THE ECONOMICS OF THE NEW GLOBAL GOVERNANCE RAJ

Roby Rajan

Soon after the short-lived "leveraged buyout" boom on Wall Street collapsed in the late-eighties, a successful bond trader named Michael Lewis wrote a book called Liar's Poker in which he revealed why American investment banks prefer hiring economics graduates. It was not because these graduates had a better understanding of markets or were more skilled at securing higher returns for investors. If anything, said Lewis, economics was becoming an ever more abstruse science, producing mathematical treatises that had little to do with economic reality. Yet, when he asked aspiring investment bankers at Harvard University why they studied economics, they would reply that it was the most practical course of study -- even though most of their time in college was spent drawing "funny little graphs" that were of little use. What was practical about taking a degree in economics, according to Lewis, was that it signaled to Wall Street that these graduates had little interest in political or ethical issues, and were willing to subordinate any moral compunction they might have to pure economic gain.

Incredulous as it seems today, the abstruse mathematical treatises and funny little graphs of contemporary economics have a respectable lineage: eighteenth century moral philosophy. But by the time of John Stuart Mill's death in 1873, a nascent "neoclassical" economic theory was already turning away from the classical preoccupation with distribution and towards a single-minded focus on efficiency. Not long afterwards, efficiency in resource allocation was to become the centerpiece of economics; the drive to efficiency was held to power the engine of growth, leading to a rise in the "standard of living" and a steady expansion of desires.

No modern economist did more to put together a self-contained package of economic knowledge in scientific form than the Nobel Prize winner Paul Samuelson in his Economics. First published in 1948 and now (with a co-author) in its eighteenth edition, Samuelson's Economics has proved to be one of the great success stories in academic publishing, selling close to 4 million copies and translated into over 46 languages. Millions of undergraduates the world over have been raised on the principles spelt out in its pages, and although no longer the market-leader, it laid out the template which virtually every subsequent introductory economics textbook was to follow. It would hardly be much of an exaggeration to say that with his text, Samuelson almost single-handedly managed to confer pedagogical respectability on economics and secured for it a permanent berth in undergraduate curricula around the world. While the particular combination of theories that Samuelson codified in his textbook has undergone many changes down the years, the core has remained more or less in tact through all these mutations and to this day supplies the knowledge base for the many "transition economies" to emerge into the full light of "market reform".

Riding the crest of a wave of disillusionment with communist-style economic management in the early nineties, neoclassical economics presented itself as the perfect antidote to all of society's ills. Privatization of public assets, the economists argued, should be the first order of business for any post-communist government; the manner in which initial property rights are assigned was irrelevant, they said, as long as these were "well-defined". The theory to which this peculiar proposition can be traced owes its existence to an Englishman named Ronald Coase - a Nobel prize winner in economics, but little known outside the discipline. Coase first rose to prominence with a polemic against the then commonly accepted economic principle that a party that causes social injury (through pollution, for instance) ought to be taxed to the extent of the damage and society compensated. Such "spillovers" of economic activity go by the name of "externalities" in economics, and Coase's main claim to fame in the discipline stems from his insight that a more efficient solution to the problem of externalities could be arrived at by redesigning the institutional framework so that the externalities are "internalized" into the decision calculus of individuals without direct government intervention. For this to occur, the "externality problem" had to be forced into the theoretical straightjacket of economics by delineating property rights in pollution so that market exchange could be allowed to work its magic and bring about an "efficient" outcome.

It would be difficult to overstate the impact of this one proposition on the subsequent course of contemporary economics and policy. Henceforth, "institutional reform" could only mean one thing: define property rights and leave the rest to market exchange. One of the most damaging legacies of this theorem has been the license it supplied for indiscriminate privatization as the panacea for the "emerging economies". Fatefully, in countries like Russia, such policies were implemented in all seriousness and public assets squandered in the name of "reform". Former party apparatchiks made the overnight transition from revolutionary to entrepreneur, and ordinary Russians woke up one morning to discover that an oligarchy had taken over the commanding heights of the economy, with its lower reaches patrolled by a homegrown mafia.

A considerable part of the appeal of contemporary neoclassical economics lies in its ability to supply simplistic property-based "solutions" for a wide range of social phenomena -- including the economic backwardness of the Third World. For economists like the Nobel-prize winning Douglass North, Third World countries that have not readily taken to the idea of private property rights have brought their poverty and misery upon themselves, and must for their own good be made to submit to "market discipline". The theoretical framework for imposing such discipline was to emerge from the "Washington Consensus", a consensus between the IMF, the World Bank, and the U.S. Treasury on the optimal mix of policies for these countries. Freed from the Consensus's strictures, they are liable to start borrowing beyond their means, spending in excess of their collections, and turning uncontrollably profligate. A regime of "global governance" instituted under the aegis of the Consensus would therefore enforce the discipline required to rein in their wantonness and administer shock therapy when called for. A whole phalanx of rules was subsequently put in place, the slightest deviation from which is said to destroy "investor sentiment"; policy makers then have to scramble to "restore confidence" and attract capital back on its terms.

This also means that the pin-stripes from the World Bank-IMF-WTO have to land at regular intervals in Third World capitals, lap-top in hand, check in to the luxury hotel, and crack the whip on local supplicants pleading for loans, grants, or debt-relief. "Conditionality" is IMF officialese for the stipulations which recipient countries must meet to avail of its largesse, such conditionality inevitably conforming to an iron formula: reduce the budget deficit, raise the interest rates, devalue the currency. The weight of these measures falls ineluctably on the poorest in these countries, but for the global taskmasters, the pain of such "austerity measures" is a regrettable but necessary prelude to real economic healing.

The power of finance capital to pit countries against one another in the race to prove their attractiveness as an investment destination is then upheld as another source of the much-vaunted "market discipline". The global governors take it as an article of faith that the "free" flow of goods, services, and capital across borders can only be a good thing, and are willing to use all their muscle to transform entire economies into the equivalent of speculative betting parlors. The size of the stock market becomes the definitive index of a country's stage of development, and the ordinary citizen's absorption in the hourly gyrations of stock prices an indicator of the nation's maturity.

Amazingly, despite all its recent setbacks and failures - the East Asian financial crisis which brought the entire region to the brink of ruin, the transformation of the Russian economy into a private fiefdom of oligarchs and mafioso, the stream of corporate scandals on Wall Street, the growing immiserisation of the Third World - despite all this and more, economics as a discipline appears to go from strength to strength, emerging unscathed from all its vicissitudes, even poaching deep into the territory of the other social sciences.

But all is not as well as it seems. The frenetic carving out of more and more domains of public life where politics has been declared persona non grata also betrays a certain desperation. Outside the charmed circle of theorists and global governors, fewer and fewer are now persuaded of the "objectivity" of their economic "science". The anti-globalization movements now taking root worldwide and the fierce protests that inevitably dog the meetings of the WB-IMF-WTO betoken a profound rejection of the monopolistic claims of economic expertise to re-order social life.

It is in an effort to forestall this threat that the apparatus of global governance now hastily assembles its "focus groups" to provide "civil society input" which then appears as appendices and addenda in its glossy reports. But no matter how many NGOs it involves in its "consultative processes" and no matter how "participatory" the deliberations leading up to "policy reform", there loom in the background the gathering clouds of politics - politics, not as competition over resources as the theorists would have it, but politics that generalizes itself across the entire space of economic knowledge. The suspicion that their overreaching may already have induced this as an unintended consequence keeps the global governors awake late into the night…………
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Roby Rajan is Professor of Economics at the University of Wisconsin-Parkside, USA. He can be reached at Rajan@uwp.edu

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