The intellectual and practical response to the worldwide financial and economic crisis of 2007-2009 as well as to the subsequent slump has exposed the poverty of prevailing ideas about how economies work and fail. The transformative opportunity presented by the crisis has largely been squandered; but the opportunity for insight has not. Insight today can support transformation tomorrow.
The present debate about the crisis and the subsequent slump has largely suppressed two themes of major importance. The first theme is the relation of finance to the productive agenda of society. It is not enough to regulate finance: it is necessary to reshape the institutional arrangements governing the relation of finance to the real economy so that finance becomes servant rather than master. The second theme is the link between redistribution and recovery. A pseudo-democratization of credit has been made to do the work of the redistribution of wealth and income in laying the basis for a market in mass-consumption goods. The most important form of redistribution is not retrospective and compensatory redistribution through tax-and-transfer; it is the reshaping of economic and educational arrangements to broaden opportunity and enhance capabilities.
Fiscal and monetary stimulus is rarely enough to redress the effects of a major economic crisis. (It was the massive mobilization and the experiments in public-private coordination of the war economy, rather than any proto-Keynesianism, that took countries out of the depression of the 1930s.) The proper role of a stimulus is to play for time by preventing the aggravation of crisis and to prefigure a program of recovery and reconstruction.
The relative success of major emerging economies in responding to the crisis and in avoiding a slump fails to provide the model of such a program. Many of the policies and arrangements pursued in these countries stabilized markets and created the conditions for continued growth. But it would be wrong to assume that economic recovery in emerging economies represents the emergence of a superior economic logic. It should be understood instead as a series of second bests. For example, the forced continuation of credit flows through governmentally controlled banks and development agencies has largely reinforced preexisting inequalities rather than democratizing access to resources and capabilities.
A preliminary to a program of broad-based economic recovery is the repudiation of the regulatory dualism that has characterized the regulation of finance: the distinction between a thinly and thickly regulated sector of financial activity. In one direction such a program must seek the institutional innovations that put finance more at the service of the productive agenda of society. In another direction, it must conceive and build institutional arrangements that give practical effect to the ideal of socially inclusive economic growth. It does so by basing growth on an institutionalized broadening of economic and educational opportunity.
The vulgar Keynesianism in which many contemporary progressives have looked for orientation fails to offer a theoretical guide to such a program of recovery. However, the fault does not lie solely in the vulgarized version of Keynes’s ideas; it lies in those ideas themselves and indeed in the whole mainstream of economic analysis that grew out of the marginalist revolution of the late nineteenth century. The established economics suffers from a deficit of institutional understanding and imagination. Only a broadening of institutional understanding can provide the practical and conceptual materials we need to imagine alternative futures. And although this understanding remains foreign to the main tradition of thinking about economic policy and reform, the same cannot be said of law. Law and legal thought are integral to the theoretical alternative explored in this essay, because they provide the institutional imagination with indispensable equipment.
This essay takes a first step in the effort to develop an intellectual alternative. It does so by outlining an approach to our present problems of crisis, slump, and recovery.
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