The market as a political agent

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This chapter starts with a seemingly problematic proposition: its very title. The market, an inanimate system of economic relations, is claimed to be a political actor, a subject of the political process. We tend to think of [democratic] politics as the theatre of voters, their representatives, media outlets, vested interests; the forum where the plurality of society’s perspectives on life is expressed (more or less). And in so doing, we may be assuming that the subject of politics is necessarily a person or group thereof. What about systems as such? Can the parameters that otherwise define a certain group themselves partake in political life?

The train of thought leads us to a question about method. It is a matter of defining the agent of politics. Agency or structure. This is the binary we are dealing with. There are individuals that act. Their actions are determined or otherwise framed by the nominal environment. Action is a function of upbringing, collective experiences, social status, education, what the law or custom promotes and suppresses, what tradition sees as just and unjust, the sphere of possibility revealed by effective technology, and the like. Whatever may be considered external to the person, yet inherent in their intersubjective lifeworld, has to qualify as structure. It is ‘there’ regardless of the individual’s will.

To this end, one would expect that the factors that frame or otherwise condition a group of economics actors—what we sum up as “the market”—is itself a facet of structure. It cannot be an agent by logical necessity. But since the consideration revolves around method, we might as well scrutinise the very dichotomy that seems to lead to this contradiction. Agency and structure are meaningful categories when we study human action. They collapse into themselves and create methodological uncertainty when applied to a holistic analysis of the polity, i.e. when we move away from human action per se.

To put it simply, if we focus on human relations, social class falls under the classification of ‘structure’. It conditions the behaviour of situational agents and patients. An individual is endowed with whatever their place (or starting point) in society allows for. The exact same state of affairs requires a different approach altogether when considered under the scope of the polity as such, for social class has implications on the distribution of power and influence. A class may colonise the state to the point of exerting its control over the rest of society. This does not happen at the level of the individual or group thereof, but at the class as such. Political systems such as feudalism provide an historical case in point. It is not the individual[s]—those living—that enforce their dominion over the rest of society, but anyone who may be part of the class, including the generations to be by virtue of the institution of hereditary rule.

The distinction may seem pedantic. It certainly is. Reflections on method are necessarily as much. Yet ‘pedantic’ does not mean ‘irrelevant’ or ‘unimportant’. It is just a technical qualification that helps in further refining the tools of the analysis. By doing so we overcome the seemingly erroneous titular claim that what would otherwise pass as structure is in fact agency. We do not use outright paradoxes like “structure is agency” without explaining their underlying rationale. That would be frivolous. Easy to dismiss. What we are doing instead is draw a subtle yet crucial distinction between orders of abstraction.

We do not consider the polity as seen from the perspective of the person, important as that undoubtedly is. We study it in total. Changing the scope implies revising the categories germane to the methodological framework. In this holistic approach, macro entities, systems such as ‘class’ or ‘market’, are very much agents of the overall political organisation of human experience. By that we mean that they do not “condition the behaviour of situational agents and patients”. Rather, their own behaviour, which manifests as a concatenation of emergent phenomena from the underlying relations of the individuals participating in the system, impacts the political process while being conditioned by the broader magnitudes—the methodological structure—of the polity: its historical-cultural-institutional order and concomitant path dependencies.

Even an outline of the specifics of a fine argument requires some explanation. We assume the above to be adequate in resolving the epistemological tension at hand. Proceeding to the salient point is in order.

Financialisation and global capital

Financialisation is the process by which the economy becomes ever dependent on the inner workings of the financial sector. Most economic activities are either directly or indirectly contingent on finance. The bank as an intermediary between savers and borrowers is not a new institution. Financialisation is.

Finance’s role as the cornerstone of the economy is not down to the ‘invisible hand’ of the free market, whereby “free” implies an organic state of affairs with no intervention from the state or any other connection to political realities. Finance is at the epicentre in large part because the prevailing conditions grant it that privileged status. These may involve (i) outright privileges from the government such as lower tax rates or lax regulation, (ii) beneficial treatment such as in cases of financial duress (where the bank is bailed out but not, say, the households that borrowed from it), (iii) unequal distribution of the efficiency gains from globalisation.

While the former two are greatly important, their specifics vary substantially depending on the jurisdiction concerned. The issue we may therefore consider for the purposes of this book is the third one: globalisation. What does this elusive concept actually stand for? What is its economic actuality?

Globalisation is the process by which the political processes of the world become ever interdependent and mutually aware, where trade attains a global character especially as concerns its integration and evolution into a systemic whole, and where there is an increasing sense of doing politics for the general interests of the international community at-large (currently on climate and to a lesser extent finance and taxation, soon in other areas such as cyber). Globalisation is the overarching theme of international relations. It essentially informs the politics of the present. To be a part of the world or to attempt to stand against the trends.

Globalisation is concurrent with—or contingent on—advances in information technology. There is a sense of immediacy to it, which is integral to the interconnectedness of the world. European citizens would, for instance, have little direct insight into the inner workings of the US presidential elections without the communication media available at our disposal. Similarly, markets would be less responsive to underlying economic changes as there would be a greater delay between an event and its internalisation in the cost/risk assessment exercise.

As immediacy becomes prevalent the need for physical proximity diminishes. Information technology effectively shrinks the space-time of human experience. Data travels in an instant. Events on the other side of the planet have a greater impact on domestic affairs than they otherwise would. Everything feels closer. For big business this means that they are not necessarily bound to any one place. Their holding company can be situated far away from where most economic activity takes place.

This opens up markets to global investment. It also contributes to the greater exposure of the domestic economy to events abroad. The Great Recession is a case in point. The burst of America’s property bubble had a cascading effect on European markets in particular and the international economy more generally. It exposed the fragility of European banks, revealed the infamous ‘Greek statistics’, contributed to the euro area’s sovereign debt and bank crisis, and so on.

From a political perspective, there are two points worth highlighting before proceeding to analyse the overarching theme:

  1. Too big to fail. Financial institutions are at the core of economic activity. That alone makes them vital. They also expand their investing/trading activities into markets that are not related to the ‘real economy’: financial derivatives and the like. Eventually they outgrow the very domestic economy in which they operate. The authorities meant to regulate them are faced with a near impossible task of tackling a global[ised] issue with purely national means.
  2. State-bank symbiosis. Corruption and corporatism notwithstanding, the interests of the state and the banks can be interwoven by economic conditions. A financial institution that is deemed ‘too big to fail’ is, in effect, treated as part of the state apparatus rather than a typical private actor. An outright bailout from the sovereign is the likely course of action. Private debt thus becomes public debt. A sovereign debt crisis may ensue, as was the case in several occasions amid the euro crisis. It then is the sovereign that needs banks to ‘support’ it, in the form of credit (buy its sovereign debt instruments).

Asymmetry and market accountability

Market dynamics themselves forge a strong bond between the state and financial institutions. But the relationship is not necessarily symmetrical. The sovereign is a nation state. It does not have the chance to reap the benefits of globalisation in the same way a multinational corporation might. The nation state is largely static. It can only impose taxes and regulations within its own jurisdiction. Whereas the bank is more flexible and adaptable. It can allocate capital across the globe, siphon profit through ‘favourable’ tax jurisdictions, partake in investment activities far from the base of its holding company.

In short, the state is local, the bank global. Yet when the domestic bank fails it is only up to the corresponding public authorities to act, as if the problem is purely their own. In a narrow sense of which legal order applies it certainly is. Though in the broader sense of the underpinnings of the market failure at hand, there likely are cross-border factors involved.

The gains of globalisation are not distributed evenly across society. International trade does not benefit everyone in equal proportion. Some lose other profit enormously. The latter group is typically populated by businesses with a cross-border reach combined with the means to exploit loopholes across multiple jurisdictions. The more nuanced point is that the magnitudes of economic activity and locality are decoupled. It is easier for private actors of this sort to exert pressure on the government by effectively shifting their core businesses to countries with more favourable regulations.

The most obvious challenge to public authority is on taxation. A nation state cannot impose high tax rates or considerably broaden the tax base without running the risk of losing the affected companies to more ‘competitive’ jurisdictions. Businesses with a global reach have the option to relocate. The effective sovereignty of the state thus diminishes. It formally remains the supreme authority. In practice there is little it can do in its own right, at least less than what would be wanted/needed.

Globalisation’s asymmetric distribution of resources has a profound effect on the political process, more specifically with regard to the accountability of public authorities. The body of citizens no longer is the sole actor that checks on the government. Markets perform the same function, albeit with different means.

Consider this example. The people of a relatively small economy elect a government on a more progressive platform. To raise taxes on the rich, expand social welfare, invest in public schools and healthcare, etc. Voters will hold the government accountable on the basis of whether it implements its agenda. Markets on the other hand will set their own policy priorities. They may attach a greater risk to investments in that country, demand higher risk premia for buying its sovereign debt, or altogether threaten to channel investments into another country with a less ‘socialist’ outlook. The state will either seek a compromise or lose out to the market forces, because the latter have the upper hand courtesy of globalisation.

States are not helpless though, provided they do not think of themselves in isolationist terms. They can engage in international relations that enhance their sovereignty by diminishing the flexibility of private ‘global’ actors. For instance, if large corporations move their profits away from, say, Greece to Luxembourg, the solution is an EU-wide initiative to harmonise corporate taxation throughout the single market. The effective elimination of major aspects of fiscal competition would force businesses with a cross-border reach into accepting the rules imposed by the authorities.

The asymmetry of globalisation is, therefore, a transitory phenomenon. It lies in the simple fact that the private sphere became global while the public remained partially trapped in the traditional conception of sovereignty as purely national. There is global trade. There is no global government. Which creates a regulatory disconnect. The magnitudes differ.

Democratic sovereignty excludes market agency

Democracy rests on the virtuous cycle of legitimation and accountability between the state and the people. The latter provide the former with their consent, which is necessary for rendering the legal order acceptable and for granting the authorities the right to govern. At the same time, it takes state fiat to qualify a group of people as citizens. There is no citizenry in the absence of the relevant legal provisions. No random person can participate in the affairs of a state.

Democracy thus represents a feedback loop between two facets of sovereignty: (i) state and (ii) popular. The first consists in the supremacy of the polity within its territorial confines. Its independence and inherent capacity to exercise legitimate force for the promotion of the general good (for the people). The second is the normative foundation of democratic rule as bottom-up and participative (from and with the people). It also contains the magma of norms and unwritten rules—culture—that gets to inform, indeed mould, a certain constitutional identity.

The market qua agent of politics does not fit into this cycle as it operates at a different scale. That is so because democratic rule is hitherto confined to a locale of sorts, typically the nation or the instituted polity ‘stack’ of the nation plus the relevant supranational stratum of politics. It is not globalised. The market is. That is exactly why it can have a profound effect on the political process even though it formally does not take part in it.

The market holds the authorities accountable by virtue of its capacity to adapt to evolving circumstances throughout the planet. It essentially has the power to escape the law and, in so doing, to pose its own conditions on legislators. Without that ability it would, at most, function as another source of information—a guide—on what the underlying dynamics in the economy are. It would be complementary to quotidian political affairs. Not a substitute of them.

The asymmetry requires global coordination

All phenomena are properly regulated at the level in which they occur. Neighbourhood squabbles can be dealt with among neighbours. Nation-wide issues call for central government initiative. Continental and global challenges require international cooperation. This is true for globalised capital just as it holds for climate change and the emerging need to regulate cyberspace.

In the absence of concerted action on that front, multinational corporations will continue to enjoy a disproportionate advantage of the political sort. Their influence on the political process will remain significant as well as loosely checked. Ultimately though, their favourable status engenders in them a tendency to seek out alliances with domestic politicians the world over. To foster or benefit from corruption that is. In both normative and economic terms this is suboptimal, indeed undesirable.

An ambitious roadmap for tackling the asymmetries of globalisation would encompass at least the following:

  • Influential states, such as the USA or the EU, would lead by example. They could proceed to stamp out any dubious tax regimes that enable multinationals to effectively escape taxation. Macroprudential policy and financial regulation in general would also be given priority.
  • International alliances would be forged on the basis of exchanging information about registered companies, fiscal practices, and financial oversight. The promotion of sound tax and bank policies should also be prioritised.
  • A global memorandum of understanding could be signed to the effect of forcing all parties to insert a “symmetry clause” in any future international treaty they sign. The clause would be a generic commitment to regulate cross-border capital in a manner that is consistent and beneficial for all states involved.

Modalities and content may well vary. The idea is to make steps towards the globalisation of the relevant politics. This is the only course of action available for restoring markets to their original function as hubs of economic activity with no immediate impact on the political process. In the meantime, they will continue to operate as a political actor towards which elected officials are held accountable without sufficient reciprocity.