and that in thepursuit of their own interests individuals are led by the invisible and anonymous hand of themarket to contribute unintentionally to outcomes which are mutually beneficial and in the socialinterest. Subsequent economic theorists have addressed Smith's proposition by asking whetherand under what conditions a competitive equilibrium exists, is stable, is unique and in particular

1 There are counter views. In Modernity and the holocaust, for example, Baumann (1989)argues that civilisation is the way human beings organise themselves to commit massviolence, and not the way they organise themselves to contain it.

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is Pareto efficient. If a competitive equilibrium is Pareto efficient, there is no reallocation ofresources and goods that can make one individual better off without making someone elseworse off. (This definition of welfare does not permit increasing the welfare of the poor bytaking resources away from the rich). Modern microeconomic theory shows that the conditionsrequired for this welfare theorem to hold are extremely restrictive. These models suppose thatall information about prices and the quantities of resources and goods offered and demanded iscentralised, and equilibrium prices, which set all excess demands equal to zero, are establishedby an omniscient Walrasian auctioneer, implying that perfect competition prevails. Marketsmust exist for everything (current and future goods, services, risks and so on), and there are nocollective goods or non-pecuniary externalities. (Traditionally the existence of externalities andcollective goods was seen as creating a case for collective action). All technologies, finally, arecommon knowledge and exhibit constant returns to scale.

In real life these conditions do not prevail. First, as Kaldor (1972) showed in a paper entitled'The irrelevance of equilibrium economics' increasing returns are pervasive. Second, marketsare far from universal. Markets are therefore not necessarily efficient at solving coordinationproblems. Collective action taken in the face of market failure may, however, introduce newdistortions, so there is often not a first best solution. Critics of interventionism argue thatgovernment action to correct distortions may itself lead to political and governmental failure.2What is important, however, is the fact that real markets do not satisfy the conditions requiredto make sustainable the claim that competitive markets are self-equilibrating and efficient.

At the same time neoclassical concepts of market adjustment and their presupposition that thereallocation of factors of production and the creation of net gains is automatic areunsatisfactory. As Keynes showed, in money economies the initial response to a decline indemand which increases unemployment is not a price adjustment but a quantity adjustment. Thereason why is that an excess supply of some factors of production will not correspond to aneffective excess demand for other goods and services as effective demand is constrained byrealised current income: excess supply in the labour market - involuntary unemployment -diminishes effective excess demand elsewhere.3

2 As Boyer (1996) points out these counter views include the arguments of the Austrian Schoolof economists such as von Hayek for whom any move beyond a minimum role forgovernment is the road to serfdom and the theories of public choice economists such asBuchanan who argues that politics fails as benevolent sovereign and the minimal state havegiven way to self-interested bureaucrats and electorally-conscious politicians.

3 A consequence is the existence of sharp cyclical movements in which phases of rapid andsometimes unmanageable growth alternate with cyclical downturns caused insufficienteffective demand. Excessive saving also contributes to these movements. As Kalecki argued'workers spend what they earn', while ' capitalists earn what they spend'. Capitalists andrentiers earn what they spend as their incomes are sufficiently high to save. Savings are only

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Theories of regulation seek to answer similar questions. These theories start with the view thatindividuals and groups have goals, that these goals are expressed in their pursuit of individualinterests and that these interests may be antagonistic or may complement and reinforce oneanother, depending on the social relationships that underpin them (as humankind is viewed asnaturally social). Capitalism has enormous potential to mobilize human energy and translate itinto economic growth. Capitalism cannot however create all the preconditions for its emergenceand reproduction. As it develops, it generates conflicts and tensions which can obstruct itsfurther development. Capitalism lacks 'the capacity to convert the clash of individual interestsinto a coherent global system' (Aglietta, 1999: 49), and 'is a force for change which has noinherent regulatory principle' (Aglietta, 1999: 62). Capitalism can destroy the conditions onwhich it depends, as the 19th and 20 centuries have demonstrated so clearly. Capitalism musttherefore be hemmed in by constraining structures, which are not a product of rationalindividual calculation or competition, but which 'emanate from the creation of socialinstitutions, legitimized by collective values from which societies draw their cohesion. Thiscohesion is the product of social interactions that take a variety of forms : conflicts, some ofwhich may be violent; debates that find their way into the political arena; associations that lendcollective strength to groups of employees; and legislative provisions that institute and enshrinesocial rights' (Aglietta, 1999: 50).The underlying view that capitalist economies while potentially dynamic are also potentiallyself-destroying is rooted in an analysis of its fundamental social relations: the commodityrelation, and the wage relation. In the rest of this section I shall ask what is the nature of theserelationships, in what ways do they lead to conflict and how are they mediated? At the end Ishall identify a role of the state and of the state-citizen and state-economy relations consideredin the political science tradition which has also addressed the question why societies founded oncompetition and conflict do not lead to chaos.

1 The role of payments system

In market economies money is main link between individual and society. Individuals do nothave to coordinate their actions through the establishment of equilibrium prices but can pursue

spent if they are lent to enterprises and invested. If investment does not take place, salesdecline, stocks increase and output declines. As a result the income saved and not invested isno longer created but is subtracted from the income enterprises can hope to earn. Capitaliststhus earn what they spend where what they spend comprises expenditure on consumer goodsand those savings of capitalist households that were spent (invested) by capitalistentrepreneurs. A consequence of this situation is the existence of economic cycles. If profitsare high, capitalist incomes are spent and invested, economies boom and this growth ensuresthat investments yield a good rate of return. If there are doubts about growth prospectsinvestment declines, saving increases, and there is a decline in the desire to spend. The resultis falls in output that correspond to their initial expectations.

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their own ends.4 To act, individuals must draw on social resources to invest, creating a debt orobligation to society. Through their activity the same individuals can earn an income which theycan use to settle their debts and to pay for the goods and services they need. The settlement ofdebts and credits presupposes the existence of a system of payments (see Figure 1). A credit andmonetary system comprising a series of commercial banks and a central bank to compensate forrecurring disequilibria among commercial banks is therefore the first requirement of a marketeconomy.

Money is also, however, a measure of value. Value is the anonymous judgement of social worthpassed by all the members of a market society on the economic actions of each individual. (Thissocial expression of the value of an individual's contribution to society, which is ratified by thesystem of payments, may however differ quite significantly from individuals' judgements oftheir contributions).

4 In a Walrasian world the auctioneer centralizes all of the information about the quantitiesindividuals will purchase/sell at different prices. The auctioneer uses this information todetermine equilibrium prices. The prices are communicated to market participants, andtransactions take place. In a decentralized system a system of payments made up ofcommercial banks and a central clearing bank settles the debts that stem from a series ofbilateral exchanges. Insofar as market institutions are established to communicate informationabout prices the heterogeneous prices that will exist for the same good of the same quality in aworld of bilateral transactions will tend towards a single price no matter who is the buyer orseller. Boyer (1996) reiterates Benassy's view that one of the nearest real-world instantiationsof the Walrasian auctioneer was paradoxically GOSPLAN.

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Figure 1 Walrasian and decentralized markets (Source: based on Boyer, 1996)

AGENT i AGENT j

CENTRAL BANK

BANK A BANK B

mijmij +mij

AGENT k AGENT l

mkl

pkijqk

pkklqk

MARKET: pkij pkkl

A DECENTRALIZED MARKET A WALRASIAN MARKET

AUCTIONEER

AGENT i

AGENT j

AGENT k

pkipkj

pkk

pmi

qkiqkj

qkk

qmi

AGENT i

2 The role of the market information system

To limit compatibility problems in such a system of decentralised exchanges, a market must beconstituted to centralise information about demands and supplies and to enable assessments ofthe quality of goods, the creditworthiness of customers, the efficiency of delivery, etc. (seeFigure 1). Market competition also depends on a framework of rules governing conditions ofentry, rules of competition policy, and so on.

3 The role of the financial system

Individually capitalists compete with each other. Competition involves attempts to reduce costsbeneath the social avearage to earn surplus profits, to open up new markets or to invent newproducts. Increased competitiveness can therefore involve an intensification of work and relatedstrategies of cost reduction, an extension of an enterprise's geographical field of operation, andproduct and process innovation. Expansion into new areas and innovation often require accessto sources of credit and imply investments in projects whose outcomes are uncertain. Thesefacts renders the financial system a fourth (alongside the payments system, the marketinformation system and the nexus of employer-employee relations) critical structure ofmediation.5 As Aglietta (1999: 49 ) argued: 5 The finance system has three functions: first, it produces and circulates information (or rather

information about information with all the risks of speculation and instability it entails);second, it plays a central role in the evaluation of financial assets, determining the direction ofaccumulation through its effects on the allocation of savings (self-financing), credit and newshare issues; third it supervises the use of savings on behalf of creditors.

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'the debts incurred by capitalists are wagers on the future which are not mutually compatible.... To accumulate capital each capitalist tries to [modify] .. the existing division of labour,[making} ... capitalism a dynamic force. ... As it takes some time for society to validate orinvalidate these wagers, the evaluation of capital at any given moment includes a specificprocess of buying and selling debts and rights to capitalist property. The capital owned byindividual capitalists is evaluated by financial markets. The evaluation amounts tospeculation on the future [:] ... wagers on the success or failure of the gambles taken by eachindividual capitalist. [This] ... financial evaluation of capital introduces the ambivalentsolidarity between industrialists and financiers ... The incoherence of the capitalists' wagerson the future [lead to] ... doubts about solvency [, and] ... drastic revisions in theseevaluations of capital, which trigger financial crises.'6

4 The nexus of employer-employee relations

A second fundamental feature of capitalism is the wage relation and the associated socialdivision between those who are able to advance money as capital with a view to theaccumulation of money wealth and those whose access to money depends on the sale of theircapacity to work. Capitalists cannot accumulate without incurring debts and without submittingthe results of their initiatives to the judgement of society. Wage earners are free to changeemployers and spend their income as they see fit. Nonetheless the employer-employee relationis a class relation. On the one side it makes it impossible for a group of free individuals lacking

6 The petroleum market, which has changed profoundly since the second oil crisis, illustratessome of these principles. Sources of supply have multiplied, and the market went worldwide.A 'spot' market, located on the major financial marketplaces (New York, London, Singapore,and elsewhere) and on which transactions are carried out nonstop, cargo by cargo, everywherein the world, increased in importance at the expense of long-term contracts. Actors on the oilscene constantly seek to optimize their sales and purchases. In this new global environmentthe prices of crude oil, of refinery products (gasoline, naphtha, bitumen, or others), and of thedollar, fluctuate constantly and unpredictably, generating considerable financial risks. Due tomarket fluctuations, for example, the time that elapses between the purchase of the crude andthe sale of finished products can cause very high losses or very high gains. Petroleum 'traders'hedge against the associated financial risks by making time settlement operations. Theseoperations, which are traditional and common in the stock market, but have developed onlyrecently on the oil markets, consist of placing orders for the purchase or sale of 'paper' oil,very little of which (about 5 per cent) will lead to an actual cargo delivery. The principle is tocompensate a real operation with an inverse 'paper-barrel' operation under the sameconditions: a negotiator buys a cargo of oil and sells the equivalent 'paper barrels' on the spotmarket at the same time. So, if the price of crude drops and the negotiator loses money on theresale of the physical oil, the negotiator buys back the 'paper' oil at a lower price than s/hesold it for, and thus makes a profit that compensates her/his loss on the real market.

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sufficient property rights and money wealth to become private producers in a market economy.On the other wage earners must accept the hierarchical authority of their employer in return fora wage. The wage labour nexus is therefore a second fundamental institutional form governingwage setting and the organisation and intensity of work.

To settle their debts to society and earn profits, capitalists collectively depend to a significantbut varying extent on the consumption expenditure of their employees. The wages capitalistspay to their employees are simultaneously a cost and an element of the income on which thesales of their products and those of other capitalists depend. The ideal solution for anyindividual capitalist is to pay wages that are as low as possible to his/her employees, whilst allother capitalists pay high wages to sustain high levels of income and demand. The implicationis that the individual interests of capitalists and their collective interest differ. As Aglietta(1999: 47-8) argues, the conflict inherent in the wage relation can be resolved if the capitalaccumulation also improves the living conditions of labour force and furthers the socialdevelopment of a wage society. Its resolution depends, however, on the on the putting in placeof mediation mechanisms that place constraints on the cost reduction strategy.

5 The role of the state

Could all these institutions and systems of mediation be self implementing. Some economistssay yes. Most accept that a political and legal order is required to establish the underlyingconditions for accumulation and to establish these institutions. Up to this point in time, viablemonetary regimes, rules of competition and market discipline, effective financial systems,functioning labour markets and the establishment and protection of capitalist property rights alldepend on the actions of public authorities. At present it is therefore impossible to conceive of acapitalist economy without an explicit role for state.

The state also acts to define citizenship and to enacts the legislation that institutes and enforcessocial rights, in the recent past through the creation in advanced countries of a welfare state andits tax and expenditure programmes.

6 The international regime

The legitimacy and coercive power of state is however confined to a particular territory. Thecontemporary nation state is defined by internal political processes associated with the creationof a domestic constitutional order and its external recognition and establishment of relationshipswith other nation states. Each nation state is therefore inserted in an international regime orconfiguration.

Conjunctural, cyclical and secular phases in the development of capitalismTheories of regulation draw on these underlying ideas to explain the trajectories of capitalistsocieties.

Historically, the development of industrial capitalism has been punctuated by three or four

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enduring crises. The first occurred after the Napoleonic Wars and saw, depending on theindustrial or agrarian character of the country, the first crisis of industrial capitalism or the last(Malthusian) crisis of the ancien rgime. The second occurred in the Great Depression of thelate 19th century. The third occurred in the period between the First and Second World Wars.The fourth started at the end of the 1960s.

Throughout the long periods between these phases of turmoil, developed capitalist economieswere reasonably dynamic and stable. At the root of stable growth was, it is argued by theories ofregulation, the emergence of a sequence of new development models often centred onfundamental transformations of the preceding economic and social order.

These new development models took shape in phases of crisis when older socioeconomic ordersfailed on the economic front and were rejected on the political and social fronts. At the root ofthese phases of regular macroeconomic development were regimes of accumulation7 whichinvolved the establishment of a significant degree of compatibility between accumulation andsocial progress due to the implementation of evolving institutional architectures and systems ofmediation (also called modes of regulation) that managed temporarily to regulate the conflicts,tensions, imbalances and contradictions capital accumulation unleashes and to translateaccumulation into social and economic progress. The development models that underlie phasesof growth depend on a political compromise between social forces and on the widespreadacceptance of particular world views. Thus, the roots of the Fordist model lay in the inter-warstruggle between social democratic and New Deal politics, Stalinism and Fascism each ofwhich sought to resolve the contradictions of a liberal order that had failed. (The dominance ofmarket rationality was, as Polanyi (1944) argued in The great transformation: the political andeconomic origins of our time, one of the major causes of the savagery characteristic of the firsthalf of the twentieth century).The capacity of mediation mechanisms (structural and legal constraints, collective agreements,and systems of values, shared expectations and rules of conduct) to regulate contradictions andstabilise development is however limited for several reasons. 'First, the effectiveness oforganisations lies entirely in the stability of their internal rules, but these [rules] allow themlimited scope to respond to variations in the conditions governing the accumulation of capital'.

7 A regime of accumulation is a systematic organisation of: (1) processes of production andvalue creation; (2) income distribution involving the division of value added among differentclasses and social groups; (3) exchange of the social product on which the validation ofproduction capacities depends; and (4) consumption on which economic reproduction and thereproduction of different classes and social groups depend. With the materialisation of aregime of accumulation, economic development is relatively stable: changes in the amount ofcapital invested, its distribution between sectors and departments, and trends in productivityare co-ordinated with changes in the distribution of income and in the field of consumption(see Dunford, 1990).

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Second, the institutionalised compromises between interest groups ... only reduce uncertainty byvirtue of their rigidity' (Aglietta, 1999: 62). The stability of regulation presupposes a certaininertia of structures and institutional arrangements. But stability is only relative. The process ofregulation itself engenders permanent movements which continually modify the character ofsocial relations, the intensity of conflicts, and the relations of strength. A critical moment canarrive when these institutions and modes of conduct associated with the existing regulatorysystem are no longer able to at regulate the changes in structure of accumulation and growth.Constraints formed to channel growth can become fetters, opening up the question of new formsof overall reproduction.

In the 1970s there was a crisis of Fordism/Keynesianism. This crisis was a crisis a particularcompromise and of the ideologies and social forces that underpinned it. Similarly, subsequentdebates about the restructuring of economic and political life are aspects of a search for a newcompromise as elites and their supporters seek to establish new world views and developmentmodels capable of securing wide acceptance.

The Fordist modelAt the root of the Fordist model was the diffusion of a new techo-economic paradigm centredaround the mass production of standardised industrial goods and services and the associated riseof a range of new consumer and producer goods industries. The core of the regulation mode waswas the reconciliation of the increasing returns and the rapid increases in productivity, whichthe resulting productive principles potentially permitted, with the growth of real income andstability in its distribution. First, real wages and consumer demand increased regularly, as realwage growth was linked to productivity growth. Second, the division of value added into wagesand profits remained stable as increases in money wages were linked to the general level ofprices. As the efficiency of capital was relatively steady, improvements in the standard of livingof the workforce were reconciled with a steady rate of profit and a rapid rate of accumulation ofcapital (see Figure 2).

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Figure 2 Trends in profitability: the French case

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990

140

120

100

80

60

40

20

Rate of profit

Efficiency of capital

Profit share

Index, 1924=100

At the root of the connection between the growth of income, demand and productivity were thecore elements of the wage-labour nexus and state economic management. Nationallydifferentiated collective bargaining arrangements ensured that wages grew in line withproductivity and the cost of living. The redistributive functions of the welfare state, comprisingthe social security and taxation systems which redistribute wealth and income and financecollective services, helped achieve greater social justice and granted nearly everyone thepossibility to consume, even in cases of temporary or indefinite incapacity to earn money fromwork due to illness, unemployment or retirement, without encroaching too far on the market-determined hierarchy of wealth and incomes. Keynesian macroeconomic management gave thestate active responsibility for fine-tuning economic expansion and ensured that incomes anddemand grew in a regular manner. In these ways the proto-socialist elements of the post-warsocial compromise paradoxically created the conditions for the most successful phase ofexpansion in the history of capitalism.8

8 All the problems that had haunted capitalism in the 1920s and 1930s appeared to have beenresolved. As Crosland argued in The Future of Socialism: 'Traditionally socialist thought hasbeen dominated by the economic problems caused by capitalism, poverty, massunemployment, squalor, instability, and even the possibility of the collapse of the wholesystem ... Capitalism has been reformed out of all recognition. Despite occasional minorrecessions and balance of payments crises, full employment and at least a tolerable degree ofstability are likely to be maintained. Automation can be expected steadily to solve any

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In this context inequalities diminished (see Table 1). Equity was an important dimension of thereconciliation of capitalist interests with social progress. On the one hand it increased the shareof the population enjoying sustained increases in standards of living. On the other it encouragedthe widespread adoption of modern lifestyles and the development of markets for massconsumer goods, which served as an engine of accumulation. Alongside the growth of theconsumer goods sector, there was also, however, in several countries (especially in the USA andUK but also in France) a parallel growth of a warfare state underpinned by state expenditure onsubstantial defence programmes. Interestingly productive performance was most impressive inthose nation states that committed fewer resources to defence programmes (Kaldor, 1990).

Table 1 Trends in US inequality : cumulative growth of average annual real income by quintilein the US, 1947-92 Source: Council of Economic Advisors, 1994

Quintiles Average annual percentage growth of mean family income

1947-73 1973-92First (lowest quintile) 2.99 -0.69Second 2.65 -0.18Third 2.76 0.19Fourth 2.79 0.50Fifth (richest) 2.46 0.93

To this first pillar, connected essentially with the distribution of wealth, was added another. Therapid rate of accumulation and investment led to steady increases in the size of the employedpopulation, relatively stable employment structures and low unemployment rates. On the onehand new activities were created to absorb the wage earners made superfluous by productivitygrowth and shifts in the sectoral profile of employment. On the other the expanded reproductionof capital permitted and required the large-scale movement of people from agriculture toindustry, of women into the workforce and of migrants from less developed countries intoemployment in the core metropolitan areas of the world economy. The consequence was atransformation of the structure of employment involving the movement of increasing shares ofthe workforce into paid employment and a stratification of the workforce into socio-professional categories often within large organisations. (Continued growth depended, however,not just on an elastic supply of labour but also on the continuing availability of cheap rawmaterials and energy, especially oil and gas).

remaining problems of under-production. Looking ahead, our present rate of growth will giveus a national output three times as high in fifty years' (Crosland, cited in Hobsbawm, 1995:267-8)

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As Aglietta (1999: 58-9) has recently indicated, the financial system and government monetarypolicies were 'a second line of defence to guarantee the durability of growth. ... banks couldadminister interest rates so as to safeguard their profit margins ... [and] competed with eachother over credit volumes. The credit system was a buyer's market with rigid interest rates andhigh elasticity of supply ... [enabling] companies to invest in growth and technical progress atminimum financial cost'.

The economic and institutional configurations differed significantly from one country toanother: economic structures and mediatory institutions took on national hues, allowing thedevelopment of national varieties of Fordism. Boyer (1999: 26-9), for example, identifiesmarket-led, meso-corporatist, state-led and social democratic variants of Fordism, whichthemselves reflected different economic and political cultures and varying national politicalcompromises.

The general result, however, was growth that was self-sustained and subject to relatively smallcyclical fluctuations. G7 growth rates averaged 4.8 per cent per year in 1960-73, whilemanufacturing productivity increased at 5.2 per cent (see Table 2). In contrast to the pastdomestic markets for consumer goods constituted the engine of growth : in OECD countries in1960-73 exports accounted for 10.8 per cent of GDP compared with 15.0 per cent in 1974-9,15.5 per cent in 1980-89 and 1990-95. Comparable figures for imports were 10.2, 15.0, 15.8and 15.4 per cent (see Table 2). Figures on the importance of trade for the individual EU15economies were significantly larger.

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Table 2 Output, employment and productivity growth in the G7, USA, EU15 and Japan:average annual percentage rates of growth (Source: elaborated from OECD (1997) Historicalstatistics 1960-95, Paris, OECD and OECD (1995) Historical statistics 1960-93, Paris, OECD)

1960

-73

1973

-79

1979

-89

1989

-95

1960

-73

1973

-79

1979

-89

1989

-95

1960

-73

1973

-79

1979

-89

1989

-95

1960

-73

1973

-79

1979

-89

G7

US

EU15

Japa

nR

eal G

DP

4.8

2.8

2.6

1.7

4.0

2.6

2.4

1.9

4.7

2.5

2.2

1.5

9.7

3.5

3.8

Rea

l GD

P pe

r hea

d3.

82.

12.

01.

02.

71.

61.

50.

94.

02.

12.

01.

18.

42.

43.

1Ci

vilia

n em

ploy

men

t in

man

ufa

ctur

ing

1.3

-0.

3-0.

4-1.

911.

51.

1-0.

4-3.

110.

5-1.

0-0.

9-3.

013.

3-1.

31.

1

Civi

lian

empl

oym

ent i

nse

rvic

es2.

42.

62.

21.

312.

83.

22.

51.

311.

81.

82.

01.

112.

72.

21.

9

Rea

l GD

P pe

r per

son

empl

oyed

3.7

1.5

1.5

0.7

2.0

0.2

0.7

1.31

4.4

2.3

1.7

0.7

8.2

2.8

2.6

Rea

l val

ue a

dded

inm

anufa

ctur

ing

per

pers

on e

mpl

oyed

5.2

3.8

2.6

1.9

3.3

0.3

2.3

5.9

3.7

2.5

1.8

10.3

3.8

3.4

Rea

l val

ue a

dded

inse

rvic

es p

er

pers

on e

mpl

oyed

2.8

1.3

0.8

0.4

1.6

0.5

0.4

3.3

1.9

0.7

0.4

6.3

2.5

1.9

Expo

rts o

f goo

ds a

ndse

rvic

es a

s ape

rcen

tage

of G

DP

10.8

15.0

15.5

15.5

5.5

8.5

8.6

10.5

19.6

25.4

27.9

27.3

10.2

12.6

12.9

Impo

rts o

f goo

ds a

ndse

rvic

es a

s ape

rcen

tage

of G

DP

10.2

15.0

15.8

15.4

5.1

9.0

10.6

11.6

22.9

26.2

29.3

29.7

9.4

12.2

10.9

1 19

89-9

32

1989

-94

14

Growth was therefore to a significant extent internally-oriented in the more advanced countries.Of course there were significant exchanges of goods and factors across national boundaries, andnational economies were parts of a hierarchical international order involving a stable set ofintergovernmental institutions that had emerged out of the General Agreement on Trade andTariffs (GATT) and the Bretton Woods fixed exchange rate system. The modesty of the shareof trade in GDP, the limited degree of financial integration that stemmed from restrictions oncapital movements, and the capacity of nation states to devalue their currencies in a system offixed but adjustable exchange rates nonetheless permitted a significant degree of nationalautonomy. Aglietta (1999: 60) has argued that the national institutions and in particular thenational wage relation and wage standard in their dual role as determinant of nationalproduction costs and domestic consumer spending power were the lynch-pins of the Fordistmode of coherence. For all of these reasons national economies were viewed as the buildingblocks of the international order into which they were integrated through their participation in arange of international institutions.

The crisis of Fordism and afterIn the 1970s there were increasing signs of an exhaustion of the Fordist growth regime. Thesesigns of a growth slowdown heralded the start of a new period of uncertainty, crisis and change.Amongst the first symptoms was the sharp downturn in rates of profit itself stemming from thefall in the efficiency of investment and the increase in the share of wages in national income(see Figure 2).9 These signs suggested the existence of malfunctions in the core systems ofmediation (the relationships underlying the wage relation, and the market, money and financialsystems) and in particular in their capacity to absorb and regulate the effects of change in theunderlying structure of accumulation and growth. What were these changes in the underlyingstructure of accumulation? In this section I shall consider five : the slowdown in the growth ofproductivity and the efficiency of capital; the internationalization of production; financialglobalization; the increase in individualism and the associated erosion of solidarity; and theerosion in the autonomy of nation states. These five changes were connected with what I shallcall the dual crisis of Fordism.

The crisis of the Fordist economic order was twofold. In the first place, there was a 'supply-side'crisis of the Fordist wage relation (which involved a combination of Taylorist principles ofwork organisation, centred on the separation of intellectual and manual work, and rigid forms ofemployment and wage determination, which underpinned the regular growth of income anddemand). In the second place, there was an acceleration of the globalization of economic life9 The rate of profit is equal to profits divided by the capital advanced. This ratio is also equal to

the product of the share of profits in output (profits divided by output) and the efficiency ofcapital (output divided by the capital advanced). The efficiency of capital is also equal to theratio of the productivity of labour (output per person employed) and the capital advanced perperson employed.

15

which added a 'demand side' crisis to the earlier supply-side crisis.

At the root of the supply-side crisis there were two factors. First, the diffusion and deepening ofTaylorist principles reached certain social and technical limits, narrowing the scope for furtherinnovation and intensification of work which together contributed to the significant slowdownin rates of productivity growth and the efficiency of capital (the value of output divided by thevalue of plant, machines and equipment). Amongst the social limits was a popular revolt againsthierarchies, against the alienation of work and against 'wasting one's life earning one's living ina one-dimensional society' (Lipietz, 1989). Second, the rigidity of wage contracts andsubstantial increases in the share of wages in national income squeezed profitability (at thesame time as inflation made real interest rates negative). This second factor was related to thefirst in that the increase in the wage share also stemmed in part from the combativeness oftrades unions and a range of other social movements active in the late 1960s and 1970s.

In the face of the crisis of Taylorist productive model, capitalist enterprises responded in severaldifferent ways. On the one hand, there was an acceleration of automation and a rapiddevelopment of information and communication technologies (ICT). Subsequently this ICTrevolution was seen as heralding a third industrial revolution, involving a Schumpeterianprocess of replacement of one productive system by another. On the other, there were a range ofexperiments with new principles of work organisation and wage determination (variouslyreferred to by the phrases job enrichment, flexible specialisation, lean production and dynamicflexibility), new intra-firm organisational arrangements and management models, and aredefinition of relationships between firms and their subcontractors and markets. These newtechnologies and new principles of work organisation were often put forward as a way out ofthe crisis of Taylorism and as the foundations of a new productive order (Boyer and Durand,1993). To others these new technologies were less radical. For these critics the newtechnologies and management principles permitted an adaptation and refinement of theprinciples of Taylorism rather than their replacement, and involved in particular an increase inthe ease and speed of reaction to firms to changes in their external environment, an emphasis onthe mass production of quality goods at low cost and the widespread use of informationtechnology and a reinforcement of the control of capital over production rather than an increasein the autonomy of the workforce and a humanisation of work (Boyer and Durand, 1993).10

10 Durand (in Boyer and Durand, 1993) argues that a major aim of the contemporaryreorganisation of work is greater production flexibility which itself involves greatercoordination/integration of the system of production as a whole and the creation of networksof systems, operations and production sequences including relation to markets and suppliers.Examples include: the integration of Research and Development and product manufacture;the integration of marketing, design, manufacture and management; the integration ofactivities in 'extended firms'; a reliance on greater organisational productivity and automationto improve the responsiveness of manufacture and assembly to variations in the volume of

16

These innovations did not, however, stem the decline in the efficiency of investment. Thereason why lay in part in the fact that the investments that firms undertook in automatedmachines were expensive relative to the increases in output they yielded. The high costsassociated with the design and development of new systems was in turn a consequence of thefact that their development involved the employment of large numbers of well-paid engineersand technicians.

The increase in the wage share was a further constraint on competitiveness, profitability and thefinancing of investment. To reduce costs and restore profitability, companies sought torationalise employment, increase employment flexibility and reduce the share of wages andsalaries in value added.11 As Figure 2 shows, in the French case it was the reduction in the wageshare, rather than increases in the efficiency of capital, which resulted in a restoration in the1980s of profit rates to their 1960s' levels. Throughout the period after 1965, the efficiency ofcapital fell. Overall it declined by 45 per cent. This restoration of the rate of profit was thereforeto a significant extent a consequence of a sharp increase the share of profits and a dramaticreduction in the share of wages in national income permitted by a combination of increasing thework done and paying less for it. As Lipietz (1996) points out, French workers produced moreeach year. Indeed, productivity increasing by 30 per cent in 12 years. Yet their hours of workremained the same, and their real wages hardly increased. In France, however, as in a number ofother continental European Union Member States, unemployment rose sharply. In the US and toa lesser extent the UK the fear of unemployment and weak social protection enabled employersto chart another course involving much greater wage flexibility. In the US annual hours of workincreased by one month since start of 1970s, while for manual workers and clerical andsecretarial staff the average real wage fell by 10 per cent since 1973. To maintain his/her 1973standard of living an American worker must do an additional 245 hours work per year.

The restructuring of productive activities that stemmed from this crisis also involved anaccelerated internationalisation of production and markets, at first as runaway industries soughtto reduce wage costs through investment in low wage locations. The fact that this process ofinternationalisation was designed to escape national wage bargaining systems and took place

demand without adversely affecting the commitment of workers; and an increase in the skills,learning capabilities, functional flexibility and involvement of the workforce in the strugglefor improved productivity and quality. The objective is, first, to accelerate obsolescence andto track shifts in fashion in order to speed up replacement, and, second, to increase varietyand/or improve the quality, price and performance of normalized products to gain marketshare at the expense of rivals.

11 To some extent there was a trade-off between the two responses to the crisis. Companies hadto choose either to produce high-value added goods and services with skilled, well-paid andinvolved workers, or lower quality products with less skilled, less well-paid and moreinsecure workers.

17

without an international harmonisation of the Fordist wage compromise added a second'demand side' to the crisis. With internationalisation, cost competitiveness emerged as theoverriding concern of governments and elites.12 Yet, as attempts to increase competitivenessinvolved reducing the rate of growth of the mass of wages and salaries, there was a decline inthe rate of growth of domestic demand, of domestic markets and of economic growth. A keydeterminant of this slowdown was the internationalisation of government austerity programmes.As Lipietz (1989) has argued, in order to reduce its balance of payments deficit, each nationstate sought successively larger wage reductions than its rivals. In order to improve its capitalaccount, each nation introduced yet higher interest rates to attract international deposits. Wagereductions and increased interest rates had depressive effects on aggregate demand andinvestment. Accordingly, the growth slowdown spread and was reinforced in a war ofcompetitive recessions.

To the earlier supply-side problems were accordingly added the demand-side difficulties of the'double-sided' crisis of Fordism. This demand-side crisis generated further difficulties. Slowergrowth tied up large sums of money in stocks of goods and materials. In addition, instabilityincreased, making it difficult to adjust output to changes in the composition and level ofdemand, and giving further importance to production flexibility.13

Greater internationalisation of production and international interpenetration of national capitalsin industry, finance, services and commerce reduced national economic independence andsovereignty. One consequence was a decline in the scope for Keynesian reflation; any increasein national demand not matched by corresponding increases in demand in other countries wouldlead to a large inflow of imports and balance of payments deficits as the initial economicpolicies of the first Mitterand government in France (June 1981-82) showed. Any sustainedreflation, it seemed, would have to be organised at an international level. As this experienceshowed, the scope for the implementation of effective systems of mediation at a national scalewas far more limited than in the past.

12 An awareness of the organisational and technical limits of the Fordist productive order wasdelayed by the emphasis on defensive relocation strategies aimed at increasing the flexibilityof labour markets. In the United States, for example, employers chose to struggle againsttrade unions and to relocate plants in states where management was stronger and wages werelower. Their successes on this front reduced the incentive to innovate that stems from highwages. The runaway industries phenomenon associated with the transfer of production to lowwage countries had similar effects.

13 In the influential The second industrial divide, Piore and Sabel (1984) argued that there was astagnation of the consumption norm : high rates of ownership of consumer goods, increasedthe importance of replacement demand, while international inequalities were too wide topermit the integration of less developed countries in circuit of mass production-massconsumption.

18

Globalization and post-FordismIn the years since the start of the 1980s there have been profound changes in the structure andtrajectories of the advanced capitalist countries and in their relations with the rest of the world.Included were a sharp increase in the degree of global economic integration and the rapiddevelopment of a new international division of labour, a radical financial markets regimechange and a major restructuring of the scope and limits of state action.As far as the economic trajectories of advanced economies was concerned, the sluggish growthof the domestic market was associated with a much greater orientation towards external marketsand externally-oriented models of development. As paid employment spread and as capitalismpenetrated formerly Communist and Third World societies, trade and international investmentwere increasing seen as a source of profit and an engine of growth. A consequence was theemergence of a new international division of labour, increased rivalry between the majoreconomic blocs (North America, Europe and East Asia) and an associated redefinition of thestrategic and security interests of the most advanced capitalist countries. (The expansionist andimperialist impulses of the late nineteenth and early twentieth centuries seemed to reassumetheir earlier significance as the advanced countries set out unchallenged to mould emergingmarkets in their own image and as the collapse of Communism seemed to permit a much moreaggressive international stance). The initial driving force was an internationalisation of virtually all of the activities ofmultinational corporations. There was an internationalisation of processes of production, ofmarkets, as attempts were made to sell similar products throughout the world, of the sourcing offinance, which was raised increasingly on global markets, of research and developmentactivities, which were located in a greater range of countries, and of management, with therecruitment of managers of many nationalities to create a worldwide management system.Different countries nonetheless played different roles in this new international division oflabour. In the developed world, in those sectors producing traded goods and services, there is anincreasing specialisation on the skilled, intellectual work performed by what Reich (1991) callssymbolic analysts or problem solvers who work on ideas, concepts and symbols and whoseactivities (design, technical and financial consultancy, information and communication,marketing, advertising, accountancy and legal services, etc.) involve the appropriation of largeshares of the value added created in global production chains. In developing countries,increasingly called emerging market economies, the scale of capitalist activity is increasing withthe production of capital and intermediate goods, the growth of a range of processing industriesand the expansion of financial and other market services.14 To paraphrase Morgan and Sayer(1987), development is occurring in these countries, without necessarily promoting a

14 Aglietta (1999: 63) points out that another dimension of the future international division oflabour will involve the exchange of the savings of the ageing populations of the developedworld for goods and services produced by the younger labour forces of the developing world

19

development of these countries.

Associated with this process of internationalisation were a decomposition of a number ofnational oligopolies and an internationalisation of the spatial arena in which competition takesplace, though it was not the case that markets were made more competitive, as there is a wave awide range of agreements, partnerships, mergers and takeovers whose result was the creation oftransnational oligopolies. An important component of this aspect of the restructuring processwas the internationalisation of privatized enterprises operating in areas of economic life thatwere traditionally a part of the public sector, including public transport, telecommunications,television and the media, and energy. In the Fordist era, these enterprises were largely shieldedfrom international competition, but in the 1980s and 1990s they were often sold off to privateowners, usually for sums that fell well short of their economic value, opening up new areas forprofitable investment, shifting the dividing line between markets and public services, andaltering the status of their employees.

Taken as a whole this new phase of globalization has significantly weakened the connectionbetween corporations and their territories of origin. In the Fordist era, internationalisationamounted principally to the international exchange of goods. The exchange of the products ofone country's labour for those of another did not have a significant impact on domestic pricesystems, permitting the setting of national wage profiles in national systems of bargaining.'Cyclical adjustment of economic policies, discretionary devaluations and exchange controlswere sufficient to reconcile the national autonomy of ... [the collective bargaining systems] withinternational trade' (Aglietta, 1999: 66). The internationalisation of production and theestablishment of globally integrated production chains alter this situation in several ways.Collective bargaining is no longer the linchpin of developed wage societies. The connectionbetween corporations, their structures of production and the distribution of value added andtheir territories of origin weakens, as capitalist enterprises more generally have escaped fromthe national constraints that formerly shaped the path of accumulation, and increasingly are ableto set the agenda, 'without any longer being subject to the constraints that formerly channelled... capital accumulation in the direction of social progress' (Aglietta, 1999: 67). As Agliettacontinues, their fundamental concerns are with their overall competitiveness, their globalprofitability and the global centralisation of finance. Their competitiveness and profitabilitydepend on their capacity to organise flows of resources, knowhow, finance and goodsthroughout the world. Strict financial criteria compel them to maximise short-term equity valuesand to bear down on employment and wages. In these circumstances, the setting of wages takesplace in the light of supranational market conditions.

The restructuring of work and employment and wage setting that result are creating a newdivision of the workforce in developed economies (see, for example, Lipietz, 1996). At the topof the hierarchy lies a modern petite bourgeoisie, made up of executives and managers or cadrescomprising Reich's (1991) class of 'symbolic analysts'. In the middle are found two groups.

20

First, there is a group of secure workers, made up middle managers, technicians and publicservants, that includes welfare professionals, Second, there is a group made up of clerical andmanual workers that includes personal service sector workers and operatives in the servicesector and whose employment is insecure and low-paid. At the bottom lies a fourth groupcomprising those who are excluded from the workforce. The first group gains fromglobalization, whereas the fourth group tends to lose. What happens to the second and thirdgroups depends on whether they can gain from the prosperity of the first group or suffer fromthe deflationary competition from the fourth.

In the Fordist era there was a hierarchy, yet society was held together as the individualisticpursuit of social advancement, social distinction and wealth took place on a social escalatorwhich guaranteed a steady increase in each individual's real income and low levels and shortdurations of unemployment. To describe this situation and in particular its characteristicdistribution of income Lipietz (1996) coined the term 'hot-air balloon society'.15 Globalizationand the weakening of systems of collective bargaining along with an associated reinforcementof individualistic attitudes has ruptured the solidarity on which this model rested.

In the western half of Europe the European Union has sought to channel these processes ofglobalization by increasing the degree of economic and financial integration (first, with theestablishment of the Single Market and, second, with the steps towards economic and monetaryunion). Fundamentally, the aim was the creation of a unified economic space as a platform forthe reinforcement of European companies in European and global markets and not the creationof a set of mediation mechanisms (other than those of the market) capable of channelling

15 The distribution of income could be represented by a floating spinning top or strobiloid withdisposable household income measured on the vertical axis and the frequency in each incomecategory on the horizontal axis assumed the form of a 'potbellied hot-air balloon'. The imageis appropriate for several reasons. First, it depicts a world in which there were few richhouseholds, few poor households and a lot of households with incomes in the middle of thedistribution. Second, it reflects the way in which the incomes of all households rose steadilyand together as the hot-air balloon rose up off the ground: movement upwards occurredbecause of expansion of demand associated with the almost immediate expenditure of theincreasing incomes of in particular the swollen middle of the distribution, while the shaperemained steady due to the fact that the wage distribution was hemmed in by collectiveagreements and welfare redistribution. Third, it suggested that the rich, middle and popularclasses would successively attain the same or similar consumption patterns and ways of life.At any point in time the lifestyle of an engineer foreshadowed by some years that oftechnicians. Fordist societies were escalators in which the social distances between socialclasses remained constant, but in which everyone rose including migrants moving from thecountryside to the city or immigrants moving from former colonies to the metropolis whosearrival involved stepping on to the bottom step of the escalator.

21

accumulation in directions compatible with universal social progress. At the same time as therewas no intention to create a new Europe-wide welfare state model, European economicintegration added to the destabilisation of an economic framework made up of relativelyautonomous national systems of prices reconciled with one another by means of exchange rateadjustments. The aim of the integration project is to replace this system with a set of relativelyhomogeneous national price systems constrained by fixed exchange rates. Adjustment in such aframework could occur either through a European system of fiscal transfers, through high ratesof workforce mobility, or through wage flexibility. As there is strong resistance to the idea of aEuropean welfare state and the establishment of social rights as constituent elements ofEuropean citizenship, and as workforce mobility in the EU is relatively limited, only wageflexibility remains. At present wage flexibility is weakly developed due to the persistence ofearlier principles of wage bargaining in many Member States. In the short-term the outcome is adeeper unemployment crisis. In the medium term wage flexibility is a likely area ofconfrontation between governments and trade union movements and is indeed one of thereasons why some fractions of the European class of employers favour the current model ofintegration.

Alongside and stemming from the globalization of capital and the increase in the degree ofglobal economic integration, financial deregulation and financial innovation permitted aglobalization of financial markets. Two groups of factors explain this trend. The first is themobilisation of global financial resources by international enterprises on the one hand, and theincreasing disconnection of national savings and investment on the other. The former was aresult of the internationalisation of activities, while the latter stemmed from differences innational growth trajectories and associated differences in the demand for and supply of savings,with, for example, the US emerging as a net borrower (debtor) and Japan as a net lender(creditor). Together this group of factors contributed to a dismantling of controls on movementsof capital. The second group was associated with the relative decline in the role of bank depositsand banking oligopolies and the rise of a system of market finance dominated by institutionalinvestors. Institutional investors insist, on behalf of their investors, on the satisfaction ofambitious performance criteria set and evaluated by financial markets. The aim is to secure highreturns involving the maximisation short-term equity values, one of whose consequences is anobsession with cutting wage costs and shedding jobs to boost share prices (Aglietta, 1999: 67-9). In contrast to the bank oligopolies, which usually held claims until they fell due, this newmarket finance system introduced innovations in the management of risks leading to a dramaticexpansion in the trading in securities and currencies and the explosion of markets forderivatives. As Aglietta (1999: 69) indicates, the outcome is 'a complex web of financialinterdependence ... woven through arbitrage of interest rates, currency speculation andinternational creditor and debtor positions'.

This restructuring of the financial sector was accompanied by a major shift in economic policiesin favour of creditors and the holders of financial wealth, creating a new set of financial

22

constraints which had a profound impact on national state action. In the 1970s, to encourageeconomic growth, real interest rates were allowed to fall (as the rate of inflation was allowed toexceed the nominal rate of interest). To protect the real value of the financial assets of creditorsand rentiers, the financial sector developed a range of new investment instruments to counterthe effects of inflation. As a result new financial markets developed in which interest rates weremore sensitive to inflation rates (Aglietta, 1999: 75-6). It was in this context that, at the end ofthe 1970s and start of the 1980s, there was a much more forceful switch to a monetarist agenda,involving the introduction of extremely restrictive monetary policies in the United States andthe United Kingdom. This reinforcement of a course of action already observable in the mid-1970s led to a dramatic increase in interest rates, a deep recession that spread throughout theworld, sharp increases in unemployment and a profound debt crisis in developing countries thathad borrowed recycled oil revenues in the 1970s to fund industrial investment programmes.(Developing countries borrowed to fund industrial investment expecting exports of the resultingindustrial products to enable the repayment of debt. Monetarism forced up interest rates,reduced the rate of growth of demand for industrial output and encouraged protectionsim inadvanced countries, crippling the debtors).By the middle of the 1980s inflation rates had subsided, yet real interest rates remained high,often exceeding the rate of growth. High interest rates, combined with the need to adapt quicklyto a rapidly changing economic environment, encouraged investments in liquid assetsguaranteeing high short-term returns, such as currencies, shares, land and real estate.Conversely, these conditions discouraged productivist strategies which tied up wealth in fixed,productive assets whose use could not easily be switched from one set of ends to another.16

16 There is a significant degree of tension between productivist strategies and rentier typestrategies. As Keynes clearly indicated in the inter-war years, productivist strategies are long-term and depend on low interest rates and economic stability, whereas commercial andfinancial strategies are often short-term, speculative and centred on the acquisition anddisposal of assets, dealing in land and property and trading in currencies, stocks and shares,debt and commodities. Of course in market societies commercial, logistic and financial actorsplay an indispensable role: commercial and logistic activities play a crucial role asintermediaries between producers and between the owners of resources and the consumers ofthe goods and services made with them, while financial institutions perform a critical functionas as providers of credit money and the buyers and sellers of debts and capitalist propertyrights. Commercial, financial and speculative activities do not create wealth, however, anddepend for their remuneration on their capacity to secure a part of the wealth created by theproductive sector or from other spheres of life (through exploitation of the domestic economy,the informal economy, drug dealing, corruption, crime, long-distance trade in agriculturalsurpluses and the scramble for the spoils of the fragile economies bequeathed by the collapseof Communism in East-Central Europe. Palloix (1993) argues that in recent years productiveinterests have been subordinated to commercial and financial interests. First pseudo-

23

As indicated earlier, the productivity, profits and investment slowdowns of the 1970s and early1980s entailed a reduction the rate of growth of output and value added, which the pursuit ofrestrictive monetary policies and increase in interest rates reinforced. Slower growth putdownward pressure on public fiscal revenues and social transfers, as did competitive downwardpressure on tax rates. At the same time the transfers required under existing welfare statearrangements increased due to the increase in unemployment and poverty, along with the ageingof the population and the increasing real cost of collective services. Governments at all levelsconsequently faced mounting financial pressures and difficulties in raising the revenuescommensurate with the increasing demands for public services. A combination of downwardpressures on revenues and constant or increasing expenditures creates public sector deficits andincreases public debt and debt-GDP ratios, while higher interest rates raise the costs of debtservice. (Governments are encouraged to offset these unfavourable trends through asset sales).The more restrictive monetary policies are and the longer restrictive policies last, the greater,other things being equal, the increase in debt. As financial markets 'dislike' public sectordeficits, the credibility of public policy declines, and long-term interest rates go up toincorporate a risk premium (increasing the attractiveness of state debt as profitable placementsfor financial wealth). Combined with the increase in individualistic values, these powerful financial constraints havereduced the capacity of governments to finance public services and have provoked a crisis ofthe welfare state, threatening the cohesion of advanced societies.17 Essentially, the universal

productive capital has used its control over the access of productive capital to markets to shiftdecisively the distribution of value added in its favour. Second the squeeze it has applied tothe productive sector has increased competition, reduced wages and prompted a strong drivefor productivity growth. As productivity growth occurs without output growth, theconsequence is the exclusion of a large and growing section of the population from the worldof paid work and from the world of consumption of commodities. Finally through itsdominant role in the restructuring of global cities and metropolitan economies, pseudo-productive capital has created new urban hierarchical systems and new orderings ofgeographical space which raise its status and profile at the expense of the productive sector.

17 Short and long-term real rates of interest have been at unprecedentedly high levels for morethan a decade often exceeding the rate of growth with profoundly negative consequences forsolidarity, investment, employment and income distribution, while the globalization offinancial markets has seen a remarkable scaling down in the rates of taxation on capital(Fitoussi 1995). Two examples will suffice. First, fiscal constraints and real rates of interestthat are high relative to the rate of economic growth have an adverse impact on the degree ofco-operation between the public and private sector. In particular the deterioration in thefinancial position of the public sector constrains public investment for economic developmentin education, health, transport and other infrastructures and in research and development. One

24

welfare state was developed to cope with low rates of unemployment and not the massunemployment of the late 1970s and 1980s with its repercussions in the shape of lost output, anarrower tax base and greater social security expenditures. The consequence is an erosion of theprinciple of social insurance, changes in eligibility, a reduction in the real value of welfarebenefits, and a move to more selective modes of intervention. An important aspect of thisreform process is the increased role of new non-governmental organisations which step into thebreach to mend some of the fissures in the social order. Necessarily, these associations abandonthe principle of universality, exercise discretion in choosing who to help and who not to helpand function as competitive interfaces and lobbyists between funding agencies (the WorldBank, national Ministries of Housing and Health, the European Commission, Charities, etc.)and poor people. The result is a slow transition to a national/international neo-liberal social statein which social entrepreneurs organise the people they serve as groups of clients and engage ina struggle with other associations for support from potential financial backers (see Lipietz,1996).

Economic performance: growth and inequality In the last section I identified a number of inter-related processes that are transforming thesocieties of the developed and developing world (the globalization of production, theglobalization of finance and the erosion of the capacity of nation states to secure socialcohesion) and I suggested that so far there has been a failure to develop new mediationmechanisms capable of channelling growth along lines compatible with universal socialprogress. The new trajectories of capital accumulation and the new international division oflabour are, in other words, neither self-regulating nor hemmed in by the type of mediatingmechanisms capable of establishing a new regime of growth. In this section I shall seek todefend this argument by outlining some of the repercussions of the resulting developmenttrajectories. Three phenomena will be briefly highlighted: the degree to which globalization hasled to economic convergence of less developed countries with more developed; the growthrecord of the more developed world; and the inequality crisis in advanced countries.

To appreciate the impact of the new international division of labour on relative living standards

of the risks of a failure to give priority to such investments is that the private sectorexperiences what it sees as a decline in the quality and usefulness of public services and isreluctant to finance it which in turn contributes to the financial pressures. The decline may bereal, but its roots lie in large measure in a restrictive economic environment. Second, if therate of interest is smaller than the rate of growth individuals who pay taxes to fund old agepensions will do so in the knowledge that the same amount of redistribution will provide themwith a higher standard of living when they themselves reach retirement age than the retentionof their taxes and investment in a financial fund at current rates of interest. Once real rates ofinterest exceed the growth rate, the situation changes. A financial investment will yield agreater return than a share proportional to the sum invested of future GDP.

25

throughout the world it is important to place global development in its longer-term perspective(see Table 3). Table 3 shows GDP per head in a number of countries in each of a series of worldregions relative to that of the United States: it shows how the US and other new countries(Canada, Australia and New Zealand) pulled ahead of the rest of the world until 1950, thoughthe Soviet Union did close the gap somewhat in 1929-1950. As this table suggests, internationalinequality is largely a result of this concentration of nineteenth and early twentieth centuryindustrialisation in the western half of Europe and the new countries settled by Europeans. Inthe period from World War Two until 1973, Western Europe, Eastern Europe and from the1960s Southern Europe and Asia experienced rapid catch-up. The group of Latin Americancountries that had adopted strategies of import substituting industrialisation also closed the gap,while Africa stood still in relative terms. In short, the post-war golden age was a period ofsignificant decreases in international inequality. After the mid-1970s Asia continued its rapidcatch-up until the recent currency crisis, and Western and Southern Europe continued to closethe gap on the United States but at a much slower rate. Conversely, Eastern Europe fell behind,with its slow relative decline turning into a calamitous collapse with the start of the transitionfrom Communism in 1989, as did Latin America and Africa. Catch-up was, therefore, faster upto the mid-1970s, and in the past twenty-five years a number of parts of the world have failed toparticipate further in the catch-up process. Africa is the most striking case,18 though in manyother countries there is evidence of an economic crisis on an unprecedented scale leading torapid impoverishment of large sections of the world population and sharp regional conflicts.

18 Cohen (1998) argues that the poverty of Africa can be attributed to the exploitation and self-perpetuating poverty of women, mercantilist policies that depress agriculture in favour ofindustry, and the corruption of elites. The answer, he argues, is to strengthen are democracyand education in a context of free trade.

26

Table 3 Comparative economic development : arithmetic average real GDP per head atPurchasing power standards as a percentage of US (Source : elaborated from data in Maddison,1995, 110-266)

GD

P pe

r hea

d as

per

cent

age

of U

SG

DP

mul

tiplie

r18

2018

7019

0019

1319

2919

3819

5019

7319

7919

8919

9218

20-

1913

1913

-19

5019

50-

1973

1973

-19

92W

este

rn E

urop

e98

186

7670

6377

5474

7678

810.

710.

771.

381.

09N

ew c

ount

ries

982

9998

9996

9797

9797

9797

1.01

0.98

1.00

1.00

Sout

hern

Eur

ope

673

563

303

3331

3121

3636

3638

0.49

0.64

1.72

1.06

East

ern

Euro

pe55

439

523

524

623

3212

2735

3431

210.

431.

141.

270.

62La

tin A

mer

ica

407

228

2829

2832

2729

2425

0.72

0.96

1.05

0.86

Asia

419

2210

1611

1412

1114

810

6914

1315

0.34

0.54

1.33

1.49

Afri

ca31

351

38

86

61.

710.

930.

80

1 Ex

clud

ing

Switz

erla

nd2

Excl

udin

g N

ew Z

eala

nd3

Excl

udin

g G

reec

e an

d Tu

rkey

4 Cz

echo

slova

kia

and

futu

re U

SSR

5 Cz

echo

slova

kia,

Hun

gary

and

futu

re U

SSR

6 Ex

clud

ing

Pola

nd an

d Ro

man

ia7

Braz

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27

Without doubt there are striking recent cases of catch-up. The most remarkable examples areJapan and, more recently, Hong Kong, Singapore, South Korea and Taiwan (see Table 4). AsTable 4 shows, however, Asian growth in the twenty years up to the early 1990s was a productof 'perspiration' (a high savings rate and increased capital and labour inputs) rather than'inspiration' (technological progress). Nonetheless, in the light of this experience it is frequentlyargued that these economies illustrate the ways in which investment in education and capitalequipment in a context of global free trade can lead to strong convergence. What is more, it isclaimed that the accomplishments of the Asian NICs can be replicated, opening up thepossibility of catch-up and reductions in global inequality on a hitherto unparalleled scale.

As I have suggested, however, the recent past is characterised not by generalised catch-up butby the existence of winners and losers and by sharply differentiated development records. Thereare differences within the group of semi-industrialised Third World countries, with relativedecline in Latin America, and South Africa, and advances in East Asia. There are differenceswithin the group of non-industrialised Third World countres, with advances at some points intime in OPEC countries, yet decline in sub-Saharan Africa. There are also differences within thegroup of former socialist countries, with advances in China, and decline in the former SovietUnion (see also Becker 2001). Most of the dynamic East Asian economies have howeversuffered dramatic recent reversals in their economic fortunes with the financial crisis, initiatedin mid-1997 with the collapse of the exchange values of their currencies.

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Table 4 Growth and its determinants in East Asia19 (Source : computed from data in Young,1995: 657-61)

Annual percentage rate of growth ofOutput Weighted

capitalWeighted labour

Total factor productivity

Hong Kong (1966-91) 7.3 3.0 2.0 2.3Singapore (1966-90) 8.7 5.6 2.9 0.2South Korea (excluding agriculture, 1966-90)

10.3 4.1 4.5 1.7

Taiwan (excluding agriculture, 1966-90)

9.4 3.2 3.6 2.6

So far the developed world has largely insulated itself from the effects of the instability ofglobal financial markets. Over the last thirty years, however, its growth record has fallen a longway short of that of the 'golden age' that followed the Second World war. In the period since themid-1970s there was a spectacular fall in output and productivity growth rates, especially inEurope. Table 2 records growth rates. In the EU15 average annual rates of growth were just 2.5,2.2 and 1.5 per cent per year in 1973-79, 1979-89 and 1989-95 respectively. Manufacturingproductivity increased at just 3.7, 2.5 and 1.8 per cent.Alongside the accelerated development of some developing economies and the growthslowdown in the developed world there have been dramatic increases in inequality. Theinequality crisis within advanced countries assumes two different forms. In the United States itassumes the form of wage inequality and the rise of the working poor (what Krugman calls'moneyless America') and in continental Europe it assumes the form of unemployment ('joblessEurope'). In each case the main victims are those people who lack skills. In the US the realwages of the unskilled fell by 30 per cent in 1973-93. Indeed in that period just 20 per cent ofpopulation gained from an increase of nearly one-third in the wealth produced (see Table 1). InFrance, to take just one European example, unskilled unemployment has risen from 3 to 20 per

19 In this growth accounting scheme, economic growth depends on capital investments (adjustedfor depreciation and obsolescence), labour time (adjusted for educational attainment) andtechnological progress, called total factor productivity which measures efficiency with whichcapital and labour are combined but which is a residual to which is attached whatever part ofgrowth quantities of labour and capital accumulation do not explain. Total factor productivityusually accounts for about 50 per cent of growth. The contributions of capital and labour arecomputed by multiplying the rate of growth of capital/labour by the share of capital/labour innational income, implicitly assuming that the profit/wage share reflects the marginalproductivity of these factors.

29

cent in 1970-90.

As indicated earlier, the erosion of collective bargaining and of the stable wage structure andregular wage growth it promoted, a decline in unionisation and the deregulation of job marketall weaken the capacity of unskilled workers to secure high wages. Most economists argue,however, that this increase in inequality is a result of a fall in the demand relative to the supplyof unskilled labour and an increase in the demand for skilled labour.

Of the factors that reduce the demand for unskilled labour, globalization and increased trade andcompetition from developing countries are frequently identified as prime causes. As Cohen(1998) has argued in The wealth of the world and the poverty of nations, however, there arestrong reasons for not attributing the inequality crisis in developed countries to trade. Trade candamage those sectors in which the advanced world ceases to specialise, substituting imports fordomestic production. At the same time, however, there are gains in those sectors which makeintensive use of skilled labour and in which the advanced world specialises. These gains accruefirst and foremost, however, to 'symbolic analysts' who figure prominently in these sectors. Ifthe losses and the gains are compared, it is clear that $100 of extra exports creates fewer jobsthan $100 of imports, as the traded goods sectors in which advanced countries cease tospecialise are relatively labour intensive. Most economists argue, however, that just 2-3 per centof the labour force is affected by competition from poor countries: in France 300,000 jobs wereperhaps lost due to trade-related factors, yet there are 3 million unemployed (see Cohen, 1998).On the supply side immigration increases the supply of labour and the competition for jobs andmay harm unskilled workers, but its scale is limited and is far from sufficient to account fortheir recent relative impoverishment.

To explain the increase in the the demand for skilled labour (which is outstripping the increasein the supply of skilled labour as a result of mass education) and the fall in demand for unskilledlabour there is a second explanation : an upgrading of production tasks in every sector, itselfreflected in increases in the proportion of expert or managerial occupations. To explain whythere have been such marked changes in the importance of skilled labour, Cohen (1998) focuseson changes in industrial organisation, drawing first on Kremer's O-ring theory which suggeststhat the strength of any activity is equal to the strength of its weakest link and that as aconsequence economic activities will increasingly be organised into smaller, more professionaland mostly more homogeneous entities.20

20 Identifying at the core of the O-ring theory tendencies towards greater associative matching,i.e. selective association among homogeneous individuals, Cohen (1998) argues that the sameprinciple is at work in education, the domestic order and the nation. In the case of the nation,for example, the advantage of a large market is no longer primarily an advantage of largenation states, as the market is global, while the latter are disadvantaged by the heterogeneityof their populations, which forces large-scale redistribution, debt and inflation. Economicintegration is, it seems, leading to a reduction in the size of political communities and a

30

A further important implication of recent trends in economic organisation is that theperformance of most enterprises is to a significant extent a a result of the cooperative efforts ofskilled collectives. In this situation the contribution of individual members of each collectivecan seldom be identified separately, and there is often no common yardstick with which tocompare collectives in different spheres of activity. Any link between the productivity of anindividual and individual earnings is increasingly tenuous leading to a disintegration of salaryscales. At the same time the deep-seated uncertainty and changeability surrounding the fate ofcompanies and of particular innovations and strategies cause sharp oscillations in the demandfor labour, in wages and in the career paths of individual employees. As Aglietta (1989: 72)argues 'employees who have undergone identical initial training may end up with entirelydifferent pay levels and careers, depending on the companies or collective activities into whichfortune or misfortune has led them.' Fractal inequality is affecting every occupational group.'No longer do qualifications, seniority or hierarchical responsibility guarantee recognizedpositions in organisations. A patchwork of individual destinies is emerging as unforeseeablechanges plunge one person into redundancy, another into precarious employment, and yetanother