REGULATION THEORY REGULATION THEORY

IN A NUTSHELLIN A NUTSHELLAnd a brief And a brief

comparison with SSAcomparison with SSA Robert BoyerParis-Jourdan Sciences Economiques

(PSE, CNRS-EHESS-ENS-ENPC)

Political Economy Research Political Economy Research Institute (PERI, Thompson Institute (PERI, Thompson

Tower, 9th floor, University of Tower, 9th floor, University of Massachusetts, Amherst Massachusetts, Amherst

March 26, 2008

INTRODUCTIONINTRODUCTION

1.The origin : surprising 1.The origin : surprising structural evolutionsstructural evolutions of of

the 70s:the 70s:- - ProductivityProductivity slow-down in the US slow-down in the US

- Rising - Rising unemploymentunemployment in Europe in Europe

- - StagflationStagflation: inflation and : inflation and recessionrecession

..At odds with ..At odds with conventional conventional theoriestheories::

- - KeynesianKeynesian macroeconometric macroeconometric modelsmodels

- - Neoclassical Neoclassical labour market labour market theorytheory

- - Marxian Marxian prognosis prognosis

2.The intellectual inspiration:2.The intellectual inspiration:- - Kaleckian macroeconomyKaleckian macroeconomy of of

capital accumulation capital accumulation

-The -The Annales Annales school of economic school of economic and social historyand social history

--Theory of habitusTheory of habitus as alternative to as alternative to homo oeconomicus rationalityhomo oeconomicus rationality

3. An eclectic but controlled use 3. An eclectic but controlled use of of methods:methods:

- - Diagnose the Diagnose the key social relationskey social relations of the of the society under investigation society under investigation

- Analyse the precise form taken by these Analyse the precise form taken by these social forms via the emergence, social forms via the emergence,

maturation and crisis of the related maturation and crisis of the related institutional formsinstitutional forms

-Explicit -Explicit the logicthe logic implied for individual implied for individual and collective behaviourand collective behaviour

- Collect the relevant statistical indexes Collect the relevant statistical indexes and look for and look for regularitiesregularities by econometric by econometric

methodsmethods- Check if partial régulations define a Check if partial régulations define a

viable viable macroeconomic regime macroeconomic regime

A SYNOPTIC VIEW OF A SYNOPTIC VIEW OF THE PRESENTATIONTHE PRESENTATION

1.1. From general equilibrium theory (GET) to From general equilibrium theory (GET) to the diversity of the diversity of imperfect market economiesimperfect market economies

2.2. Régulation theory (RT) in a nutshell: an Régulation theory (RT) in a nutshell: an analysis of economic analysis of economic institutional institutional architecturesarchitectures

3.3. An analysis of An analysis of crisescrises and changing patterns and changing patterns through time and spacethrough time and space

4.4. How many How many régulation modesrégulation modes ? ?5.5. The era of The era of globalization:globalization: a a renewed renewed

diversitydiversity of institutional configurations of institutional configurations6.6. The era of The era of financializationfinancialization: RT and SSA : RT and SSA

II.II. FROM GENERAL FROM GENERAL EQUILIBRIUM THEORY EQUILIBRIUM THEORY

(GET) TO THE (GET) TO THE DIVERSITY OF DIVERSITY OF

IMPERFECT MARKET IMPERFECT MARKET ECONOMIESECONOMIES

The generalization of GET has failed

Table 1 – In real economies, as many market failures as efficient markets

The belief in self regulated markets has been eroded

Table 2 – The promises and the

deliveries of the free marketers

The interest and limits of game theory: ad hoc rules

of the game Diagram 1 – From general equilibrium theory to game theory: analyses by domains but not any theory for the complete economic system GENERAL EQUILIBRIUM

THEORY

Removing some key hypotheses

Strategic interplay

between agents

GAME

THEORY

No auctioneer

Asymmetric information

Missing future markets

Increasing returns

Imperfect competition

Alternative solution concepts

° Multiple equilibrium ° Unstable equilibrium ° Micro behavior does not imply any definite aggregate regularity

Rational

expectations Coordination of

monetary economies No Walrasian

equilibrium for credit or labor

markets J. STIGLITZ

Intertemporal models with overlapping

D. CASS

Endogenous technical change

and growth P. ROMER

(1990)

Repeated games

Applied game theory

Statistical Theory of

aggregation

Representative agent

+ Rational

expectations

Temporary equilibrium or disequilibrium

theory

New Keynesian

Theory

The role of norms and

social justice on market

Models with overlapping generations

Oligopolistic competition

and unemployment

Experi-mental

economics

New industrial economics

New labor

econo-mics

Credibi-lity of

economic policies

Interna-tional econo-mics

SONNENSCHEIN J.M.

GRANDMONT

R. LUCAS T.

SARGENT

J.P. BENASSY

J.M.

P. HOWITT P. WEIL

G. AKERLOFF R. SOLOW

P. SAMUELSON

J.P. BENASSY C. PLOTT A. ROTH

J. TIROLE

F. LAZEAR

D. COHEN

P. KRUGMAN

W. HILDENBRAND GRANDMONT

A basic issue: what are the actual institutions and the

rules of the game?

III.III. RÉGULATION THEORY RÉGULATION THEORY IN A NUTSHELLIN A NUTSHELL

The macroeconomic The macroeconomic consequences of institutional consequences of institutional

formsformsDiagram 2 – Starting from Marxian theory to understand the institutions of capitalism : « regulation theory » in a nutshell

THE CAPITAL/LABOR RELATION OF PRODUCTION

Capitalist Production

Mode

Accumulation

law

MORE GENERAL

CATEGORIES THE MARKET RELATION OF

EXCHANGE

WAGE-LABOR NEXUS

FORM OF COMPETITION A set of

INSTITUTIONAL FORMS

An ACCUMULATION

REGIME

INTERMEDIATE

CATEGORIES NATURE OF MONETARY

CONSTRAINT

WAGE AND PRODUCTIVITY DYNAMICS

PRICE FORMATION A

REGULATION MODE

Which makes viable

OBSERVED

VARIABLES

CREDIT, MONEY AND INTEREST

RATE

The post WWII institutional The post WWII institutional architecture and growth architecture and growth

regime: the Fordismregime: the Fordism Diagram 3 – The post

WWII capital labor accord shaped most

other socio-economic institutions

IV. NO INSTITUTIONAL IV. NO INSTITUTIONAL ARCHITECTURE IS STABLE ARCHITECTURE IS STABLE FOR EVER: three sources of FOR EVER: three sources of

crisiscrisisThe success leads to institutional The success leads to institutional

obsolescence: endogenous structural obsolescence: endogenous structural crisiscrisis

Diagram 4 – From emergence to maturation and crisis

Reversal of previous

favourable trends

Degree of coupling of institutions

Emerging inertia

High

Sophistication of rules and deepening of complementarity

Entering into crisis and decay of an institutional configuration

Actors perceive a complementarity

Uncertain coherence

Change in the context

Low Series of innovations

Incentive for the search of new configurations

Time

New configuration

Maturation

Aging

Decay and destruction

Competing with other economies and adapting foreign institutional forms:

hybridization

Henry Ford’s vision

Obstacles to its implementation

(1913)

United-

States

Actual American Fordism

Rise…

and maturation

STRUCTURAL CRISIS OF AMERICAN

FORDISM

Financialisation

Crisis of a finance-led growth

regime

Endometabolism Endometabolism

Hybridization

Obstacles to the adoption

Exacerbates American

crisis

Hybridization Exacerbates

Japanese crisis

Hybridization

Adaptation

process

Japan Invention

of Toyotism

Rise and

success

STRUCTURAL

CRISIS OF

TOYOTISM

Slow and uncertain

growth

Endometabolism

1900’s World War I World War II Oil shocks Financial globalization

2000’s

Diagram 5 – Hybridization and endometabolism, two factors of institutional change: the joint evolution of American and

Japanese trajectories

The leading role of political alliancesThe leading role of political alliances

It builds an economic regime and its evolutions

It affects the bargaining power of groups and actors

Impact upon political support

Consequences for elections

Building a governmental coalition

POLITY:

Sets the rules of the game

Makes strategic choices ECONOMY:

The emerging new The emerging new institutional architecture of institutional architecture of

the 90sthe 90sThe Hierarchical position of the The Hierarchical position of the

international economy and the international economy and the financial regimefinancial regime

Diagram 6 – The new hierarchy of institutional forms in contemporary

Europe

IV.IV. HOW MANY HOW MANY REGULATION MODES?REGULATION MODES?

FOUR REASONS FOR FOUR REASONS FOR CONTRASTED BRANDS OF CONTRASTED BRANDS OF

CAPITALISMCAPITALISMThe recent advances of micro economic The recent advances of micro economic

theory of theory of imperfect informationimperfect information: as : as soon as no complete contract can be soon as no complete contract can be drafted, nor all contingent markets drafted, nor all contingent markets organized, many second best solutions organized, many second best solutions can be given to the same economic can be given to the same economic issue (J. Stiglitz, 1987).issue (J. Stiglitz, 1987).

Since the functional role of economic Since the functional role of economic institutions is not explaining their institutions is not explaining their origin, their variety explicitly derives origin, their variety explicitly derives from from the intricacy of the political the intricacy of the political processprocess (D. Hibbs, 1987) which leads to (D. Hibbs, 1987) which leads to institutionalized compromisesinstitutionalized compromises..

Specialists of Specialists of technical changetechnical change and and evolutionary economists have evolutionary economists have developed fairly sophisticated models developed fairly sophisticated models built upon the role of built upon the role of increasing increasing returns to scalereturns to scale (G. Dosi, 1988; (G. Dosi, 1988; 1991). Then, initial choices, which 1991). Then, initial choices, which seemed marginal and reversible, turn seemed marginal and reversible, turn out to propel the economic system out to propel the economic system along a trajectory, featuring strong a along a trajectory, featuring strong a path dependencypath dependency (B. Arthur, 1994). (B. Arthur, 1994).

The same evolutionary framework The same evolutionary framework can be extended to the analysis of can be extended to the analysis of co-co-evolution and the complementarityevolution and the complementarity of of institutions, organizations and institutions, organizations and economic specialization (M. Aoki, economic specialization (M. Aoki, 1995). The central issue is the 1995). The central issue is the compatibility of a complete compatibility of a complete institutional architecture.institutional architecture.

Régulation theory findings Régulation theory findings (RT): at least four institutional (RT): at least four institutional

architecturesarchitectures Table 4 – The diverse nature of capitalism in Regulation Theory

REGULATION

MARKET-ORIENTED MESO-CORPORATIST STATIST SOCIAL-DEMOCRATIC

1. OVERALL LOGIC AND HIERARCHICAL PRINCIPLE

Commercial logic is the organising principle for almost all of the institutional forms

Principle of solidarity and mobility in an economic unit that is large in size and diverse in output terms

Economic circuit shaped by public interventions in areas like production, demand and institutional codifications

Social partners negotiate rules governing most aspects of society and the economy

2. IMPLICATIONS FOR INSTITUTIONAL FORMS

Wage labour nexus Significant decentralisation of wage bargaining, individualisation of pay and segmentation of labour market.

Wage compromise within large companies but pay hikes are synchronised

Trend towards a strong institutionalisation of rules on employment, working hours, wages and social benefits

Traditionally with a centralisation of collective negotiations, under a constraint of short and medium-term competitiveness

Competition Concentration restricted by legislation, reshuffling from one oligopolistic type of competition to another

Relatively intense in the product markets, involving big companies with activities in many different markets

Moderate seeing as it is channelled by by public regulations or by professional associations, with high degree of capital concentration

Small number of big firms (that are also highly internationalised and thus have to compete)

Money and finance Central bank is independent, financial market logic prevails, financial innovations proliferate, companies are tightly run by a financial logic

Role of main bank and keiretsu in funding and capital allocation. State authorities (financial supervisors/ Central Bank) have tight control

State has tight control over credit and monetary policies. Traditionally the Central Bank has had little autonomy to speak of, the financial sphere having played a crucial role

Most funding is by the banking sector. Monetary policy aims to enhance employment and at a later date competitiveness

The State Fragmented into series of agencies and control entities, growth possibilities are highly restricted because of competition in the political marketplace

Ensures provision of collective services plus coordinations that the big firms are incapable of running. Small size but significant role

Strong quantitative and qualitative development of State interventions: nationalised companies, regulations, public spending, social benefits, etc.

Multitude of public interventions lead to financial transfers and extensive and restrictive regulations

Insertion into international system

Adhesion to free trade principles, degree of autonomy varies depending on status and size (differences Us vs. UK)

Trade and finance-related choices are conditioned by imperative of technological and economic development.

Traditionally with a a tight State control over external relations (tariffs, norms, quotas, restrictions on financial flows).

Acceptance of competitiveness principle based on technological and organisational innovation

Table 4 – The diversity of economies nature in Regulation Theory

REGULATION

MARKET-ORIENTED MESO-CORPORATIST STATIST SOCIAL-DEMOCRATIC

3. CHARACTERISTICS OF THE MODE OF REGULATION

Regulation very market-oriented, controlled by sophisticated legal mechanisms

Large companies, the market and the State make adjustments at the meso-economic level

State at heart of macroeconomic adjustments, with markets and firms adapting to its rules

Tripartite bargaining (employers-unions-State) lies at the heart of institutional reforms

4. EFFECTS ON:

Innovation

Schumpeterian waves predicated on radical innovation, preponderance of a patent-based logic and individualisation of benefits derived from innovation

Aptitude to copy and adapt products and processes by operating incremental yet profitable innovations

Radical innovation supposing major investments and a long-term time frame. Adaptation of Fordist (i.e. relatively centralised) innovations

Innovations are focused on resolving social and economic problems, be they marginal or radical..

Specialisation Sectors tied to radical innovation: IT, space, pharmacy, finance and leisure industry.

Sectors requiring major coordination efforts and mobilising a localised but cumulative type of competency: auto, electronics, robotics

Sectors involved in major public infrastructures: transportation, telecom, aeronautics, space, arms industry, etc.

Sectors tied to social demand (health, security, environment. etc.) or exploit natural resources through technological recovery

Source: Amable, Barré, Boyer [1997: 194-195]

They display quite contrasted They display quite contrasted sources of innovation and sources of innovation and

growthgrowth Market-ledMarket-led capitalism: linking capitalism: linking

basic science with businessbasic science with business

Diagram 7 – Market led configuration

University High Quality

Market for scholar

Segmented labor market

Education System

Pressures toward research

Non skilled workers relative wage declines

Few professional and technical

tracks

+

Less demand for

low skilled workers

Large patenting

Rising

inequalities

Implementing the new productive

paradigm is difficult

Diffusion/ Protection

Specialization in

activities with codifiable knowledge

Pharmaceuticals

Publishing

High tech

Fordist industries decline

but sunrise industries

+

-

Risk Capital

- Growth External trade deficit

+

Reluctant Investment in industries with long run maturity

Financial Market

Close project assessment but short termism

Meso corporatist capitalism: Meso corporatist capitalism: coordinating a series of coordinating a series of

incremental innovationsincremental innovations

University selection of elite

Segmented and interdependent labor market

Secondary education

system

Homogeneity of formation, selection

of individuals Few basic research

Large firm Sub-contractors

Low

inequality

Little basic research done by

firms

Learning localized

knowledge

Large diffusion of new products

Anticipation of forthcoming

specialization

Incremental innovation

Quality based competition

Automobile

Electronics

Robotics

Specialization in durable goods

+

Permanent upgrading of the

industrial structure

Growth

+

+

Financial System

Control by main bank, loose but

long termist

Internal capital

Mobility

Constructed competitive advantage

Diagram 8 – The “meso-corporatist”

configuration

Social-Social-democratic democratic capitalism: capitalism: innovations innovations related to related to

public goods public goods

and educationand education

Diagram 9 – Social democrat capitalism

Public Research and University

Labour Market

Education System

° Homogenous ° Centralised

bargaining ( 1989)

Good basic education Retraining of workers

Concern for basic

research

Social justice, and

solidaristic values

Patenting for resources intensive sectors, transport, equipment goods,

biomedicine

High wages

economy

Rather reduced income

inequalities

Natural Resources

Small open

economy High Value

Added Industries

Internatio-nalisation of

SSI

Periodic industrial

restructuring

Competitiveness by quality and

service

Few risk

capital

Specialisation in resources, intensive sectors, equipment,

information

-

Financial System

Not very sophisticated, bank centred

Growth constrained by competitiveness

State led State led economy: the economy: the overwhelming overwhelming role of public role of public

interventionsinterventions

Diagram 10 – The State led capitalism

Public Research Institutes

Organized Labor Market

Education System

Minimum wage Extended welfare State

Basic education is public Selection of elite

Public spending

led innovations

Public interventions:

codifying the rules of the game

in quite all

sectors

Scientific discovery rarely

linked to potential market

demand

Firms : Their organization is

related to public interventions

Congruent

with the Fordist model

Public sector or

public spending related sectors

Private Sector in charge of

mass production

Specialization : transport

equipment, aircraft, weapon, pharmaceuticals

+

Competitiveness Growth

Financial market Bank credit Heavy State control Public finance circuit

International System

Stable

VI.VI. THE ERA OF THE ERA OF GLOBALIZATION: STILL GLOBALIZATION: STILL

RENEWED DIVERSITY OF RENEWED DIVERSITY OF INSTITUTIONAL INSTITUTIONAL ARCHITECTURESARCHITECTURES

A multiplicity of coordinating A multiplicity of coordinating mechanisms, on top of the mechanisms, on top of the

conventional opposition State conventional opposition State versus marketversus market

MODE OF COORDINATION AND

DISTRIBUTION OF POWER

HORIZONTAL VERTICAL

1 Market

2 Firm

6 Association

INTE

RE

ST

5 Network

M

OTI

VE

FO

R T

HE

AC

TIO

N

OB

LIG

ATI

ON

3 Community, Civil Society

4 State

Diagram 15 – A taxonomy of the different coordination principles

Source: as per Hollingsworth, Boyer [1997]

None of these mechanisms is None of these mechanisms is perfect: perfect: compensating the compensating the

imperfectionimperfection of one of one mechanism by the strength of mechanism by the strength of

another is a source of another is a source of institutional resilienceinstitutional resilience

• Viable régulation modes instead a mythical perfect configuration

Correct the limits of each institutional arrangement by another one:

Markets monitored by associations or regulatory authorities

State under the scrutiny of civil society (NGO) Associations operating under the surveillance of

State

The need for a complete architecture with checks and balances

Within such a hierarchical system, the political order plays a key role:

In overcoming discrepancies, conflicts, economic disequilibria

The success of a régulation mode is up to the coherence of an institutional configuration

Hence a multiplicity of Hence a multiplicity of capitalism brandscapitalism brands

Diagram 16 – Analysis of the

variety of capitalismsas the expression of a

combination of the four main principles

of coordination

The opening of national The opening of national economies usually reinforce economies usually reinforce

institutional diversityinstitutional diversity Diagram 17 – A mode of regulation’s different levels of

adjustment in an open economy

Follower countries

Technological trajectory

Technological trajectory

Leader country

Repertory of

coordination procedures

Specialisation

Repertory of coordination procedures

Institutional forms and

mode of regulation

Institutional forms

and mode of regulation

1 Stability: Homeostatic equilibrium 2 Revision of market share

3 .Adjustment of institutional forms 4. Structural crisis: need to revise repertory

Unless financial instability Unless financial instability promotes short run flexibilitypromotes short run flexibility

Diagram 18 – A general evolution towards short run efficiency at the cost of long run performance and social justice?

The social constraints imposed The social constraints imposed by polity may tame the by polity may tame the

destabilizing trends of pure destabilizing trends of pure market mechanismsmarket mechanisms Diagram 19 – A third vision : the market mechanism is

stabilized by social constraints imposed by polity

VII.VII. THE ERA OF THE ERA OF FINANCIALIZATION AND FINANCIALIZATION AND

ITS CRISES: ITS CRISES: RT AND SSA COMPARED RT AND SSA COMPARED

SSA And RT:SSA And RT:A new epoch for class A new epoch for class

alliancesalliances• H1 – Back to social historyH1 – Back to social history

The 60s: a The 60s: a de facto de facto compromise between compromise between managers and wage earnersmanagers and wage earners

Consumers

Patient financial market

Managers Permissive international regime

Wage-earners

Strong links Weak links Direction of influence

The 80s: An international The 80s: An international competition led regime weakens the competition led regime weakens the bargaining power of wage earnersbargaining power of wage earners

Consumers

Gain from trade Managers More

international competition

Discipline

Erosion of past compromise

Wage-earners

Strong links Weak links Direction of influence

The 90s: The The 90s: The ex postex post alliance of investors and managers alliance of investors and managers

Consumers

Transparency

Managers Large and powerful financial markets

Share holder value More risk Financialisation of

income and pensions Wage-earners

Strong links Weak links Direction of influence

The 2000s: The emerging tensions within the The 2000s: The emerging tensions within the finance industry and the rise of the lawyerfinance industry and the rise of the lawyer

State,

as the last resort

THE LAWYER

Institutional Investors

Managers Auditors

Rating Agencies Financial Analysts

Fund Mangers

Pension funds

Flow of information Financial flow Intermediation of conflicts and related income

SSA And RT : A finance led SSA And RT : A finance led accumulation regimeaccumulation regime

• P1: Financialization is part of a long term P1: Financialization is part of a long term structural transformation of contemporary structural transformation of contemporary capitalism, after the crisis of Fordismcapitalism, after the crisis of Fordism

International opening

Regained power of managers

Demand addressed to managers =

shareholder value

Surge of CEO compensation

Erosion of wage-earners bargaining

power

Acceptance of pension funds

Inflow on the stock market

Financial bubble

Crisis of the Fordist growth

regime

Conservative backlash

Financial deregulation

Multiple innovation in

finance

• P2: An accumulation regime at odds with P2: An accumulation regime at odds with Fordism: the centrality of the stock Fordism: the centrality of the stock marketmarket

+ Dividends

and Pension funds

+ High stock market price

+ Easy access to

credit

+

Profit

+

Consumption Production

+

+

Employment Diffusion of

Financial norms - Careful management

of investment

+

Globalised Financial

regime

Shareholder value as a new form of competition

and governance mode

Highly reactive wage labour

nexus

• The multiple channels of financializationThe multiple channels of financialization

+ Monetary policy,

Financial market stabiliser

+

Limitation of

public borrowing

-

Public

expenditure

+

Stock Market

prices

G F

Credibility of Government ac-

tions

E Tax system favour-able to the most mobile factors

+

+

+

Industrial specialisa-tions, Financial con-

centration

Raising the required rate

of return

- Productive investment

+ Profit

A

+ + -

FINANCIAL SYSTEM

Management of firms for sharehold-

ers

B Labour con-tract flexibil-

ity

+ Productive capacity

Effective de-mand

Employment, wages

- +

+

+ “Patrimonial” Eq-uity based Household

behaviour

C

Wealth effect on Sav-

ings/Consumption Allocation

+ Current con-sumption

+

+

Privatisation of elements

of social security

D Pensions via stock market

Purchase of housing and

durable goods

+

+

+

+ Secured bor-rowing

• P3: This regime is generating P3: This regime is generating speculative bubblesspeculative bubbles that burst out… that burst out…

• ……But are cured by an But are cured by an activeactive monetary policy… monetary policy…

• ……And the positive impact of And the positive impact of financial innovationsfinancial innovations……

• ……For instance the For instance the securitisationsecuritisation first prevents the fragility of banks first prevents the fragility of banks A strong paradox: an unstable accumulation regime rescued by the deepening of financial innovations

• ……But But private innovationsprivate innovations, such as , such as subprimesubprime loans, exploit this opportunity to shift the risk… loans, exploit this opportunity to shift the risk…

• ……The boom of this market reaches its limits, the reversal of The boom of this market reaches its limits, the reversal of confidence confidence challenges challenges macroeconomic stabilitymacroeconomic stability……

• ……And again the And again the Central BankCentral Bank is the rescuer of last resort in order to preserve the is the rescuer of last resort in order to preserve the viability of the financial viability of the financial systemsystem

Figure 1 – A typical sequencing of

financial crises

Private innovatio

n

Success /

High profit

Rapid adoption

Entry in the zone

of financial fragility

Lender as a last resort

No public intervention: collapse

of the innovation

Regulation by the

government

Viability of the regulated

innovation New

cycle

Figure 2 – A first example: energy derivatives

and the ENRON collapse

Energy derivatives

Unprecedented profit

Creative accounti

ng

Bankruptcy

New rules of accountability for CEO and CFO

Prevention from any

public control by lobbying

But not any reform of

accountability principles

A structural weakness

Potential for new crisis

Figure 3 – A second example: rise and collapse of Northern Rock

Financing by bonds of mortgage

loans

High profit / Rapid

capture of market shares

No reaction

of Financial Service Agency

More bonds issued

Banking run

Initially, Bank of England did not bail out

Worsening of the crisis

Systemic crisis

Conflict between Bank of England,

Treasury, FSA

Search for self

regulation

A failed innovation

Nationalization of

Northern Rock

Figure 4 – A third example: the sub-prime mortgage

Sub-prime mortgage

New and growing market

Absence of public regulatio

n

Securitization shift the risk

Reversal of the

housing

market

Melting down of the sub-prime

market

Limited FED

intervention

Diffusion of Non

Performing Assets (NPA)

A creepin

g banking

crisis

Searching for new

regulations

Recapitalization by

sovereign funds

Mergers among banks

Unlimited access to

liquidity from FEDA systemic

financial crisis

Figure 5 – The impact of globalization and financial deregulation on emerging countries

crises

Easier access to external financing

Deregulation of domestic

financial system

Strengthening of the financial

accelerator

From boom to crisis

Brutal reversal of

capital flows

Major crisis

Structural reforms

Search for alternatives to foreign saving driven growth

IMF orthodoxy is challenged

Large Central Bank reserves

Possible regional financial

intermediation

• P4: The financial led regime cannot be P4: The financial led regime cannot be universaluniversal

COUNTRIESPARAMETERS

United States

Great Britain

Canada Japan Germany France

1.Average propensity to consume (1996)

0.95 0.926 0.956 0.869 0.884 0.908

1.Wealth in shares/ disposable income (1997) %

145 75 95 30 25 20

3. Extent of capital gains /disposable income (%)

35.5 15 11 - 7 7 5

4. Proportion of shares and bonds in households’ financial assets

28.4 52.4 n.a. 25.3 21.3 14.5

1.Monetary market rate 5.34 7.38 5.20 0.32 3.5 3.46

1.Return on bonds 6.51 5.59 7.30 1.06 3.97 4.23

1.Reference profitability 12%-16% 12%-16% 12 - 16% 5% 6% -7% 9%

• Actually, in other OECD countries Actually, in other OECD countries alternative alliancesalternative alliances may exist and may exist and govern govern different different accumulation regimesaccumulation regimes

Managerial

expertise

THE

AMERICAN FIRM

Governance under

shareholder value

The firm as a bundle of

competences

THE JAPANESE

FIRM

Financial

capital Firm specific

competences

ESOP

Employee ownership/

co-management

THE GERMAN FIRM

CONCLUSIONCONCLUSIONC1 C1 Actually existing economies Actually existing economies

drastically differs from pure drastically differs from pure market economiesmarket economies..

C2C2 Thus Thus many mechanismsmany mechanisms explain explain significant institutional significant institutional differences: idifferences: imperfection mperfection of of information, information, increasing increasing returns, returns, coevolutioncoevolution of technology and of technology and institutions, and the role of institutions, and the role of polity polity in the emergence of most in the emergence of most economic institutionseconomic institutions..

C3C3 International tradeInternational trade reinforcesreinforces institutional competitive advantage of institutional competitive advantage of each economy but each economy but financial financial globalizationglobalization may affect adversely non may affect adversely non market led economies.market led economies.

C4C4 Market led economies should not be the Market led economies should not be the benchmark since at least benchmark since at least four or five four or five distinctive configurationsdistinctive configurations coexist among coexist among OECD countries (probably much more OECD countries (probably much more among emerging countries) and among emerging countries) and generally do not deliver Pareto inferior generally do not deliver Pareto inferior outcomes. outcomes.

C5C5Each configuration has significant Each configuration has significant margins of margins of development and flexibilitydevelopment and flexibility, , but conversely sources of but conversely sources of weaknesses weaknesses and fragilitiesand fragilities. The task of the . The task of the economist is to diagnose them.economist is to diagnose them.

C6 C6 FinancializationFinancialization is diffusing all over the is diffusing all over the world, but world, but only the USonly the US experienced a experienced a finance-led accumulation regime.finance-led accumulation regime.

C7 The present sub-prime crisis is an C7 The present sub-prime crisis is an evidence for a general interpretation of evidence for a general interpretation of financial crises: financial crises: private innovationprivate innovation but but lagging surveillancelagging surveillance and public control. and public control.

Thank you for your Thank you for your attentionattention

Robert BOYERPSE (Paris-Jourdan Sciences Economiques) 48, Boulevard Jourdan 75014 PARIS, France

Tél. : (33-1) 43 13 62 56 –

e-mail : boyer@pse.ens.fr

web site : http://www.jourdan.ens.fr/~boyer/