Which “free market” after the crisis? Truths and untruths

After showing the many variable ways the market “tells the truth”, it is time to leave “world 3” and go to “world 1”, so that we can test how the neo-liberal narrative analysed so far has affected the real world of economic relations and the global stage(s) of markets. One could point out, ironically, that so-called shadow banking is the best implementation today of the truth of the market idea. Financial speculative markets grew especially between 2000 and 2008, far from the real economy and generating a dark zone totally immune to legal checks and regulations governing the commercial banking industry. This “shadow banking” system fostered by the creation of new financial products and an enormous amount of trading activity in the derivatives market is still alive and well established today. Due to the rapid interconnection of banking and non-bank financial activities, the financial system as a whole fuelled a massive risky economy until the 2008 financial crisis. This flourishing business from the United States also landed in Europe, especially in Great Britain, which today is its preferred location. Its importance, amounting to some $67 trillion according to the 2012 report by the Financial Stability Board, has grown even more. According to the 2013 report especially in emerging markets (China, Argentina, India, and South Africa), its growth rates peaked at around 20 per cent. With shadow banking the “too much government” issue was reversed to its opposite “no government at all” platform! Some years after the crisis, the persistence of a shadow economy, dangerous for the global economic system and unchallenged by global governance,[1] generates questions on “the strange non-death” of neoliberalism (Crouch 2011) and suggests that we are in a situation of “path-dependency” (Zumbansen, 2008), demonstrating not only a cultural and political inability to change, but even more the strength of financial powers (Macchiati 2009).

Turning now to the real economy, we can investigate how suitable the “free” market narrative based on “competition” is. Of course, although we cannot investigate this important issue exhaustively, we will attempt to draw attention to two aspects which threaten the consistency of this picture. First of all, “free” markets are concerned with the dominance of giant corporations, whose practices are frequently inconsistent with the narrative. Secondly, in the next paragraph, we will address the phenomenon of “state capitalism”, which is an important aspect of the global economic scenario but largely ignored in the analysis of “free” markets. Although much political debate is focused on the conflicts between the market and the state, the impact of corporations on both of these issues is equally important today.

We shall begin with the large transnational corporations which grew especially in the widespread process of mergers and acquisitions in the 1980s and 1990s. The current economic scenario dominated by extra-large corporations proves that competition is not enough to prevent this from happening. As mentioned, the battle between competition and efficiency was settled by the Chicago School in favour of efficiency. Highly specialised enterprises and large corporations are perceived as part of the unavoidable progression towards economic development and globalisation. Therefore, the largest process of wealth concentration in the history of capitalism went hand in hand with the greatest diffusion of competition. The dominance of giant corporations in global markets has been intensified by the financial crisis, and one wonders to what extent they truly speak the language of competition.

We shall now delve further into the history of competition and openness of the market, focusing first on some rather systematic aspects of (vertical and horizontal) integration, internalisation, and inter-firm trade. The problematic relationship between multi-national firms and antitrust was addressed by Williamson from a (neo)institutionalist economic perspective (Hennart 1986; Williamson 1975), as a development of Coase’s theory of transaction costs. Market globalisation extended all these aspects, increasing many kinds of “restrictive agreements”, internalisation and intra-firm trade. As noted by S. Strange (1996: 47-48):

more and more, the goods passing from one country to another are not in any sense of word “sold” or “bought”. They are only moved by order of corporate managers between different branches of the same TNCs [transnational corporations]. Contrary to the teaching of conventional International trade theory, they are moving not because of comparative advantages in market terms of one country over another but because the management of a transnational company has decided on a production strategy that involves such movements. Overall, it is thought that by now well over a quarter of all worldwide trade is now intra-firm trade.

Several years after Strange’s criticism, the figures for intra-firms exchanges were still quite high (Lanz and Miroudot 2011).Internalisation is frequently theorised as “driven by the risk of third parties dissipating the reputational value of firms assets”, but different contributions have also underlined a contract-theoretical approach of multinationals intended “to avoid crossborder contractual frictions, which in turn drive organisational choice” (Corcos et al. 2012: 2). At the same time, their intention to avoid competition can be noted, and one may wonder how much intra-firm trade limits spillover effects ascribed to FDI as a source of improvement of efficiency for host countries.

The function of internalisation by corporations, which goes hand in hand with contractual devices, such as franchising, that facilitate it, can be seen as one of several kinds of “private protectionism” used to protect themselves from competition. But private protectionism has not received the attention it deserves (Strange 1996: 147). While state protectionism has been a repeated target of neo-liberal campaigns, commercial practices based on the “dog does not eat dog” principle have not been sufficiently dealt with in the literature. Together with antitrust principles and guardians, “free” and “open” markets experience different and continuous challenges and practices intended to bypass them: an increasing use not only of intra-firm trade, horizontally and vertically, but also of pooling, trusts, tie-ins, and so on. It is no surprise that these practices resulted in so many court cases, the most important being Microsoft which brought “the trust on trial” (MacKenzie 2000).

While antitrust philosophy and institutions were promising fairness and justice through competition, the wealth and power of gigantic corporations were increasing. This paradox is even more evident if we refer to the well known formula “too big to fail”, especially in the banking industry (Feldman and Stern 2004), including unregulated financial intermediation. This formula is, at the same time, the best denial of the competition doctrine as well as a request to transform corporations’ great size into an insurance policy against failure. This summarises very well the paradoxical mix of public/private created by global governance. It is especially the large private financial firms claiming that they have to be saved by states when they are in ruins because they play an important public function, despite the fact that they have conducted their business activities with a high level of moral hazard, without any regard to that public function they claim to play. At the same time, states are deprived of many of their financial resources and traditional prerogatives in managing and preventing market instability, despite being called on to act as “rescuers” (Napolitano 2009), to repair failures and problems created by managers’ moral hazard.

There is yet another paradox: the risk is controlled significantly by a small group of poorly regulated rating agencies whose benchmarking is “deeply rooted in business analysis” (Langohor and Langohor 2008). Attempts to reform the duties of this oligopolistic club have only just begun to address the existing macroscopic conflicts of interest (Rognoni 2011) and the importance of re-assessing correctly the private/public interests balance (Kruck 2011).

Through all of these events we can also observe a complex trajectory of state identity. Originating in Europe in the modern age as “sovereign” Hobbesian entities, states came to act as important agents in the rationalisation of the world (Giddens 1999; Weber 1978). Their role in controlling risks and economic instability through law can be framed within the same picture. After a trend of expanding privatisation, we are facing anew kind of “risk society” (Beck 1992) due to financial (derivative) markets (Vella 2012) ending up with the states themselves being subjected to risk especially because of so-called sovereign debt. As noted, the sovereign debt crisis “is a development of the financial crisis of 2008 and signals the concrete risk of passing from a ‘market failure’ to a ‘state failure’” (Napolitano 2012: 384). Previously this problem seemed faraway and of interest only for advocates of the “third world”, when we used to speak of debt for poor countries. After the 2008 crisis, the problem of sovereign debt appeared as a deadly illness for Western states themselves (Somma 2013). Thus, states are now trapped between a (growing) risk of debt often due to a (bad) financial economy and (reduced) means and ability to deal with it because of poor financial and legal resources. Significantly Streeck signals how the “sovereign debt” issue shows clearly that financial markets are nowadays a sort of second constituency of the modern state. As such, they oblige states to balance their budget and approve laws for enforcing this result. Thus states transform themselves from “states in debt” into “consolidation states”. Under the pressure of “financial markets”, consolidation efforts by states are realized through a general reduction of state expenditure and privatization of their functions. (Streeck, 2013: 134-38). This last transformation imposed on states as a result of an international regime, the obligation “to pay”, not “to protect”, is the fulfilment of the Hayeckian ideal of freeing the economy from politics (Streeck, 2013:132-34).

  • [1] There have been, of course, some legal answers and attempts at reforming financial markets.Notably, the reform of financial markets in the United States, with the 2010 Dodd-Frank Act,introducing checks on hedge funds and other dangerous financial products, as well as Basel 3 in2010-2011, strengthening bank capital requirements, in order to reduce leverage. Moreoversome reforms on the rating agencies were made in order to ensure more responsibility, transparency and independence into credit rating activities, and to raise the quality ofratings. Europe toomade some regulatory attempts (Chiti and Vesperini [eds.] 2015): from the EMIR (EuropeanMarket Infrastructure Regulation) in 2012, trying to change the bilateral contractual regime ofOTC instruments, in order to bring more transparency, until the approval of a banking union forthe Eurozone, ensuring common rules for all banks, and their implementation under a SingleSupervisory Mechanism (SSM), and a Single Resolution Mechanism. However, still the bankingunion is incomplete.
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