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krippner book forum: part 3 – critique, commentary, and provocation

Part 1, Part 2, Brayden discusses consumer advocacy and credit markets.

In this final chapter, I move to critiquing Capitalizing on Crises. Since most of this post will be spent on criticism, I want to make clear that I think this is a good book. For me, the book offers two major contributions to economic sociology. First, it documents that there has been a little noticed, but extremely important, shift in the American economy – the financialization of profits. Second, it makes the important case that banking regulation and monetary policy were subject to strong pressures from interest groups. Financial policy was less about optimizing global welfare and more about solving a series of political problems. These insights, I suspect, will be a lasting contribution to economic sociology and political economy.

Now, to the heckling…

1. Critique: A central argument was that Regulation Q created a shift in profits. This may be true, but it is not obvious to me. In general, raising the price of money – ending Q meant you have to loan out deposits at a higher rate to cover higher payments to depositors – means that people will take fewer loans, and thus suppress demands for goods. In other words, getting rid of Q, and other rules, created an incentive to issue more financial instruments but it simultaneously created downward pressure in the economy.This suggests to me, at the least, that some mechanism in addition to banking regulation might needs to be considered. For example, a Krugmanite explanation might focus on taxes and redistribution of income – dividends and interest are taxed way lower than wages and salaries, which creates an incentive to shift. These alternate hypotheses need to be picked up and discussed more thoroughly. This was done do defend the financialization episode, but not the mechanisms linking various Federal policies to shifts in corporate profits.

2. Fed-centrism: The close, historical reading of Fed decisions is a really great feature of this book. Anyone who believes that the Fed is run by a bunch of a-political technocrats should read this text. This isn’t to say that the Fed eschews economic theory. Rather, the governors are subject to enormous political pressures. If nothing else, this book is a great political sociology of the late 20th century Fed. At the same time, I wondered if there is some selection bias. Does the focus on the Fed and the Treasury draw attention away from other factors in the economy that might be driving financialization? In other words, if we were in a decomposition of variance framework, how much financialization would be accounted for by Fed and Treasury decisions?

3. “With political incentives, discretion’s a joke.” That’s a line from the second Keynes/Hayek rap video and it encapsulates how I felt after reading the historical chapters of the book. In each case, with maybe the exception of the monetary policy discussion, the issue is that top down regulation of the economy became undone when subjected to a wave of political pressures. What does this say about policy in general? At the very least it is consistent with a public choice view of the world, where political institutions respond to voter or interest group pressures and not ideal policy discussions. I imagine this story would make radicals of all types comfortable. The neo-Marxist might say that yes, maybe capitalist economies can be properly regulated, but it’s a politically hopeless endeavor. The libertarian, after reading this book, would view financial policy as another example of Stiglerian processes at work, with the regulated capturing the regulators. The mainstream, who views regulation of the economy as a proper and natural function of government, are left with an empty bag,  the edifice of cherished New Deal banking policy melting under the demand for easy credit.

So that’s it – thanks for reading this semester’s book forum! Send me email, or post in the comments, suggestions for the Fall.

Written by fabiorojas

May 31, 2011 at 2:29 am

5 Responses

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  1. Fabio,

    Excellent book forum, as always. I’m a bit confused about criticism 3- Are you saying that Krippner ought to have discussed the implications for our understanding of regulation more broadly? Or that Krippner overemphasizes the Fed’s discretion in the face of the analysis of political pressures? Would you clarify a bit?

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    Dan Hirschman

    May 31, 2011 at 3:03 am

  2. Thanks, Dan. #3 is certainly a case of a provocation. The purpose of Greta’s book is to explain this one macroeconomic event, not policy making. So it may have actually been a distraction.

    But it’s certainly an obvious question. Since her book is strongly based in radical political economy, we shouldn’t be surprised that the story revolves around interest group pressures and their destabilizing effects. But people who don’t come from that perspective would find the general story interesting because it essentially anti-technocratic.

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    fabiorojas

    May 31, 2011 at 3:32 am

  3. I also really liked the book and learned a lot about Federal economic policy by reading it. Like Fabio I am somewhat concerned by the Fed-centrism of the book, although I’d call it state-centrism. Granted, Greta is quick to note that others, including Davis and Fligstein, have looked at this question from the perspective of business and her contribution is to provide a more political, state-centered explanation. But by focusing so much on the internal workings of the state, we sort of lose focus on the actors who were shifting to a more financial mode of profit-making. I wanted one additional chapter that looked specifically at corporate reactions to changing state economic policies. Of course, the quality of research and richness of information in this book is so great that adding just one more chapter may have added another year or two to writing it, and so I can certainly understand, from a researcher’s point-of-view, why Greta made the choices she did.

    Perhaps at some point Greta, Jerry and Neal will do a panel together to talk about each other’s work.

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    brayden king

    May 31, 2011 at 2:27 pm

  4. I like Brayden’s idea. Here’s the next best thing at the ASA (Neil-free for now):

    Sat, Aug 20 – 4:30pm – 6:10pm
    Thematic Session: Economic Utopias and Dystopias: Possible Trajectories from the Financial Crisis
    Session Participants:
    Session Organizer: Greta R. Krippner (University of Michigan)
    Session Organizer: Gerald F. Davis (University of Michigan)
    Presider: Erik Olin Wright (University of Wisconsin)

    Reviving the Non-utopian Utopia: Prospects for a New Social Democracy
    *Fred Block (University of California-Davis)
    Toward a Diversified American Capitalism: Cooperatives, Mutuals and Local State-owned Enterprise
    *Marc Schneiberg (Reed College)
    Building with the Ruins of the Past: Opportunities for Social Organization Created by the Collapse of Shareholder Capitalism
    *Gerald F. Davis (University of Michigan)
    Economic Categories in Neoliberal Society
    *Marion Fourcade (University of California-Berkeley), Kieran Healy (Duke University)
    Abstract:
    It is widely recognized that periods of economic crisis are also periods of transformation in the social and political structures which organize the economy. The Great Depression gave rise to the regulated economy of the “Golden Age” of postwar capitalism, characterized by an active state, corporations that offered significant social protection to workers, and a sustained period of relative peace between capital and labor that supported widely shared prosperity. The economic crisis of the 1970s brought a swing in the other direction as markets were unshackled from regulatory constraints, the state retreated from its active role in guiding the economy, and corporations lost the organizational coherence that had characterized firms in preceding decades, chasing after the elixir of quarterly profit reports rather than making longer-term investments in communities and workers. What kind of economic future does the current crisis portend?

    Rather than offering yet another post-mortem on the financial crisis of 2007-2008, this thematic session takes a step back to consider the various possibilities for social, economic, and political transformation presented by the financial crisis and whether these possibilities are likely to be realized. Thus, this session would invite presenters to consider the crisis as a possible turning point in financial capitalism, with the goal of discerning what kinds of new organizational forms, new popular movements, new regulatory strategies, and new modes of economic discourse we might see emerging in the future (or the obstacles to their emergence).

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    Jerry Davis

    June 1, 2011 at 1:36 am

  5. […] Capitalizing on Crisis by Greta Krippner […]

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