Beyond economic disembeddedness

While the aftermath of the global financial crisis is putting severe strains on welfare institutions, this could also engender positive consequences. Periods of unsettled beliefs sometimes inspire social and economic policy innovation. Deep economic crises are often moments of political truth, so the history of the twentieth-century teaches us. In the wake of both the Great Depression in the 1930s and the Great Inflation of the 1970s, the social order of advanced economies, triggered by exceptional economic hardship, was recast in fundamental ways. The welfare state of mid-twentieth-century Europe emerged from the economic and political lessons of the war and depression years. In the 1950s and 1960s it proved highly successful in protecting workers and families from the vagaries of the market through comprehensive social insurance, without undermining the modus operandi of the free market economy. When advanced Western economies ran into the crisis of stagflation in the 1970s, ensuing recessions did not, however, invoke the welfare state's demise. On the contrary, the remarkable stability of social spending, at about 25-30 per cent of GDP, over past decades of neoliberal hegemony is surely testimony to the staying power of modern social politics in advanced European economies.

Social policy has surely resurfaced at the centre of the political debate. Citizens and policymakers have once again realized how important social policy provision is for mitigating social hardship and fostering economic stability. In the immediate wake of the 2008 financial crash, the more comprehensive welfare states of the EU, such as Sweden, Denmark, the Netherlands, Austria, and Germany, proved surprisingly resilient in reducing the impact of aggregate demand decline and ameliorating social hardship. Generous social benefits and wage subsidies acting as robust automatic stabilizers, together with high-quality social services, effectively ensured that workers on short-term unemployment benefits could preserve their jobs and/or maintain their human capital through new training and active labour market policies. Consistent with European policy legacies, welfare provisions were strengthened in the immediate aftermath of the Wall Street crash of 2008 in many nonEuropean economies. In China, the government enacted a comprehensive Keynesian stimulus programme, steering the economy towards a greater reliance on domestic consumption through a big rise in welfare spending, by deepening and strengthening social safety nets, through more secure pensions and improved healthcare; this also covered migrant workers (Cook and Lam, 2011). The Indian government achieved something similar by boosting incomes in rural areas through improved pension and job opportunities. In Brazil, over the past decade, forty million citizens have been lifted out of poverty through access to social assistance, education, health, credit, and formal employment. The surge of the Brazilian economy has resulted from an explicit political commitment to benefit poorer families. Macroeconomic stabilization and the expansion of social protection programmes thus resulted in a self-reinforcing virtuous cycle of high economic growth with broad-based social progress, led by domestic markets. Government policy, especially the Bolsa Familia programme, social assistance, conditional on children attending school, and minimum wage legislation, fostering productivity gains to be translated into higher wages, profited the emerging middle classes (Lindert, 2006; Soares, Ribas, and Osorio, 2007). In the United States, where the stock market collapse wiped out retirement savings, and rising unemployment left more and more people without health insurance, by early 2010 President Barack Obama was able to push through a hard-won healthcare reform, in part inspired by the more comprehensive and efficient European health systems. In other words, the financial crisis, at least initially, changed the image of a dysfunctional welfare state. No doubt the economic, social, and political context will have been further transfigured by the time this book is published late 2012; however, the central question of the imperative to integrate social concerns into economic policy strategies for reasons of political legitimacy will not, I believe, have been sidelined in the meantime.

My contention is that the most fundamental insight to (re)emerge from the global financial and economic crisis is that economic markets are not selfregulating, self-stabilizing, and self-legitimizing (Rodrik, 2011). This is what the economic anthropologist Karl Polanyi long ago called the 'embeddedness' of economics. The notion of embeddedness underlines the fact that economic activity is created and shaped by political decisions, social conventions, and shared norms and understandings.

Effective market allocation depends, first and foremost, on the political protection of property rights and contract laws. In his Great Transformation, Polanyi shows that public intervention and regulation have historically played a decisive role in the institutional separation of society into an economic and political sphere by providing a supportive framework in which markets can prosper (Polanyi, 1944). Although free markets are often misper- ceived as natural, sovereign, self-contained, and self-regulating, a market economy cannot exist independently of the society and rules within which it is located. While this important lesson is certainly not new, a whole generation of policymakers and private economic actors seem to have forgotten the basic truth that the benefits of global economic interdependence rely heavily on robust and equitable social and political institutions since the recessions of the early 1980s. Market economies cannot function without collective, nonvoluntary rules determining who is entitled to enter contractual relations and under what conditions (Streeck, 2011). Without enforceable rules, free markets cannot function.

Embedding the economy is fundamentally a political activity of institutionbuilding and maintenance. Structures of permanent rules for making important (economic) decisions are, like property rights, assigned, restricted, qualified, and regulated by political decisions, subject to cultural and historical variation. Modern capitalism not only requires regulatory systems at the micro level, but also effective macro institutions, including monetary and fiscal governance. Although labour market regulation, social service provision, and redistributive programmes such as unemployment benefits, public pensions, education, and healthcare are provided for through non-market arrangements, they too are intimately connected to the private market economy, through which they are financed and for which they perform stabilizing and productive functions. Thus, social policy interventions, despite not being market-generated, are central to embedding mature capitalist economies as they impact on production, resource allocation, regulation, economic growth, levels of productivity and employment, and the distribution of goods, services, incomes, and wealth.

It is fair to say that the global economic crisis has fundamentally redrawn the boundaries between states and markets. Governments and central banks have enacted unprecedentedly active responses to the credit freeze panic in 2008. All this happened despite the standing hegemony of neo-liberal doctrine, which proclaimed unequivocally that government was the problem and markets the solution. Faced with an exceptionally deep crisis, public authorities showed little inhibition in pursuing bold strategies of crisis management, on a scale truly unthinkable in the 1990s. As the credit crunch adversely affected the real economy, governments turned to dazzlingly aggressive stimulus packages, followed by tax cuts in the hope of stabilizing consumer demand. After 2010, central banks cut interest rates to practically zero, while simultaneously pumping hundreds of billions of euros and dollars into the world's weakened banking systems and purchasing sovereign bonds from the most vulnerable economies. By so doing, most observers agree that the public authorities' activist crisis management strategies have succeeded in forestalling the darkest scenario of a rerun of the Great Depression. In the process, important lessons have been (re)learnt. For one, global financial deregulation is no substitute for effective public regulatory oversight, including higher capital requirements and perhaps a tax on financial transactions. Across Europe, third, tighter eurozone economic governance is no longer a taboo subject. The internationalization of banks must be accepted and matched by the creation of an integrated pan-European regulatory agency (Eichengreen, 2009).

Over the past four years, as policy attention has focused primarily on immediate crisis management, fiscal and monetary policy coordination, and financial sector risk regulation, little systematic thinking was devoted to the question of whether and to what extent the crisis creates momentum for more fundamental social reform other than fiscal austerity, including the distributive dimension of legitimately dividing the pain of the crisis and its aftershocks. The dire social consequences of the financial crisis indeed force us, once again, to rethink twenty-first-century welfare provision from the perspective of the embeddedness of economics and the fundamental interdependence of markets, societies, and polities. According to the former chief economist at IMF, Raghuram Rajan, the lack of adequate welfare provision played an important role in the growing private indebtedness in the US economy since the 1980s. Growing job insecurity and the general stagnation of wages of the American middle class since the late 1970s were compensated by easy credit and subprime mortgages, allowing spending patterns of the squeezed middle to be kept up by reductions in household savings and mounting private indebtedness. In other words, in a free-wheeling 'disem- bedded' market environment, access to easy credit and subprime mortgage loans to low-income households seemingly replaced the welfare state as the basis of the American social contract. Weak social safety nets, growing inequality, and increasingly unequal access to education and privatized healthcare have, since the 1980s, deepened the faultlines of the overleveraged US economy, and tempted consecutive American governments and the Fed to pursue extremely risky expansionary fiscal and monetary policies (Rajan, 2010). Across Europe, policymakers are beginning to understand to what extent competitiveness gaps in the southern eurozone periphery, especially for Greece and Italy, are inherently related to their antiquated passive and insider-biased social contracts, inhibiting employment opportunities and constraining adequate social protection and support for women and youngsters. More ex positive, the competitive strength of Scandinavian economies, before and after the 2008 credit crunch, is slowly but surely being recognized as in part a product of their expensive, active, and capacitating, universal provisions in areas of work, care, and welfare. This evidence surely goes against the neoliberal argument that all European welfare states merely deliver lousy social services at the expense of economic progress.

Governments have an important responsibility to steer clear of the macroeconomic instability and excessive income inequality that result from unfettered markets. The politics of re-embedding the capitalist economy through the welfare state, as Wolfgang Streeck argues, is typically a politics of mediation between the conflicting demands of markets and social policies, serving citizens and families to organize their lives so as to be able to live with the potentially disruptive dynamics of capitalist 'creative destruction' (Streeck, 2011). From this perspective, re-energizing modern social policy, anchored in normative considerations of fairness and human capabilities, is key to reembedding volatile markets in the aftermath of the worst recession since the Great Depression. Crisis aftermath political and social conflicts will in one way or another be concerned with who should be protected by regulatory institutions and how, against the potentially socially destructive logic of capitalist expansion. Can we envisage a politics of social reconstruction, aimed at redesigning a welfare state that is both economically viable and politically acceptable for early twenty-first-century capitalism?