The New Paradigm Papers of the Month of July

Theorizing Varieties Of Capitalism: Economics And The Fallacy That “There Is No Alternative” (TINA)

Thomas Palley

„Margaret Thatcher often used the phrase “There is no alternative” to justify her agenda to remake the British economy in a Neoliberal image. That phrase has become known as TINA and the thinking behind it has seeped into public understanding. The result has been a tacit straitjacket which has restrained economic policy for forty years.” This is how Thomas Palley starts his analysis in a recently published FFM policy paper. In it, the author adds to a strand of economic discourse united under the term ‘varieties of capitalism’ (VoC), an analytical framework that challenges the TINA idea according to which neoliberalism is without alternative by emphasizing that character and outcomes of economies are subject to plasticity and hence a matter of choice. The challenge, according to the author, is that the choice is subject to constraints and policy lock-ins created by past choices and the TINA narrative itself. Reduced policy space reduces the heterogeneity of capitalism and cuts off paths of development. Policy lock-ins create new institutional arrangements and business patterns that are very costly to reverse, and even if they are reversed, the economy may not revert back to its initial condition.

However, according to Palleys analysis, some space for choices will always be present. He distinguishes between varieties (‘species’), and varietals (‘sub-species’) of capitalism. Both are shaped by societal choices and the policy space connected to them. Varietals of capitalism are more plentiful and may hence be easier and quicker to reverse. He then introduces the mesoeconomy – the institutions, behavioral norms, rules and regulations, and policies that characterize the economy and influence its performance – to underline that there is room for the design of new policies and societal choices. The fact that economies inevitably involve a choice adds an inescapable normative question regarding what type of capitalism society will have, according to Palley. “In particular at a time when democracy is threatened by a rising tide of political intolerance and proto-fascism, it is vital we understand what economic arrangements are needed to support democracy and open society.“

Conditions for a New Ecological Industrial Policy

Barbara Praetorius & Wolfgang Dierker

To achieve the global climate targets, drastic emission reductions are necessary in Germany and the world in all sectors, including the energy industry, buildings, transport and agriculture. Industry in particular has a key role to play in the decarbonization process. In addition to reducing emissions in its own production, industry has the task of producing climate-neutral products and emission-free production processes. In order to accelerate the reduction of emissions across industry and the transformation of the economy towards climate neutrality, Barbara Praetorius and Wolfgang Dierker make proposals for an actively shaping, new ecological industrial policy in a recent article for Wirtschaftsdienst. These include the further development and expansion of emissions trading as well as the promotion of innovation, combined with measures to protect the business location in global competition in the face of unequal sustainability standards. In addition, the policy must encourage the increased expansion of renewable energies and set regulatory requirements that ensure rapid decarbonization. With their analysis and focus on state control of structural change in favor of environmentally and climate-friendly products and technologies, the authors join a growing strand of research that assigns a significant role in the transformation process to an active fiscal policy beyond the “market versus state” dogma – a paradigm shift that is increasingly replacing the decades-long consensus that a reduction in the role of the state was desirable.

Ten Financial Actors Can Accelerate a Transition Away from Fossil Fuels

Truzaar Dordia, Sebastian A. Gehricke, Alain Naef, Olaf Weber

 In the transition to a carbon neutral, sustainable economy, private investors and equity owners play a crucial role. A new study by Truzaar Dordia, Sebastian A Gehricke, Alain Naef, and Olaf Weber adds new insights to the fragmented literature on financial systems, supply-side policy and sustainability transitions. Using network analysis, the authors map the market structure of equity ownership in fossil fuel firms, showing that ownership is concentrated among a very small number of influential shareholders. The study reveals that among the most prevalent owners are government signatories of the Paris accord and prominent American investment managers. These influential individuals have the potential to influence the strategic direction and governance of these firms and should consequently be held accountable for financing the economic activities that contribute to climate instability. Stunningly, and scarily, the authors find that just ten financial actors control the majority of fossil fuel firms and could hence accelerate a sustainable transition across the industry.

Investing in Innovation: A Policy Framework for Attaining Sustainable Prosperity in the United States

William Lazonick

In a new INET working paper, Professor of Economics at the University of Massachusetts, William Lazonick develops a policy framework for sustainable prosperity in the US. In it, he emphasizes the importance of the ‘investment triad’ of businesses, household units and government agencies. Lazonick links sustainable prosperity to an economy generating stable and equitable growth for a large and growing middle class. The author argues that the US has been void of this sustainable prosperous growth since the 1980s due to inequitable income, unstable employment and anemic innovation activity by businesses. While the Build Back Better agenda from the Biden administration set out to restore sustainable prosperity through an increase in the productive capabilities of government agencies and household units, he criticizes that investment by business firms lags behind. Many of the biggest corporations, according to Lazonick, focus more on distributing dividends to shareholders than investing in the productive capabilities of their workforces for innovation – what Lazonick calls ‘predatory value extraction’. Based on the high degree of financialization by US firms, the author argues that the Biden program will fail unless it more strongly encourages and enables corporate investment in innovation. He concludes by outlining a policy framework that could stop the looting of the business corporation, among other things through a stronger representation of workers and taxpayers as directors on corporate boards, a reform of the tax system to reward innovation and penalize financialization, and a ban on stock buybacks done as open market repurchases.

Monetary Targeting Revisited

Florian Kern, Philippa Sigl-Glöckner, Max Krahé

Since the end of the Bretton Woods system in the early 1970s, the monetary policy strategy of major central banks, including the Fed and German Bundesbank, has been subject to severe changes. A monetary policy strategy is used to define the instruments a central bank uses to achieve its policy objectives as well as the incoming data it takes into account when using these instruments. It is important to provide policymakers with a coherent analytical framework that maps actual or expected economic developments into policy decisions as well as to communicate with the public. In a new research paper, Florian Kern, Philippa Sigl-Glöckner, and Max Krahé from the think tank Dezernat Zukunft explain why the monetary targeting strategy that was pursued by the Fed and Deutsche Bundesbank in the 1970s is subject to severe analytical fallacies and outline the ideological assumptions that sustained it. They also propose an evaluation of of monetary policy strategy and its changes since the end of Bretton Woods with the aim to clarify the role monetary targeting played in preventing monetary policy from achieving its stated objectives.