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Unformatted text preview: The Global Economy and World Politics
Professor Edward Weisband Lecture 7: Markets, Heteronomy, and Methods of Mutual Adjustment Governance Resolutions in Response to the Problematics of Risk
Economic activity is not possible without economic governance
Specialization Sectoral Diversification and Synergy Increased Interdependence Need for Risk Reduction Risk Need for Governance Hierarchy: Governments Institutions Fordist Firms Regulation Heteronomy: Markets Networks Toyotist Firms Competitiveness Up Scales of Value Addedness First Cut Two Systems of Economic Governance Two systems of economic governance Designed to facilitate economic activity and interaction By means of coordination and/or control In the reduction of the problematics of risk Hierarchy (topdown) by rank or authority Heteronomy (bottomup) by promissory obligation or contract Both systems seek to introduce elements of risk reduction In order to enhance the dynamics of specialization In ways that permit deeper structures of sectoral diversification combined with sectoral synergy In order to produce GDP outputs up scales of value addedness The Two Faces of Economic Governance The two systems of economic governance have "faces" Hierarchy: institutions and organizations Heteronomy: markets The "interface" between hierarchy and heteronomy is what we will call regulation Regulatory laws and practices mediate between the agents and actors of hierarchy and heteronomy In ways that coordinate and thus regulate economic activity Balancing Hierarchy and Heteronomy Hierarchy and heteronomy operate as systems of economic governance to resolve the problematics of risk In relation to specialization, diversification, interdependence, and sectoral synergy Although each has its advantages each carries its own costs Hierarchy carries the costs of administrative structure (often called carrying costs) combined with rigidity Heteronomy carries the costs of market transactions (often called transaction costs) combined with what we will call market failures (externalities) and moral hazards (guile and opportunism) Centralized Control and the Suppression of Economic Choice Hierarchical governance promotes sectoral diversification But may suppresses invention and innovation across sectors Relative to specialized capital inputs up scales of value addedness In the production of GDP output BECAUSE no set of hierarchically organized institutions Can centrally determine the complex range of choices and interdependent relationships Demanded by the kinds of collaborative or cooperative synergies that contribute to intersectoral productivity That are provided by heteronomous markets The Counter-Productivity of Centralized Planning and Control An example of hierarchy carried to the extreme of centralized planning that suppressed heteronomy is the Soviet economy The Soviet centralized planning attempted to reduce risk by controlling capital inputs and GDP outputs in ways that allowed its defense sector to produce GDP outputs at premier levels of value addedness But at the cost of synergistic interdependence AND the heteronomous Central planning intruded on the dynamics of heteronomy to the products and overproduction of others dynamics of supply/demand throughout the remainder of the economy dynamics of supply/demand throughout the remainder of the economy point that "black markets" emerged in the face of scarcity of many Second Cut Markets and Heteronomy Bureaucracies can become counterproductive To the extent that they suppress the dynamism In the interdependent relationship Between value added inputs and profitable GDP outputs For these reasons markets emerge as an alternative form of economic governance to coordinate choices absent hierarchical control Markets coordinate choices Exerted through the entry points of exchange and interaction In which agents make choices in pursuit of values and preferences We call this dynamic heteronomy Heteronomy as Horizontal Coordination Heteronomy is a form of governance Organized, managed, and controlled By myriads of small decisions made at the margins of open markets It is a form of economic coordination That maximizes choice and reduces the carrying costs of institutions By encouraging interdependence and reducing the risks inherent to divisions of labor and specialization By means of promissory obligations and contract Bottom-Up Governance by Small Decisions To speak of what is heteronomous is to address GOVERNANCE BY SMALL DECISIONS Governance by small decisions Emphasizes economic freedom coordinated by markets That supports at the margins of economic and social activity Including at the level of individuals and households When governance operates bottomup rather than topdown So that decisionmaking occurs at the lowest possible level We have heteronomy Why Heteronomy Not Hierarchy? What mechanism of economic governance links sectoral diversification and synergy in specialized inputs to value addedness in GDP outputs in ways that are most efficient and profitable and thus most productive for a national economy? How does an economy choose GDP outputs and what determines their profitability? Who decides what will be produced for whom at what costs? MARKETS Markets and Self-Interest Markets allow individuals and households (oeconomica) To express economic values and preferences In the form of demand In bottomup ways Markets establish multiple entry points And permit individuals to act as self interested maximizers By making calculations and choices That may be "rational," "biased," or grounded in imperfect information or incentives Markets As Mechanisms for Economic Exchange Heteronomous markets coordinate economic exchange That occur wherever exchanges are made and preferences expressed Markets thus regulate behavior by rewarding and punishing and by creating incentives and disincentives Adam Smith understood this dynamic and captured it with the metaphor of the "hidden hand" The Hidden Hand of Heteronomy Thus the "hidden hand" represents the economic coordination That grows out of the pursuit of individual selfinterest Based on bottomup economic choices Exercised through the entry points Made available by open markets and coordinated by means of heteronomy Availability and Accessibility, Supply and Demand Markets exist wherever and however Buyers and sellers that cede or convert Some sets of values as a means of obtaining others In a process of incremental agreements and mutual or reciprocal adjustments That sort out the relationships between demand and supply In terms of the availability of what is supplied Calculated in terms of efficiency Third Cut Market Efficiency and Coordination Markets represent the coordinating mechanism that most efficiently promotes sectoral diversification and sectoral synergy WHY? Heteronomous markets allow an economy to produce what consumers demand At the lowest possible costs up scales of value addedness for purposes of greatest overall profitability Because they make many choices available at many entry points for purposes of customer satisfaction for terms of consumer sovereignty Thus promoting greater overall economic productivity Why Markets Promote Efficiency Markets promote efficiency by channeling energies relative to specialized capital inputs and releasing them in the form of profitable GDP outputs By facilitating countless exchanges And by coordinating divisions of labor across as well as within many markets and economic sectors To promote sectoral diversification as well as sectoral synergy Markets represent a form of economic governance that coordinates the countless conversion relationships that transform capital inputs into GDP outputs Markets thus coordinate decisions from Allocation, investment, savings, distribution, and redistribution Fourth Cut Market Efficiency, Size, and Openness
Markets expand as they become Diversified Synergistic Competitive To be efficient Across and within economic sectors BUT markets must become interlinked and open to each other Thus market efficiency is limited only by the extent of market size and openness Market diversification and synergy lowers opportunity costs And generates efficiencies Across economic sectors ...
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- Spring '08