Market Economies Require Regulation

24 Mar 2016 1:47 PM | Mike Lillich (Administrator)

By Oren Levin-Waldman

First published in the Yonkers Tribune online ( on March 21, 2016.

Joseph Schumpeter famously described capitalist markets as processes of creative

destruction. The old and obsolete are replaced by the new and technologically more advanced. This, of course, was supposed to be the measure of progress. In practical terms this meant that buggy whip manufacturers would be replaced by automobile manufacturers. It also meant that in the process of creative destruction there would be serious dislocation.

Those who performed skilled labor for higher pay would be replaced by low-skilled workers on the assembly lines. And in today’s economy it has meant that higher paying manufacturing has been replaced by lower paying service sector jobs. In short, the process of creative destruction has resulted in the two-tier economy that we have become all to familiar with: an economy of highly skilled and highly paid workers at the top and poorly skilled and poorly paid workers at the bottom.Still, the process of creative destruction is supposed to be a measure of progress. Why?

Because all workers who have been displaced will in theory be reabsorbed back into the economy. And yet, Schumpeter never really addressed the issue of how long periods of dislocation would last and how long it would take for workers to be reabsorbed. These periods could be as little as a few months and as long as fifty years.

To the extent that creative destruction speaks to market dynamism, there are two ways to understand it, with clear implications for the political debate over economic policy. One understanding is that competitive markets operate according to natural processes and should be free to run their course unfettered by governmental interference of any kind. If we allow these so-called market forces to run their course, workers will be reabsorbed faster, even if their new jobs don’t pay as well as their old ones did. After all, they are always free to retrain and acquire the necessary skills to obtain better paying jobs. A new economy requires new levels of education.

The other understanding, of course, is that government in a market economy has a responsibility to ease these transitions and to facilitate workers’ reabsorption. Not only does government have a responsibility to facilitate reabsorption, but a responsibility to ensure that the new economy will pay workers liveable wages. In other words, if more education and skill is required, then government needs to invest in the development of human capital. And if wages are low because higher paying manufacturing has been replaced by low-paying services, then institutions need to be in place to bolster wages.

I have many times in this space talked about the importance of labor market institutions like unions and minimum wages for bolstering the wages of not only those at the bottom, but of the middle class. But the process of creative destruction actually speaks to a larger issue, which is that if market economies are to survive, then they need more regulation to ensure their survival.

What we are seeing in the American economy today, which we have been seeing for several decades is what the Marxist economist Michel Aglietta called a crisis in capitalism created by Fordist production. Fordism referred to the early assembly lines that were created by Henry Ford. With these assembly lines more goods and services could be produced more efficiently. But it also meant that skilled craftsmen who were paid relatively well were being replaced by unskilled assembly line workers whose wages were considerably lower. Over time through unionization, these workers’ wages would rise, allowing them join the ranks of the middle class.

And yet, capitalism, especially under the pressure of globalization is in crisis. What crisis? In order to be competitive, firms need to cut costs and the easiest costs to cut are labor costs. If workers won’t be flexible in their wage demands, then firms will relocate their capital elsewhere. Still, if wages keep falling, then there is no longer a middle class to demand goods and services. As aggregate demand drops, the economy will slow down.

Of course, we have been hearing from market purists and those on the political right that this crisis only requires greater flexibility on the part of workers. Even politicians from the Democratic party will espouse this position because investment bankers who make large political donations subscribe to this orthodoxy. Aglietta’s point, however, was that capitalist markets actually required greater regulation.

The nature and scope of changes that have occurred in the conditions of those who work for wages have necessitated what Aglietta called the “development of state influence within structural forms.” By structural forms, he meant a regulatory framework that would allow the market place to survive. These structural forms would surely include labor market institutions designed to maintain wages. And in today’s economy, these structural forms would include a wage policy.

Let’s remember, in the absence of a serious wage floor, employers will not raise wages because they cannot be sure that their competition will do so. A wage floor in the form of a minimum wage ensures that everybody does because it applies to all. But the development of state influence within structural forms means more. It means regulating the financial sector so that there will be stability. It means investing in education and human capital so that workers can more easily be reabsorbed into the new economy. And it means that actors from the public and private sector need to work in partnership in order to create an effective market regime.

In urban politics, regime theory has long referred to the relationships between public and private actors for the realization of the public interest. Here it would mean working together for the attainment of an economy that benefits everybody, especially the middle class. It would not be political actors beholden to special interests who seek to enrich themselves at the expense of others. It would not mean a return to laissez faire economics and absolute free trade as espoused by the political right. It also would not mean the class warfare espoused by the political left.

Until these points are understood, it is not clear that the political debate over how best to restore the American economy will ever progress to one where we can truly believe that the political class, regardless of political party, really cares about the middle class. At the end of the day, it isn’t about economic growth, but economic development.

Just published: Wage Policy, Income Distribution, and Democratic Theory:

Oren M. Levin-Waldman, Ph.D., is professor at the Graduate School for Public Affairs and Administration at Metropolitan College of New York, Research Scholar at the Binzagr Institute for Sustainable Prosperity, as well as part-time faculty member in the Milano School for International Affairs, Management, and Urban Policy at the New School. Direct email to:

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