Thursday, March 19, 2015
Robert C. Hockett and Saule T. Omarova have posted a draft of their important—hence highly recommended—new article, “Public Actors in Private Markets: Toward a Developmental Finance State,” at SSRN, available here. The abstract:
The recent financial crisis brought into sharp relief fundamental questions about the social function and purpose of the financial system, including its relation to the “real” economy. This Article argues that, to answer these questions, we must recapture a distinctively American view of the proper relations among state, financial market, and development. This programmatic vision – captured in what we call a “developmental finance state” – is based on three key propositions: (1) that economic and social development is not an “end-state” but a continuing national policy priority; (2) that the modalities of finance are the most potent means of fueling development; and (3) that the state, as the most potent financial actor, both must and often does pursue its developmental goals by acting endogenously – i.e., as a direct participant in private financial markets. In addition to articulating and elaborating the concept of the developmental finance state, this Article identifies and analyzes the principal modalities through which the modern American developmental finance state operates today. Finally, the Article proposes three broad strategic extensions of the existing modalities, with a view to enabling the emergence of a more ambitiously proactive and effective developmental finance state – and thus rediscovering a truly public-minded finance.
As Hockett and Omarova note,
“our polity never has been strictly ‘command-and-control’ or ‘hands-off’ in relation to our economy. Rather, we have always sought means of proactively fostering and furthering economic development and growth, and have done so through government instrumentalities that act in markets as much as they act on them. Our government is more than merely a market overseer and regulator – it is also a direct market participant, acting not only to correct market failures or to provide vital public goods but also to create, amplify, and guide private markets in ways that enhance these markets’ potential to serve important long-term public interests.”
Intriguingly, they characterize the rhetorical strategy of the argument as one that
“identifies, analyzes, and builds upon the distinctly American mode of mixing polity and economy, in hopes of recovering a policy approach that the nation once had and could use again now, after a major financial crisis. The tradition we seek to recover traces its roots directly to ideas originally formulated by the country’s first Treasury Secretary, Alexander Hamilton. We refer to that tradition under the conceptual heading of the ‘developmental finance state.’”
However refreshing the invocation of Hamilton, I’m not sure how significant or even true it is to view this as a “distinctly American mode of mixing polity and economy,” for in the comparative terms of welfare capitalism or capitalist democracy (keeping in mind that such regimes ‘represent different ways of organizing not only the transfer sector, represented by social welfare policy, but also the productive sector of the capitalist economy’), this seems merely to bring the conventional model of the “liberal welfare regime,” exemplified by the United States, closer to a corporatist or even social-democratic model, an alternative characterization that may not prove as rhetorically pliable to a fair- or open-minded assessment of their proposal. In any case, I believe a move in this direction would portend progress on several fronts, not the least of which would involve movement toward satisfying moral and political values that have been used as criteria for assessing the “real worlds of welfare capitalism,” namely, (1) efficiency (of various economic kinds), (2) reduction of poverty, (3) promotion of equality, (4) promotion of social integration and avoidance of social exclusion, (5) promotion of social stability, and (6) promotion of individual autonomy. On this, please see Robert E. Goodin, et al., eds. The Real Worlds of Welfare Capitalism (Cambridge University Press, 1999).
Here is a clear and compelling conceptual outline and working definition of this “developmental finance state:”
“Three propositions form the basis of our argument. First of all, we assert the utmost significance of pursuing socio-economic development as a continuous national project that does not end once a country is sufficiently industrialized and modernized to be considered a ‘developed’ economy. Development is not a particular end-of-history state; it is an inherently dynamic phenomenon. Development is a conscious pursuit of qualitative (not merely quantitative) growth and adaptation to new environments; it is an evolutionary process of national self-definition and reinvention. In today’s world, any ‘developed’ nation that does not strive to develop risks losing its global competitive edge. In this sense, the United States is a developing country, whether or not Americans realize or admit it. We seek to re-introduce this critically important normative concept into the public discourse.
Secondly, we view this conscious pursuit of national development as a fundamentally public-private enterprise. As the ultimate public, collective actor, the federal government is well-positioned to formulate a national developmental strategy. But its successful implementation would require the government to utilize, deliberately and systematically, its ability to participate directly in private market transactions as an endogenous, rather than merely exogenous, actor. Via this explicitly participatory market-actor modality, the government can lead the market from within – thus becoming an integral part of the private market, altering some of the market’s potentially undesirable internal dynamics, and empowering both the market and the nation.
Finally, we deliberately focus on the use of financial techniques and financial instruments as primary methods of the government’s pursuit of developmental goals in its role as a market actor. Finance represents both the lifeblood of the economy and ‘the nerves of the state’ – it is the principal link connecting the state and the market. Finance is a universal productive input; it can be fairly easily moved and re-deployed for a multitude of purposes.
Moreover, the increasing financialization of the American economy in recent decades makes finance a particularly potent lever of economic and political power. Therefore, we view financial markets as the strategic arena in which America’s future developmental trajectory will be decided. These three elements, inspired by and building upon Hamiltonian ideas, define the contours of what we tentatively call here a developmental finance state model. A ‘developmental finance state’ can be defined as a state that pursues specific developmental goals through direct participation in private financial markets as an endogenous market actor.”
I hope this proves sufficient enticement for you to read the article.