University of Crete
A shift away from the Keynesian, welfare-state interventionist era towards a neoliberal, market-based disciplinary order in economic policy has been taken place the last decades. This shift could be attributed to key social, political and institutional changes, which have eroded the foundations of the post-war international economic order, shaped by the Bretton Woods monetary system, and caused the formation of a new, global, financial structure of power. The revival of global finance reinforces the deflationary bias of fiscal and monetary policy and reduces the viability of relatively expansionary policies. The aim of this paper is to consider the contribution of the revival of global finance to the resurrection of neo-classical ‘orthodoxy’ in current economy policy making. Based on a growing body of literature in the field of International Political Economy, it attempts to develop a political economy framework to consider the way the ‘orthodox’ deflationary discipline that this global, financial structure of power imposes on macroeconomic policy and especially of monetary policy works under certain conditions.
JEL Classification: B15, B22, E12, G28
KEYWORDS Global finance, fiscal and monetary policy, globalisation
During the last quarter of the 20th century, we have witnessed radical changes in the formation and the character of state’s policies. The earlier Keynesian-interventionist ‘orthodoxy’ that ruled the Bretton Woods era has been subjected to severe criticism and questioned in several respects. Currently, the neoliberal model dominates. Macroeconomic policy in particular has been formed on a set of ‘orthodox’ principles, which draws its inspirations from the old, liberal, world order of the Gold Standard. Governments and policy makers are now willing to sacrifice economic growth and employment to assure lower levels of inflation.
The aim of this paper is to consider the contribution of the revival of global finance to the resurrection of neo-classical ‘orthodoxy’ and the deflationary bias in current economy policy making.1 The second section is based on a growing body of literature in the field of International Political Economy, which investigate the importance of some critical social, political and institutional changes in the process of financial globalisation.2 These changes have formed a new, global socio-political order that determines the power and the politics of global finance and shaped new conditions in the international financial relations that, arguably, led to the creation of a new, global, financial structure of power. This new structure of power has undermined the autonomy of national macroeconomic management imposing significant constraints on macroeconomic policy-making. The third section attempts to develop a political economy framework to consider the way the ‘orthodox’ deflationary discipline that this global, financial structure of power imposes on macroeconomic policy and especially of monetary policy works under certain conditions. The last section summarises and concludes this paper.
2. The revival of global finance 3
It is widely recognised that world capitalism has been undergoing a period of profound restructuring. Globalisation and principally financial globalisation has been a central historic process in this restructuring. The revival of global finance has been one of the most topical issues in the international political economy in recent years. This is due to its dramatic effects on the economic and political affairs of nations.
Alternative measures of economic integration as well as developments in information and communications technologies do not add much to our understanding about the causes and especially the consequences of financial globalisation on macroeconomic policy. Recent scholarship in the field of International Political Economy conceptualises the causes and the implications of the revival of global finance through concrete historical formations and considers changes in the social structure and in states’ policies as well as institutional changes that have crucially transformed the global process of wealth creation and distribution.
An immediate consequence of global economic restructuring has been a radical change in the social formation of contemporary capitalism with the emergence of new, social forces and the dominance of specific class fractions. These new social groups have proceeded in step with international capital, particularly financial capital, as well as the global integration of national productive systems and financial markets. Changes in class formation of contemporary capitalism are a key aspect behind the dynamics of the globalisation process.
Since the 1960s many scholars have discussed the reorganising of the world class structure and the rise of an international capitalist class. Hymer (1979) noted that an international capitalist class is emerging, whose interests lie in the international economy. In his view, this capitalist fraction prefers market freedom and considers its economic interests in the further growth of the world market rather than its curtailment. Cox (1987), Gill and Law (1989) see an emerging global class structure and have identified a hegemonic transnational capitalist class fraction. Robinson and Harris (2000) claim that a transnational capitalist class has emerged as that segment of the global bourgeoise which represents transnational capital. All scholars seem to agree that a transnational capitalist class is in a process off constructing a new, global, capitalist historic block, which is consisting of various economic and political forces that have become the dominant sector of the ruling class throughout the world. This historic bloc is composed by the multinational corporations, rentiers, financiers and private bankers, the elites that manage international policy institutions, dominant political parties, media conglomerates and technocratic elites.
The question that arises is what role could such social forces play in promoting broad changes in the process of capitalist restructuring and especially in economic policy-making. Cox (1993) has argued that a historic bloc can not exist without a hegemonic social class. A hegemonic class or class fraction is a dominant social group in a historic bloc and in a social formation, which drives the process of capitalist restructuring according to its own material interests. A growing body of scholarship4 agrees that financial capitalists, whose politics and policies are conditioned principally by the functioning of financial markets, have a dominant role in this new, global ruling bloc of social and political forces. This development could be attributed to specific economic, political and institutional developments.
The economic prosperity of the post-World War II boom led to high rates of accumulation of savings, which in conjunction with a rapid growth of debt in the form of corporate debt, personal debt, public debt and national debt, caused the emergence of a national and an international social group of rentiers (Smithin, 1996; Marglin 1990; Bhaduri and Steindl, 1983). Crotty and Epstein (1996) and Smithin (1996) have observed that the events of the 1980s and the 1990s can be described rhetorically as the revenge of the rentiers. Private and central banking have operated as a means of circulation of rentiers' economic interests in the state apparatuses. The renewed growth of rentier interests as well as a rentier psychology has been a striking social development with significant economic, political and ideological implications expressed in the hegemony of financial capital and financial speculation.
Rentiers, private bankers, currency speculators, portfolio investors, as well as central bankers hold a vast volume of savings in foreign currency reserves and use diverse currencies for their world-wide business. Wealthy individuals and financial firms make profits from lending and speculation in financial markets and hence have certain preferences and expectations with respect to the formation of macroeconomic policy. Changes in the inflation rate, interest and exchange rates, in the domestic and international money and capital markets determine the profit expectations of this group of capitalists and their profitable business. In the late 1960s and 1970s, national and international rentiers and private bankers observed the erosion of the value of their accumulated savings and wealth, as being a result of the accelerated inflation that many capitalist countries experienced at that time.
A "dear" money policy seems therefore reasonable to have become more pronounced in rentiers circles. Insofar as such a policy is very likely to be favoured by banks and other financial groups, rentiers might have emerged as a political ally of the financial community, asking for changes in the character of economic policy. It is the logic of global, financial profit-making rather than industrial performance and national capital accumulation that guide the political and economic behaviour of this capitalist section. The globalisation of finance is thus likely to have increased pressures for general policy changes and convergence toward an agenda set by wealthy individual and investors.
Bankers, financiers and rentiers are therefore likely to have formed a new and powerful social coalition5 that has altered the hierarchy of power within society provoking a new, socio-political world order and a new hegemony.6 This shift in power privileges mainly financial as well as multinational industrial interests and reinforces their representation in the economic policy decision-making. Changes in the hierarchy of power might have also radically affected the political structure as well as the states’ policies towards the institutionalisation of the prerogatives of multinational financial and industrial capitalists. These social forces have promoted a drift towards conservative politics, and the most powerful financial section of capital in particular has been able to drive this shift so that its economic policy preferences has been advanced under the cloak of a dominant policy agenda. These social forces were able to press governments to promote economic policies, which prioritise the interests of financial markets, rather than domestic production, output and employment.
The policy preferences of this new hegemonic bloc consolidated ideologically in the 1980s under the program of the ‘Washington Consensus’ (Williamson, 1993) or more broadly of global neoliberalism.7 Neoliberalism as a model for economic restructuring seeks to harmonise, in fact to minimise, a wide range of state’s policies. It finds its legitimacy in neoclassical economics and in monetarism and new-classical economics as well as in the globalist rhetoric of the benefits of free and unregulated markets in economic growth, efficiency and prosperity.
States, particularly of the major industrial powers, have accommodated and through their policies stimulated the rise and the global dominance of neoliberalism. There has been an increased political prominence of governments and policy makers of a neoliberal policy framework. Neoliberals advocated a laissez-faire approach to financial issues across the capitalist world and the following of automatic rules of the market in national and in international sphere.8 They call for a return to balanced budgets, independent central banks, free capital movements, fiscal and monetary austerity, labour market flexibility as well as privatisation of formerly public spheres and market liberalisation and deregulation. States’ response to pressures of the new, liberal, hegemonic, socio-political block and their willingness to make specific changes towards macroeconomic stability, market freedom and economic restructuring have dramatically altered principally the functioning of national financial markets, stimulating gradually their globalisation.
The dominance of neoliberalism and the emergence of the new, hegemonic social forces opened the way for three significant institutional changes to take place, which have marked the weakening of old structures of power and the creation of a new, global, financial structure of power in the international economic and financial relations. The critical feature of this new, structure of power is that it reflects the advantage of the financial section of capital in the hegemonic socio-political bloc and institutionalises its power and interests in economic policy-making.
The first institutional change came in the 1960s and was the birth and expansion of the Euromarkets as international commercial money markets. A major effect of these markets was that they provided a regulation-free environment in which to trade financial assets denominated in foreign currencies. All traded currencies were separated from their national monetary base, and were under the control of international financial capital and, to an extent, under its speculative activity. The Euromarkets were the first international capital and money markets to be created free from any kind of capital control, or other state regulations, immediately after the Second World War. They brought a degree of financial openness during the 1960s, which crucially stimulated the internationalisation of financial capital within the restrictive, financial order of Bretton Woods (Helleiner 1994). Strange (1990) has observed that in a world of extensive capital controls, Euromarkets acted as a kind of adventure playground for private bankers and financiers, marking a significant break from the restrictive pattern of financial relations since World War II.
This new, liberal institutional structure that resulted from the formation of the Euromarkets was the outcome of the efforts of international financial capital to overcome and erode national capital controls and the regulations of Bretton Woods. In this respect, Frieden (1987) has noted that the Euromarkets was a solution to the problem of American and British financiers, who wished to restore the London-New York financial axis that had been important in the 1920s. The support of the US government for the creation of the Euromarkets stemmed from the dominant presence of American banks and corporations in these markets. The American banks and transnational corporations demanded the freedom to operate offshore in order to compensate for the limitations of capital controls. On the other hand, the British government's support for the Euromarkets stemmed from the commitment to promote London's role as an international financial centre (Coakley and Harris, 1983; Helleiner, 1994).
With improvements in telecommunications and information processing, increased trade, and the internationalisation of production, these "offshore" markets became massive and more integrated with national financial markets, because not only firms, but also governments began to borrow from them, to finance budget and balance of payments deficits. However, the mobility of capital, especially short-term capital flows, which were encouraged by the Euromarkets, undermined the fixed exchange rate system and the regulatory mechanism of Bretton Woods, eroding the stability of the international monetary system in the 1960s (Strange, 1986; Frieden, 1993; Gill, 1993a).
The disintegration of the Bretton Woods system further stimulated global finance. Yet, the demise of Bretton Woods questioned the feasibility of the national mechanisms of regulation. A major impact of the collapse of Bretton Woods has been the liberation of financial exchanges from the disciplines of the fixed exchange rate system. This change brought about significant developments in economic policy, because it occurred within a new, liberal, financial environment, which was characterised by increasing capital mobility. The combination of floating exchange rates and capital mobility made it impossible for governments and policy makers to stabilise exchange rates without subordinating monetary policy.
Furthermore, the transition to floating exchange rates created profit opportunities, especially for speculative financial capital. The collapse of Bretton Woods significantly stimulated both the mobility of capital between different financial markets, and the influence of the speculative section of capital on national, economic policy making. Grabel (1993), Webb (1994) and Eatwell (1995) have observed the benefits of speculative financial capital since the collapse of Bretton Woods, and the resulting fluctuations in foreign exchange markets. Strange (1986) has pointed out that such markets have become like a "casino", where financial capital can make profits from speculation. As we will argue below, currency speculation and the resulting instability in the foreign exchange markets act as a disciplinary device for domestic, monetary and fiscal policy. Consequently, the introduction of a floating exchange rate system after 1973 that encouraged speculative financial movements, operated as an additional factor that forced national governments to abandon a fundamental principle of Bretton Woods, the policy autonomy of the welfare state in an environment of increasing financial openness.
The collapse of Bretton Woods signalled the beginning of a new era for the global monetary system. The main features of the current monetary system are the absence of a powerful, national, financial capital to control international financial relations and the internationalisation of different national financial capital. The latter generates competition among national financial markets and centres, which destabilises the current international monetary system with detrimental effects on national macroeconomic management. In addition, the collapse of the Bretton Woods fixed exchange rate system contributed to the inability of states and policy makers to control the speculative, international, financial capital. At that time, states gave to market more freedom, when they began to fully abolish their post-war system of capital controls.
Much like the departure from the Bretton Woods, in the international sphere, market liberalisation and the abolishment of capital controls by many capitalist states since the 1970s were the third institutional development that crucially altered financial relations and established an effective mechanism of influence of financial markets on economic policy. Capital controls were the pivot of the Keynesian economic strategies and represented an important part of the structural break from liberal traditions in economic affairs in the inter-war period (Cerny, 1993; Helleiner, 1994).9 Capital controls were a necessary policy measure to protect the effectiveness of the expansionary experiments in macroeconomic policy of the new interventionist welfare state. Macroeconomic management could easily be disrupted by speculative capital movements and capital flights, due to differences in the patterns of the implemented domestic policies and the resulting changes in the interest and inflation rates among national economies.
Capital mobility may have been facilitated by financial innovation and advances in information and communications technologies. However, without explicit policy decisions by governments, capital controls would have prevented the globalisation of finance and the increasing integration of national financial market. Cerny (1993) has observed an ideological backlash against state economic interventionism as a key factor behind market deregulation. Political decisions stimulated the revival of global finance by giving in more freedom to market forces, refraining from imposing effective controls on capital movements.
In 1974, the United States initiated this liberalisation trend by removing capital controls, and Britain followed in 1979. When these two major, advanced capitalist states supported the growth of the Euromarkets in the 1960s, and then liberalised and deregulated their financial markets, in the 1970s, foreign financial centres have increasingly witnessed their business and capital flying to these, more attractive, financial markets. Other capitalist countries, as the result of a policy of competitive deregulation followed the lead of Britain and the United States by liberalising and deregulating their own financial systems in the 1980’s and the 1990’s, in order to be able to compete effectively for this mobile, financial business and capital (Cerny, 1993; 2000; Helleiner, 1994). Each financial centre wished to preserve a regulation-free environment, in order to attract international, financial business to their territory.10
The immediate result of these institutional changes has been a structural break in financial affairs contributing to the collapse of the post World-War II international financial order of Bretton Woods. In addition, they caused a significant move toward a global integration of world financial markets based on a liberal, financial order. This new, liberal, financial order have, arguably, transformed the highly integrated and unregulated national and international financial markets to a global, financial structure of power with detrimental effects on macroeconomic management.
3. The Political Economy of Macroeconomic Policy
National governments remain responsible to their electorates for their macroeconomic policy in terms of the performance of employment, inflation, balance of payments and growth. However, in the last decades, the area of control determining economic policy has shifted increasingly away from the national governments to multinational capital and principally to financial capital, whose devotion to making profits in the global financial marketplace is unquestionably very strong. With the shift in the centre of the gravity to financial markets, national economic policies begin to resemble more closely the economic strategies and preferences of financial capital. The major targets of economic policy are thus likely to have changed according to the needs and the requirements of rentiers, bankers and financiers, who determine the functioning of the global financial markets.
To conceptualise the impacts of global finance on macroeconomic policy we shall first identify the central factors that define the rules of the international financial game of wealth creation and distribution. The essence of the new, global, financial structure of power is that a massive pool of capital easily circulates within the global financial marketplace, while a great deal of that is speculative. This has increased instability and uncertainty in the money and capital markets. The highly integrated and unregulated financial markets have imposed upon economic policy a market discipline. In addition, they have institutionalised market freedom and the absence of any mechanism of regulation, two principles that have considerably undermined macroeconomic management and marked a structural and ideological break with Keynesianism.11
In the new, liberal, financial structure of power, oweverhh internationally mobile capital, currency speculation, and the increasing competition among leader countries to improve the competitiveness of their national financial markets and centres to attract global finance are fundamental determinants of national, economic policy-making. In a regime of market determined flexible exchange rates, any state’s interventionist attempt in markets could provoke overwhelming and unpredictable speculative capital movements with great destabilising potential for the national economy. This possibility has changed drastically the context of macroeconomic policy in the present phase of financial globalisation.
In the current monetary and financial system, despite the fact that the hegemonic power of the United States still exists, new nations and regional unions have emerged in the global, financial marketplace. They seek a role in the international financial game, or, at least a bigger share in the distribution of the global, financial profit-making business.12 The increasing competition among different national financial centres for the distribution of world business and profits connect national macroeconomic policy to the interests and policy preferences of global finance.
The emergence of new reserve currencies13 has increased both financial competition over the distribution of global business and speculation in foreign exchange markets (Walter, 1991; Grabel, 1993). The combination of increasing capital mobility, currency speculation and financial competition generate significant pressures on the independence and the stance of national, fiscal and monetary policy, because of their critical role in determining the conditions of the distribution game of international financial business and profit making.
Financial markets are, today, dominated by short-term capital flows, which seek to make profits from buying and selling assets denominated in different currencies. The degree of capital mobility and asset substitutability between different financial markets is important in determining the influence of capital flows on exchange rates.14 Fiscal and especially monetary policy affect domestic inflation and interest rate, which, among other factors, determine the value of a domestic currency in terms of other currencies. Changes in the stance of fiscal and monetary policies cause price, interest and exchange rate changes, which in their turn alter both exchange rate expectations and risk premia.15
The aforementioned factors determine the expected return of wealth holders in interest bearing financial assets and in currency speculation, and, hence, the process of profit making and the expected profitability of global wealth holders. Hence, national macroeconomic policy is crucial in defining the profitability and desirability of holding different financial assets, which are denominated in different currencies in the national financial markets, compared to the profit opportunities offered by foreign markets. The value of the domestic currency, or other currencies that are traded in the national financial markets, determines the desirability of holding financial assets in the national, financial marketplace. Changes in the value of the traded currencies become the centre of national financial interests, because they directly affect their profit seeking business at a national and global level. In this manner, changes in exchange rates impose constraints on the formation and the stance of national macroeconomic policy.
Speculative movements of financial capital are driven mainly by the profit expectations that national and global wealth holders have, regarding changes, particularly in the inflation, interest and exchange rates of different economies. The degree of capital mobility and asset substitutability, in conjunction with speculative capital flows and the competition between different financial markets, are crucial factors that define to what extent control over monetary and fiscal policy independence has to be sacrificed in order to avoid disruptive exchange rate fluctuations. The implementation of independent macroeconomic policy becomes very difficult, as massive shifts of speculative capital can disrupt domestic interest and exchange rates, and thus, the expectations of wealth holders and their decisions to invest in the domestic or in a foreign financial market.
Macroeconomic policy seems, therefore, to be a critical factor of the expected profits of wealth owners and their investment decisions. It appears to be an instrument that can determine the competitiveness and attractiveness of national currency and the national financial markets, their comparative advantage compared to other markets abroad and their ability to redistribute global business and profits in their favour. Macroeconomic policy hence determines the investment climate of financial markets. The ideological importance of the investment climate involves the concept of business confidence. Today, mobile capital judges the investment climate in financial markets of one country with reference to the climate that prevails elsewhere. Beside this, changes particularly in monetary policy of leading financial powers, and stability in their financial markets that crucially determine the global movements of capital, are likely to alter relative interest rates and expectations over the implemented economic policies and the stability in the financial markets of less powerful countries.
The relationship between macroeconomic policy and financial interests may become even stronger when a currency is a reserve currency. In such a case, the level and stability of a currency's value are the key factors that affect the confidence of foreign investors, and the international attractiveness of that currency. The confidence of the international, financial capitalists in the strength and stability of a nation's currency rests on the domestic interest rates and on the credibility over the implemented policy, in order to eliminate the risk and uncertainty of holding financial assets in national financial markets.16
Policy credibility acts as a disciplinary device with which global financial markets exert pressure on governments and policy makers and institutionalises economic austerity. Credibility over macroeconomic policy is directly related to the relationship between interest rate, exchange rate, a currency's desirability in the financial markets, financial capitalists’ profit expectations as well as capital flights. The high mobility of financial capital has made national governments to avoid any disturbance of the financial markets that may cause capital flight. Capital flights from one reserve currency to another, as a result of changes in interest rates and the expected changes in exchange rates.
To the extent that certain types of policies and governmental institutions generate destabilising perceptions of risk, or changes in the inflation rate, the interest rate and the exchange rate, serious external constraints on macroeconomic policy emerge. Governments have assumed a restrictive macroeconomic policy by aiming at lower budget deficits and inflation rates, keeping interest rates high, and adopting austerity measures for public expenditure even in the face of high unemployment and low growth. Fiscal and monetary policy are therefore driven by the developments of financial and foreign exchange markets, under the constraints, which are imposed by unrestricted movements of financial capital, especially its speculative fraction.
If national macroeconomic policy fails to be credible, then the national, financial markets will lose competitiveness against rival, financial markets. Financial capital will out of the country because of the negative expectations of making profits. Economic austerity and credibility can be seen as being strategic weapons for national financial markets in the determination of their comparative advantage. It is in this manner that domestic macroeconomic policy is held hostage to the expectations and perceptions of national and global wealth holders. Eatwell (1995) has observed that a credible government is a government that pursues a policy according to what the financial markets believe to be sound. A decision by one nation to pursue an expansionary economic policy, in the absence of controls on capital movements, will result in the flight of capital to nations providing a climate more hospitable to wealth holders.17
Neoliberal advocates stress the importance of central bank independence in enhancing the credibility of a state’s macroeconomic policies. A monetary policy that is legally distinct from the elected government is able to give promise that policy objectives could be insulated from political and electoral pressures. For instance, an independent central bank could pursue anti-inflationary monetary policy and hence foster a favourable investment climate for wealth holders. In the logic of this argument, the only way governments and policy makers can avoid speculative capital flows and disruptive fluctuations in national economy are to do what the market wants.
Capital flights represent a threat that has given those who control international mobile capital an increasing structural power through they can cancel policy options, which counter to their interests. The essence of this power is that wealth owners can exit from an economy that implements policies that oppose their interests. Under threats of capital flights governments do not often use the standard tools of an expansionary economic policy, to the extent that the policy results are likely to differ from the policy objectives of wealth owners and the preferences of financial markets.
Fears of a potential collapse in the exchange rate and in financial markets, which could result from a change in macroeconomic policy, make credibility a significant constraint imposed on economic policy making. The concept of policy credibility therefore has a strong political dimension, since it constrains the implementation of alternative, domestic economic policies, as a result of fears of the market's punishment of non-credible, national policy patterns.18 Central to governments’ economic policy is an implicit calculation of the costs, economic and political, that would be associated with any attempt to implement an alternative macroeconomic policy. Crotty (1989; 1993) has noted that financial interdependence and capital mobility gives the wealthy classes around the globe veto power over the economic policies and policy objectives of every nation. These social forces are likely to construct an external political barrier over the implementation of expansionary monetary and fiscal policies.
Owners of mobile capital thus gain influence on economic policy at the expense of less powerful social forces, especially domestic industrialists and workers. Furthermore, the globalisation of financial markets gives an advantage to the most powerful capitalist countries, in the determination of the patterns of economic policy, since they can export policies through their well-developed money and capital markets around the globe. The degree to which countries could follow independent economic policies will depend on the degree to which they can tolerate changes in domestic interest rates and exchange rates, as well as eliminating risk and uncertainty in national financial markets, without triggering capital flights.
We have argued that the shift away from the Keynesian, welfare state interventionist era towards a neoliberal, market-based disciplinary order in economic policy could be attributed to key social, political and institutional developments that have caused the revival of global finance. These developments have eroded the foundations of the post-war international economic order, shaped by the Bretton Woods monetary system, and stimulated a new, liberal, financial order and the formation of a global, financial structure of power.
The combination of floating exchange rates, increasingly integrated financial markets and the ability of global finance to freely move between nations have, arguably, undermined and eroded the autonomy and the independence of domestic, economic policy-making. Furthermore, global finance reinforces the deflationary bias of fiscal and monetary policy and reduces the viability of relatively expansionary policies, while at the same time helping to sustain the view hat such policy choices are inherently flawed.
Governments have been increasingly constrained by the investment decisions of internationally mobile capital as well as the economic policies of major capitalist states. The absence of any kind of market regulation has made financial capital capable to react to government policies or expected policies much more rapidly than productive capital. Financial capital can quickly flow out of a country to more attractive markets.
A credible, economic austerity policy emerges as a ‘unique’ policy option since it determines the international competitiveness, principally of the national financial markets. In this framework, fiscal and monetary policies are directly linked to the interests of financial markets and to the global financial competition among leader countries and financial centres in present day capitalism. Policies that promote liberalisation and, in general, free markets seem to be also important in determining the credibility of the implemented austerity policies and the competitiveness of national economy within a more liberal and antagonistic, global environment.
1 The dominance of orthodox rules and of a deflationary bias over macroeconomic policy-making could be attributed to other critical factors as well. Among them, we highlight the counter-revolution in economic theory especially in the form of new classical macroeconomics and the role played by international institutions (IMF, World Bank) in advocating neoliberal policies (see e.g. Smithin, 1996, Pieper and Taylor, 1998). The economics profession has played a significant role in financial capital’s victory through its promulgation of concepts such as rational expectations, credibility and the non-accelerating inflation rate of unemployment.
2 Financial globalisation refers to the broad integration of national financial markets that is characterised by increasing movements of unregulated capital across national marketplaces.
3 Conditions approximating today’s global finance existed before 1914 among the most advanced economies and their dependencies (see e.g. Helleiner, 1994). In this sense, relatively open financial markets are not new in world politics. It must also noted from the beginning that for the purposes of this paper we assume global finance to encompass all types of international financial transactions.
4 See the review of Cohen (1996).
5 We don’t assume a unified, global capitalist fraction. We suppose common global economic interests and policy preferences, which could be satisfied conditional to the profitable opportunities and the states’ support on the efficient functioning of national and international financial markets.
6 Such a concept of hegemony and global order has been inspired by the writings of Gramsci (1971) and implies a consensual balance between different social forces and political and economic interests as well as a particular form of socio-political order. In this line of argument, Cox (1993) has defined hegemony as a social, economic and political process, where the economic interests of the most powerful classes and class fractions affect the process of shaping institutional arrangements and states’ decisions. Gill (1993b) and Stubbs and Underhill (1994) have argued that hegemony emerges as a general political, economic and ideological synthesis of the universal interests of the most powerful social groups and class forces both within and across nations as well as of coalition blocs of the major states.
7 Schor (1992) has called it global neoclassicism. In her view, global neoclassicism stresses the futility of international financial regulation and discretionary macroeconomic policy.
8 Neoliberal advocates have favoured financial globalisation partly on efficiency grounds. Global finance is supposed to move across the world leading to a more efficient allocation of world resources.
9 Keynes outlined many reasons to explain why a liberal financial order was incompatible with the new
, interventionist, welfare state and expansionary macroeconomic policies. Crotty (1983) has noted that Keynes demonstrated the euthanasia of the rentier as a consequence of the new, international monetary system of Bretton Woods that facilitated expansionary policies at a national level.
10 Epstein and Schor (1992) have provided empirical evidence that financial interests, far more than either industrial interests or labour, have been hostile to the use of capital controls.
11 However, the break with Keynesianism must be seen as part of a broad neoliberal reaction in theory and policy against the state interventionist economic strategies that had been growing across the capitalist world since the Second World war.
12 Coleman and Porter (1994) have provided empirical results reporting that Japanese and German banks have replaced American and British banks, in the global and European market, respectively, in the beginning of the 1990s. Japan was the leader in banking at a global level, while German banks emerged as the largest international lenders in the European Community, followed by France and Italy. Coakley and Harris (1992) and Helleiner (1993) have observed the dynamic effects on international, financial relationships, due to the emergence of the powerful, Japanese and German financial centres in the current era.
13 Suzuki (1987), Tavlas (1991) and Tavlas and Ozeki (1992) have argued that since the eighties the Japanese yen and the German deutsche mark have been internationalised, and have been used in a growing volume of world trade and financial transactions. Today, the same happens with Euro.
14 There is high capital mobility but not perfect capital mobility and substitutability between assets denominated in different currencies in private portofolios. Uncertainty and risk are important in foreign exchange transactions, since they affect investors' expectations and their decisions to buy and sell assets in different markets.
15 Here, the way that private asset holders form their expectations is crucial. Epstein (1995) has argued that there is substantial evidence that exchange rate expectations are not rational. Expectations are determined both by fashion and convention, rather than rational calculation. This applies both to the risk premium and expected exchange rate changes.
16 Policy credibility stems directly from the precepts of new-classical macroeconomic theory. Policy credibility in conjunction with rational expectations form a powerful twin that doubts the viability and effectiveness of any type of policy intervention to promote a better economic performance. Our analysis in the text is in line with Grebel’s (2000) argument that ‘credibility of any economic policy is endogenous and founded on political power, rather than on epistemological adequacy’ (p. 2).
17 As Bhaduri (1998) has argued, this is the logic of a situation in many developing countries that lends acceptability to the stabilisation and structural adjustment programs suggested by the institutions of Bretton Woods.
18 Grabel (2000) demonstrates that the credibility criterion is theoretically anti-pluralist and politically anti-democratic.
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