THE MORE THINGS CHANGE: BANKING, BAILOUTS, AND BUSINESS AS USUAL IN AMERICAN CAPITALISM.

• Author: Blyth, Mark

Mark Blyth is Director of the William R. Rhodes Center for International Economics and Finance and the William R. Rhodes '57 Professor of International Economics at Brown University. His research focuses on how uncertainty and randomness impact complex systems, particularly economic systems. The Journal spoke with Professor Blyth, who took us on an irreverent tour of the contemporary political economy landscape, the prospects for political reform and a more responsive political process, and why inflation and COVID-19 and climate change are serious problems that nevertheless won't result in lasting positive change.

Journal of International Affairs (JIA): Could you briefly take us through your history of the global economic system from 1945 to 2008 and your framework of different "softwares" organizing the global economy?

Mark Blyth (MB): Let me give you background on how this came about. When I want to do research, I look at the academic literature. And then I think: "Is there a real world that this actually references?" So when I did the book on austerity, I wanted to meet bond market vigilantes, because apparently, they exist. So I went off to meet them. And what you find is that for bond traders, most of them care about portfolio stability; very few of them are vigilantes. And it's not at all what you read about in the papers. In order to get inside their heads, I need to get inside their conferences. To get inside their conferences--which cost like $5,000 for two days, which I can't afford--I needed to figure out a way to get in. For me, that was basically to start going in as a speaker. I talked about Europe, and they would tell me about bonds, and there were gains in trade.

This was so much fun that I decided around 2015 that I wanted to figure out if this hunch I had was right, which was that most of the stuff that goes by the name of "tech" is just bullshit. This was around the time Theranos was starting to be seen as what it is, so I wanted to figure out if I was right.

I started going to tech conferences.

Now, what were the gains in trade for me to speak at tech conferences? Tech people actually do kind of want to know about global macro. But you can't start giving them the chapter and verse that you normally would to an academic audience; you needed a metaphor to make it work for them.

I settled upon this metaphor of talking about economic systems as computers with hardware and software. Our hardware is the basic institutions of capitalism: everybody has a labor market, everybody has a product market, everybody has a capital market. But they are very differently configured: the components are linked to each other in different ways. But nonetheless, there's a kind of commonality, if you will, of the motherboard in certain historic periods. And then there's a set of software instructions for running the hardware, which are our ideas about how to run economies.

So if you think about the software as the economic ideas, and then you think about the hardware as the economic institutions, then you can tell a story whereby when you run this computer for a while, you begin to build up bugs in the software because you're overstressing the system. Eventually that creates a system crisis, and the entire thing collapses. At that point, you might be able to get away with rewriting the software, but you might have to actually reconfigure the hardware.

Let's use this metaphor starting from 1945. Back after WWII, pretty much everyone (except the USSR) decided that we really couldn't have fascism or communism again because when we tried that, everybody ended up dead. The new policy priority became full employment.

If you want to have full employment as a policy target, what do you need to do? You need to have pretty restricted capital movements, so everybody moves towards relatively closed economies, at least in terms of finance. Trade and things that you can drop on your foot were good, and trade in money and bonds were not so good.

What else do you need? You need to have big labor market protections and labor market institutions like big capital, big labor--corporatist institutions to control wage inflation. What else? You need to have a big state that basically either occupies the commanding heights of industry, or otherwise guides investment--dirigisme in the French case, corporatism in the German case.

This was all served by a series of ideas about how the economy works called Keynesianism. Keynesianism basically emphasized the role of aggregate demand in steering the economy and believed in a Phillips curve trade off and all that fun stuff.

But a couple of things happen if you run a relatively closed economy with a full employment target for about 30 years. The most important thing that happens is that your median wage gets bid up, and the wage at the top end of the distribution gets bid up even further. Now, you can have a welfare state and taxes and all the fun things that you can finance in that system as long as you have relatively stable inputs, and you can always augment productivity to pay for real wage increases. If you get to the point where your labor markets are super tight, and continue to be tight, then you will generate wage inflation in excess of your ability to offset it with productivity gains. That was the crisis of the 1970's.

At that point in time, there needed to be a system reset. The economics of it were pretty straightforward. You needed to open up, to integrate, to privative, and to eventually globalize--basically make the national international and remove the ability of labor to influence both production and pricing. What happens on the political side is the Reagan and Thatcher revolutions. And inside the economy, it's the birth of neoliberal economics and the reemergence of supply side thinking.

So what does that lead to? That leads to a very different type of reset, one whereby there's a physical resetting of the hardware, which is the rise of independent central banks as the policy shifts from full employment to price stability At that point in time, you get financial dominance rather than fiscal dominance, you get the rise of the financial sector and the integration of markets, et cetera, all of which takes pricing power away from labor and gives more and more of the returns to capital. A simple way to think about it was that the crisis of the old computer was an inflationary bug that caused the profits crisis. Neoliberalism was the reset on the software and hardware side, which basically allowed you to kind of restore the value of capital and restore profit.

Now, this was fabulously successful, except it was too successful. One way to think about this was when Mrs. Thatcher and her friends were thinking about doing the Big Bang for the City of London in 1985, what they were imagining was a world in which finance would basically be freed from shackles and would invest in British industry, and it will have a rebirth. Unfortunately, what actually happened was that finance figured out that doing mortgages and inventing various financial products was far more profitable, and asset stripping industry and shipping it abroad was even more profitable, so we ended up with a world in which increasingly the returns went to capital. We now call this the world of inequality that Thomas Piketty uncovered for us some ten years ago.

But there's also a lot of problems with this--what are the bugs in this system? Well, if you basically squeezed labor's share of national income, but prices are continuing to go up; if you turn housing into assets; if you have cheap money relative to the ability of assets to grow, then you benefit an asset-earning class to the detriment of...