27 Mayıs 2012 Pazar

The Importance of Minsky, Marx and Schumpeter in Macroeconomic Field


Introduction

   There are different arguments in order to explain the crisis of capitalism. These arguments have interpreted in different forms both by capitalist approach and the socialist approach.   Within that frame of these analysis about crises, Hyman Minsky's ''financial instability hypothesis'' takes an important place in these arguments. Hence, we begin with an explanation of the strengths and weaknesses of that hypothesis. After that, we'll mention on the James Crotty's article which is about the Centrality of Money, Credit and Financial Intermediation in Marx's Crisis Theory. Then, we will continue with the basic characteristics of the Marxian approach which is differed from Keynes and Minsky. Finally, we will point on the Schumpeter's insights about the crisis theories in addition to the Keynes, Minsky and Marx. Therefore, primarily, we begin with the explanation of the background of the Minsky's financial instability hypothesis. Then, together with the explanation of that hypothesis, we will try to show its strengths and the weaknesses.

Background of the Financial Instability Hypothesis

   We should have to consider both of the internal and the extarnal factors in explaining the crises of capitalism. Generally, explanations depend on these external factors, the internal factors take an important place. Here, at that point, the Minsky's financial instability hypothesis confronts us within the frame of the analysis of the internal problems. Before the explanations of that hypothesis's strengths and weaknesses, we should briefly look at the other arguments which underpin this hypothesis. Therefore, at this point, Marx's (1976), Fisher's (1933) and Stiglitz's and Weiss's (1981) similar arguments are placed as the building stone in order to understand the hypothesis. First of all, the profit motive is lay under the Marx's argument. Pursuing for the profits of the entrepreneurs creates production disorder and instability in the economy as a whole. At that juncture, the beginning of the production disorder is partly shaped by the loan of Money (Marx, 1976). This is used for the purchase of the labor power and the means of production (Marx, 1976). Because entrepreneurs invest more in case of the profit motive, there will be an unstable and unplanned development in an economy. Also, there will be a creation of credit chains so as to expansion of production and investment in the process of that development (Marx, 1976). However, any trouble that will occur in the production process will create problem for these credits and the firms will begin to go in a bankrupt (Marx, 1976). This problem will be also valid for the lenders as corporations. On the other hand, these issues will cause to dissolution of asset values and to decrease in prices of that financial assets (Marx, 1976). Hence, both of these problems will increase the possibility of the capitalism downfall and cause to the creation of long crises. The 1929 Great Depression and the 2007 Financial Crisis are the examples of that situation. Secondly, in my opinion, Fisher's arguments have important characteristics which are placed in the Minsky's approach. Fisher specifies that the inefficient position of the financial markets, the economy place up or down of the equilibrium (Fisher, 1933). He grounded that idea to the 1929 Great Depression case. He also points that it is evolved a bankrupts and crisis bound to debt deflation in case of the negative relations between price movements and the debt amount in the market (Fisher, 1933). According to Fisher, any bankrupty of firm will affect negatively to the other firms in the case of the bound together of the firms with credit chains and hence, the crisis will become inevitable (Fisher, 1933). We can also see that these arguments are accordance with the Marx's interpretation. Finally, the main point which is stress on by Stiglitz and Weiss, is the issue of asymmetric information. They present possible troubles that can occur in financial markets based on the asymmetric information argument. Stiglitz and Weiss mentions that the asymmetric informations disrupt the credit markets (Stiglitz and Weiss, 1981). The banks can not support just as the profitable investment, they can support unprofitable investments due to the asymmetric informations (Stiglitz and Weiss, 1981). Therefore, the credits which will lend to firms, will represent average value independently from the value of the investments (Stiglitz and Weiss, 1981). In this case, meanwhile profitable investment will not find the sufficient financial sources, unprofitable investment will find more financial sources (Stiglitz and Weiss, 1981). That's why, at that juncture, the importance of the uncertainty emerge together with the asymmetric information. In my opinion, these arguments also present compatible views with the Minsky's arguments about the troubles in financial markets.

Minsky and the Financial Instability Hypothesis

   Briefly, according to financial instability hypothesis, the main reason of the instability problem in different economies is depended on the high borrowing rate of investors led by the financial system. As Minsky (1992) points that '' the financial instability hypothesis is a theory of the impact of debt on system behavior and also incorporates the manner in which debt is validated ''. Therefore, mainstream economies are typically dwelled the investment increases in company with indebtedness and following the depression phase (Minsky, 1986). On the other hand, the theoretical basis of the Minsky's Financial Instability Hypothesis can be seen in his famous book which is Stabilizing an Unstable Economy. According to Minsky (1986), the fundamental propositions of the financial instability hypothesis are

  1. Capitalist market mechanisms can not lead to a sustained, stable-price, full-employment equilibrium.
  2. Serious business cycles are due to financial attributes that are essential to capitalism (Minsky,1986).

   Minsky (1986) also mentions that '' these propositions – and thus the financial instability – stand in sharp contrast to neoclassical synthesis, which holds that unless disturbed from outside a decentralized market mechanism will yield a self-sustaining, stable-price, full-employment equilibrium ''.

   The arguments of Minsky are coupled with the Keynes and he is one of the leader economist of the Post-Keynesian approach. Minsky has an approach which takes the financial structures and financial relations including the Keynesian point of views. Minsky (1992) also points that '' as an  economic theory, the financial instability hypothesis is an interpretation of the substance of Keynes's '' General Theory '' ''.  Constructed his hypothesis in the lights of these arguments, Minsky had a crucial contribution to an economic literature as part of analysis of financial crises. In Minsky's approach, the financing method of the investments and the results of the way of that financing takes an important place. According to Minsky, the deficiency of the Keynesian theory is the result of an exclusion of the capitalist financing (Minsky, 1986). As it is seen that the financial transactions and the financial relations are basic points to understand the capitalist crises according to Minsky. So much so that, capitalism is a financial entire at heart (Minsky, 1986). There is a financial connection behind any transactions. The real economy is mainly tied to financial relations. For that matter, we can say that, for Minsky, finance is everything for capitalism. So that, at this point which impelled Minsky to the financial instability hypothesis for an explanation of crises of capitalism.

   Moreover, according to Minsky, there should be a continued necessity to the intervention to economy because of the problems inherently caused from the process of capitalism (Minsky, 1986). Also, Minsky stresses on the requirements of new instruments in order to understand the economic problems (Minsky, 1986). At that juncture, it should be examined the causes of these three questions so as to develop the economic policies:
  1. How the ruling market mechanism achieves coherence in particular outputs and prices, 
  2. How the path of incomes, outputs, and prices is determined, and
  3. Why coherence breaks down from time to time: that is, why is the economy susceptible to threats, if not the actuality, of deep depressions? (Minsky, 1986).

   Furthermore, Minsky (1986) points that '' these questions need to be answered in the context of the institutions and financial usages that actually exist, not in terms of an abstract economy. It may be that what the neoclassical theory ignores, namely institutions, and in particular financial institutions, leads to the observations it can not explain ''.

   So that, I will mention on the strengths and weaknesses of the Minsky's Financial Instability Hypothesis in the lights of these above informations. I will stress on three points for the strenghts which are the ideas for the price and profit, the problem of investment and its financing harmonizing with the uncertainy and risk and the criticism of the neoclassical economy within the frame of financial instability hypothesis. On the other hand, the weaknesses will constitute on the absence of analysis for class struggle in shaping of capitalist relations and the insufficient explanations for the reasons of people's indebtedness.

   Neoclassical price theory is remain incapable to explain the market efficiency due to not considering the capitalist economy with its sophisticated financial structure (Minsky, 1986). As we know, according to neoclassical price theory, the role of the price is to provide the scarce resource allocation and to determine the production level in the economy. However, the relations of price with debts and the other issues are neglected in that theory because the usage of financial assets as money due to get profit from the production does not place at the center of that price theory.
   However, Minsky's investment analysis based on the price and profit brings a new method to the macro dynamics. The prices have characteristics such as creating profit, causing the way of borrowing and providing a new possibilites of the new types of goods production as well as neoclassics' arguments of determining the resource allocation and the production level (Minsky, 1986).

   Moreover, the validate of previous investments should be provided via to the prices of production goods in order to incline new investments (Minsky, 1986). Therefore, capital prices and the financial asset prices play an important role for the investment in that tendency (Minsky, 1986). In my opinion, these two price order inclusion to investment provide a crucial contribution to the modern macro dynamics.
  
   Furthermore, the another important point of the Minsky's hypothesis is the presenting of relationship between investment and its financing. According to Minsky's argument, it is not possible to present the method of determining of investment decision without pointing out the sources of the investment financing (Minsky, 1986). At that juncture, three factors or the sources of financing determine the investment which are cash flows and assets, internal funds and external funds (Minsky, 1986). This last source which is external funds is achieved by way of borrowing (Minsky, 1986). Minsky (1986) points of the negative results of that funds as '' if external (borrowed) funds are involved, then the supply of price capital also includes explicit finance costs – most importantly the interest rate but also all other fees and costs – that is, supply price increases due to lender's risk ''. At this point, we can also see the adding of the uncertainty and the risk concepts into the investment financing. For example, if the investment financing supports by the debts, there will be an emergence of the risk in the payments of the debts with the issue of uncertainty. If the debtor can not be able to pay their debts due to any reason, the possible debt amount which can be taken in the latter period will be interrupted (Minsky, 1986). In a similar way, according to Minsky, in a period with a stable growth path of the economy, the banks will be more volunteer to lend money and they will reduce the demanded margins of safety from the customers (Minsky, 1986). As Minsky (1986) points that '' in a recovery from a severe downturn, margins are large as expectations are muted; over time, if an expansion exceeds pessimistic projections, these margins prove to be larger than necessary. Thus, margins will be reduced to the degree that projects are generally successful ''. Also, it can be expected that the banks consider the informations of the customers backgrounds whether they paid the loans just in time or not. However, Minsky (1986) points that '' the size of the margins of safety determines whether a financial structure is fragile or robust and in turn reflects the ability of units to absorb shortfalls of cash receipts without triggering a debt deflation ''. Hence, the close relationship with the investment decisions and the dynamic position according to economy of the margins of safety, it propounds the financial aspect of the investment (Minsky, 1986). In other words, investment is a financial phenomenon according to Minsky (Minsky, 1986). That's why, as it mentioned above, the financial relations are the main reason behind the evolution of capitalist crises. Also, it is composed an important building stone against the neoclassical economy with the introduction of uncertainty, risk and financing within the frame of investment. Here, this financing issue of investment adds a new argument in order to analysis of capitalist crises.
  
   The another important point of the Minsky's argument is the critique of the neoclassical approach in addition to his arguments for the relations between the price and profit and the relations of financing of investment, uncertainty and the risk. When you look at the neoclassical approach, the problems are temporary in the economy. The system will automatically come to the equilibrium. There is no need for any intervention because it interrupts the automatic adjustment mechanisms (or, the adjustment mechanism of the invisible hand). The role of the government is the protection of the market rather than to intervene it. Also, one of the most important part of this automatic adjustment mechanism is arised from rationality of people. In this point, Minsky's criticism has an important place for the neoclassical approach. According to Minsky, the rationality creates problems in the economic system (Minsky, 1986). For instance, Minsky (1986) points that '' if the economy does not conform to the general equilibrium theory, if it is endogenously unstable, and if units behave accordingly, then rational expectations will exacerbate instability ''. The system transform itself into a instable and financial fragile situation with rational units which are pursued of profits (Minsky, 1986). In other words, in that point, the financial instability appears. At that juncture, the financial instability is explained by the relations with the existence of intermediate financial institutions, pricing of capital goods and financial assets, fluctuations of their prices and the creation of profit possibilities of these fluctuations (Minsky, 1993). One of the significant point in the Minsky's hypothesis is the causation of any problems in the cash flows to the increase of the indebtedness in case of investment (Minsky, 1986). Also, according to Minsky, all economic units face with the restrictions on cash flows (Minsky, 1986). That restrictions cause to increase in indebtedness rate. On the other hand, although the indebtedness increase the growth, investment and the profit rates, it creates the upward instability (Minsky, 1986). According to Minsky (1986),          '' because of the upward instability of the investment-financing-profit interactions, from time to time, fragile financial structures emerge ''. He (1986) also mentions that '' fragile financial structures regularly break, which sharply reduces investment spending ''. Furthermore, any problems in the cash flows increase the risk ratio of the borrowers and it widens the problems to all economic units (Minsky, 1986). Hence, increase in debt ratio will stimulate the financial instability with raising the interest rate and then reducing the necessary financial resources (Minsky, 1986). So that, the investment rate will fall (Minsky, 1986). Moreover, it brings the sale of financial assets in order to find funds and it causes the fall of asset prices. The speculative revenues will reduce and therefore, the debt/asset ratio will deteriorate (Minsky, 1986). This processes can also show by Minsky's three types of finance which are hedge finance, speculative finance and ponzi finance (Minsky, 1986). Palley (2010) summarize these types finance like:

  •  In the hedge finance, borrower's expected revenues are sufficient to repay interest and loan principle.
  •  In the speculative finance, revenues only cover interest.
  • In the ponzi finance, revenues are insufficient to cover interest payments and borrowers are relying on capital gains to meet their obligations.

   In conclusion, investment and the financial relations are the key factors in the financial instability hypothesis. Also, the arguments about the prices, profits, uncertainty, risk, cash flows and the indebtedness bring new ideas to the macroeconomic field. As it can be seen in 1929 Great Depression and 2007 Financial Crisis, the financing of the investment with debts create recovery, but latter, the economy ride into deep recession as a result of the excessive debt ratio. Therefore, that point leads us to another issues which are not handled in the Minsky’s analysis. These are the absence of analysis of class struggle in shaping of capitalist relations and the insufficient explanation of the reasons of people's indebtedness.

   In my opinion, in addition to the important arguments for the economic literature in the process of the post-1980 financialization era, the hypothesis can be criticized within the frame of the solution to crises. First of all, Minsky’s basic priority for the provision of crises is the tight financial regulation process. In other words, he points that financial regulation or the tight control system is the basic indicator for the stability of the economic system (Minsky, 1986). However, what is the validity of that policies as part of class struggle? Hence, I think that the Minsky’s hypothesis and the solutions aimed at the crises can be discussed as critically within the frame of class struggle.  As it mentioned above that Minsky's hypothesis is the causation of any problems in the cash flows to the increase of the indebtedness in case of investment (Minsky, 1986). Also, according to Minsky, all economic units face with the restrictions on cash flows (Minsky, 1986). That restrictions cause to increase in indebtedness rate (Minsky, 1986). In other words, the indebtedness problem mainly depends on that restrictions. However, if the main aim of the capitalism is to maximize profits, the basic way to achieve it depending on the reducing of the costs. The labor costs, thus, has the highest rate as a percentage relative to other costs. That's why, capitalists try to repress the wage ratios. Moreover, the problems in the accumulation process of capital and the reduces in the profit rates cause structural changings within the capitalist system. Hence, beginning with the 1973 crisis, the financialization and the neoliberal process are examples to that situation. That's why, I think that the way that going to the financial instability process is the class struggle in capitalist mode of production. Therefore, even though the economic process has a strong control mechanism or regulation system, it will produce policies in order to repress the costs. However, actually, Minsky did not ignore the problem of capital accumulation. According to Minsky, the capital accumulation is one of the most important economic problem and many issues are closely related with the capital accumulation as part of an explanation of economic crises (Minsky, 1992b).  In addition to the roles of producers and financial intermediaries, there are also households, international units and government in the monetary flows in an economy. The relations between these units decide the capital accumulation and the performance of the system. The dynamic relations which provides the capital accumulation are also the main sources of the fragility and the instability (Minsky, 1992b). So, at this point, why did Minsky analyze the capital accumulation process just within the frame of monetary flows? I think that it is an important question. Hence, this question brings me to the class struggle issue. For example, apart from the financial relations, there is a deficiency due to not considering the capital accumulation process in the real economy. At that juncture, according to Minsky, instability causes from the deterioration of the debt-income relations (Minsky, 1995). However, he did not explain why people indebted. I think that it is more than restrictions on the cash flows. For instance, the repression on the wages could not find in the Minsky's arguments.

   Secondly, the other supportive argument comes from the structural Keynesianism. One of the most important characteristic of that approach is to handle the income distribution effect upon the aggregate demand within the frame of the class struggle. In this point, the Palley's arguments gives a detailed informations. In a sense, it provides the development of Minsky's hypothesis. According to Palley (2010), structural Keynesianism offers a synthesis of these points of view:

  1. It shares the generic Marxian point of view that there is an underlying real economy problem regarding wage squeeze and deterioration of income distribution, which ultimately gives rise to a Keynesian aggregate demand problem.

  1. It recognizes that finance played a critical role in sustaining the neoliberal regime by fueling asset price inflation and borrowing, which filled the demand gap created by the wage squeeze. That recognition opens the way for incorporating Minsky's financial instability hypothesis with financial excess being the way that neoliberalism staved off its stagnationist tendency. This in turn, explains why the crisis took the form of a financial crisis when it eventually arrived (Palley, 2010).
The Roles of Money, Credit and Financial Intermediation in Marx's Crisis Theory

   Generally, in the Marxian crisis theories, the arguments are based on the problems in the real economy. In other words, the roots of the capitalist crises are analyzed depending on the problems in the real economy. That's why, in the Marxian crisis theories, there are deficiencies about the explanation for the financial crises. Of course, there are strong arguments about the process of finance, the analyses are focused on the real sector. Also, the analysis of money and the credit system is tried to conducted on the real economy. At this point, James Crotty's arguments have an important points in order to fill the gap in the financial theory of the Marxian approach. His work was conducted in attempt to show the importance of money, credit and financial intermediation for the analysis of Marxian accumulation and the crises theories. As Crotty (1985) mentions that '' our major objective is to demonstrate that the neglect of money and finance in the Marxian literature is inconsistent with Marx's own emphasis on these aspects of accumulation and crisis and to show that the de facto dismissal of the centrality of money and finance in much of this literature is based on a basic misunderstanding of Marx's analytical methodology ''.

   As it mentioned above, the main aim of Crotty is an analysis of the monetary and the financial phenomenon in addition to circulation and the production in the Marxian crisis theories. According to Crotty, when Marx conducted his arguments of simple commodity production (C-M-C) to commodity exchange economy (M-C-M'), he also created a monetary theory in the part of explanations for the functions of money in the capitalist system (Crotty, 1985). As Crotty (1985) mentions that '' before Marx even begins his analysis of specifically capitalist production relations he has established that the theory of money and credit and the theory of crisis are so intimately interwined that they are analytically inseperable ''. Also, Crotty presents the reasons of not having a constituted financial theory of the Marxian approach by criticizing Marx and the latter Marxists depended mostly on the real economy in order to analyze the capitalist crises (Crotty, 1985). As Crotty (1985) points that '' the fundamental reason that the traditional crisis theory literature incorrectly relegates monetary and financial aspects of crisis theory to such an inferior analytical status is its failure to appreciate the theoretical significance of Marx's analysis of the crisis potential of commodity exchange ''. For Crotty (1985), the important points are established at the highest level of abstraction in the analysis of simple commodity production (SCP) and in the 4th and 5th part of the Capital Volume 3. Therefore he is conducted his theory based on these points. Crotty (1985) points also that '' the Marx's criticism of the school of thoughts that see all crisis as imposed by ''irresponsible'' financial activity on an otherwise crisis-free capitalism have been frequently misinterpreted as an argument that the financial system is an unimportant aspect of his crisis   theory ''. In other words, emphasizing on the financial system means the correction of the misunderstanding in the Marxian crisis theories. At this point, it is began with the Marx's theory of crisis potential of simple commodity production (SCP). Crotty points that the concept of an abstract form of crisis in the theory of monetary and financial behavior is played an important role within the SCP (Crotty, 1985). As Crotty (1985) mentions that '' the term form refers to an economic model, in this case a model of simple commodity circulation. The adjective abstract indicates that the models to be considered are quite simple, incorporate little or no institutional detail, and, most important, abstract as much as possible from reference to specific relations of production... They are forms or models of crisis because Marx used them to demonstrate that a commodity exchange economy is crisis prone or has crisis potential independently of its specific production ''. Moreover, Crotty states on 5 different money function as an abstract forms of crisis which are placed in the SCP: money as a measure of value (MMV), money as a means of circulation (MMC), money as a means of hoard (MH), money as a means of payment (MMP) and money as a means of international payments settlement (Crotty, 1985). The MMC and the MMP has an important role at the center of crises. In this point, after the criticism of Say's Law based on MMC, the more advanced functions of money as MMP transfom the economy into more fragile by making it crisis-prone (Crotty, 1985).

   So that, we begin with the MMV. Marx makes a difference between the barter economy (C-C) and the SCP (C-M-C). The main factor is the inclusion of money (M) into the circulation. With an explanation of Crotty (1985) '' SCP is qualitatively different from barter in that it separates the acts of purchase and sale in time and space and inevitably draws vast numbers of producers into a complex, interlocked, interdependent system of social relations of production and exchange ''. Here, the most important point is the invalidation of Say's Law. According to Crotty (1985), '' the fundamental distinction between Marx's analysis of the dynamics of advanced commodity exchange and the childish babble of a Say or, one might add, of Walras or a Friedman, is precisely the distinction between a monetary economy and a barter ''. As it mentioned above, inclusion of the money into circulation means the end of process of barter economy. Moreover, the time factor is incurred to the process (Crotty, 1985). In case of the inclusion of money into economic process causes also inclusion of two monetary concepts into the Marxian approach which are money as an asset and velocity of money (Crotty, 1985). In this point, that situation can be seen in the example of overproduction theory. As Crotty (1985) states that '' the idea that velocity can slow down is intimately related to Marx's assertion that there can be a general excess supply of commodities – a crisis of reproduction – in SCP ''. In other words, people can want to hold cash money due to any reason. At the end, it causes the excess supply of commodities. In addition to this, the another characteristic of the money is the measure of value in SCP (Crotty, 1985). By MMV, Marx refers to the estimate of the value of a commodity made by its owner or by others prior to its actual sale (Crotty, 1985). Also, MMV measures the expectations of commodity owners as to the value they will receive in the market with the system of commodity exchange (Crotty, 1985). The difference in time between MMC and MMV causes the development of crises (Crotty, 1985). However, according to Marx, unless money uses as a means of payments, it can not be emphasize of any crisis theory in the SCP. As Crotty (1985) states that '' it is only with contracts, credit and financial intermediation and with time-consuming interdependent production and circulation process involving long-lived capital goods that the potential differences between the price expectations that guide decisions to produce and prices actually prevailing at the time of sale take on  a key, and often a dominating role in crisis theory ''. Here, it can be seen the transition from SCP to commodity exchange economy (CEE). According to Crotty (1985) '' theorizing MMP in SCP constitutes a qualitative increase in the analytical power of the framework as a form within which to build a concrete theory of capitalist crisis. And it is with the SCP-through-MMP abstract form of crisis that Marx introduces contracts, and commercial credit and paves the way for the introduction of financial intermediation into his theory of crisis ''. The inclusion of MMP into the model prepares the basis of financial crises with an increase of fragility in reproduction causing the change in time (Crotty, 1985). According to Marx, the development of circulation evolves with the contracts (Crotty, 1985). As Crotty (1985) mentions that '' the first type of contract  discussed by Marx is one made to reduce the uncertainty involved in obtaining a given commodity at a given time at a given price ''. Furthermore, in the form of MMC, the commodities are sold due to use-value but in MMP form, it changes in order to accumulation (Crotty, 1985). Also, for Crotty (1985), '' the addition of the function MMP to the SCP form extends the separation in time between pruchase and final sale involved in commodity circulation and makes the process more complex: instead of two separate acts required to complete circulation – C-M and M-C- we now have three -C-D; D-M and M-D, where D stands for a debt contract ''. Also Crotty (1985) continues that '' according to Marx that the necessity to sell, the forced sale of commodities by the indebted commodity owner creates that aspects of an industrial and commercial crisis... known as the monetary crisis and lays the foundations for the conceptualization of the financial crises ''.

   Besides, on the contrary to the MMV and MMC within the frame of existence of money, MMP is unpredictable in order to exactly know the crisis in SCP (Crotty, 1985). Crotty (1985) mentions that '' since purchase and sale, supply and demand are independent, no agent can be sure that the labor embodied in his commodities will be exchangeable for an equal amount of the socially necessary labor time of others ''. Moreover, Crotty (1985) continues that '' the agents in the first abstract form of SCP, in other words, are subject to the anarchy of an economy not under their control. Therefore, they are vulnerable to the threat of unforeseeable, unavoidable capital losses caused by an unequal exchange of labor-time as prices fluctuate between production plan and sale ''. However, Crotty points on the change of first abstract form of money in the contract economy.  Then, these contracts and credits produces a fragility in the reproduction process which makes the system more crisis-prone (Crotty, 1985). On contrary, it is not possible to arise of any large-scaled fragilities and the crises in the MMV and MMC (Crotty, 1985). In other words, the incorporation of MMP to SCP increases the potential of crisis. Finally, Crotty (1985) mentions that '' two central elements are involved in Marx's stress on the significance of MMP...First, agents undertake contractual commitments at one point in time to exchange money (or commodity) at a specific time in the future. These contracts are based on estimates or expectations of the prices and values that will prevail at the relevamt future date...Second, the contract economy develops not just isolated reciprocal future commitments between pairs of agents, but a complex interdependent system of interlocked commitments drawing most agents into its web ''.

   In conclusion, Crotty presents 4 different phases according to their arguments at the stage from SCP to capitalism. First, because the modern capitalism is a commodity exchange mode of production, the analysis of the crisis potential to simple commodity production must be incorporated and transformed into crisis theory (Crotty, 1985). On the other hand, because capitalist mode of production is indicated the highest stage of the production style, the complete model of SCP is applicable to advanced capitalism's law of motion (Crotty, 1985). Also, this point is the changing and developing point of the production relations. As Crotty (1985) mentions that '' until we have theorized the production relations of a particular mode of production and integrated this theory with the SCP model, we can not develop an adequate analysis of its laws of motion ''. Secondly, Crotty (1985) points that '' the development of capitalist social relations proceeded historically alongside the evolution of the contract-credit system in a symbiotic relation with it. Thus, although the abstract form of SCP including MMP belongs to Marx's theory of commodity exchange, it is capitalism that deepened, widened and intensified contract-credit system ''. At that juncture, it indicates the development path of financial intermediation and financial structure of capitalist mode of production (Crooty, 1985). Thirdly, the key factor behind the dynamics of accumulation and crisis in capitalism is the rate of profit (Crotty, 1985). Although there are many possibilities within the frame of the analysis of that factor, Crotty (1985) states that '' the important point is that accumulation, which requires some historically specific minimum rate of profit to sustain itself, eventually causes the rate of profit to decline, this destroying its most important condition of existence ''. This point provides to the development of the unified theory of the capitalism together with the increase in accumulation and decrease in profit rates (Crotty, 1985). However, the main problem according to Crotty (1985) is '' the failure to comprehend the existence and significance of the theoretical articulation of the laws and tendencies of the rate of profit deduced from the sphere of production with Marx's analysis of monetary and financial phenomenon''.  Finally, Crotty emphasizes on the unity of circulation and production compatible to the integration of these tendencies or laws of capitalist production relations  into the analysis of abstract crisis forms to construct a unified theory of the capitalist reproduction process (Crotty, 1985). Hence, Crotty (1985) states that '' a complete integration of the spheres of circulation and production in the theory of accumulation and crisis would have to consider all four effects of the contract-credit system: (1) the overextension of the expansion, (2) the increasing vulnerability of the expansion to adverse financial or nonfinancial developments, (3) the codetermination of the timing of the crisis and (4) the deeping and widening of the contradiction ''.

The Marxian Approach and Its Basic Characteristics

   One of the basic approach is the Marxian approach which takes the capitalism as a whole and criticize it. The main reason that makes this approach important is depended on the analysis of dynamics of capitalism within the concept of historical process. So that, in this title, I will point on the characteristics of the Marxian approach which are also differed from the Keynes and Minsky. First, I will mention about the Marx's method and his economics. Second, I will try to explain labor-value theory, surplus-value and the sources of the exchange.
  
   Primarily, one of the most crucial idea of the Marxian approach is composed with the presenting the social transformation in the historical context. Marx thought that the societies were separated depending on their organizations of the mode of production (Fine and Saad-Filho, 2004). Also, the mode of productions were shaped on the base of the class relations. That's why, all these social concepts should have been defined led by that class relations (Fine and Saad-Filho, 2004). Moreover, there was an important role of the relations between theory and time in the analysis of the societies. In other words, Marx embraced materialist concept rather than the idealist concept in the societal developments (Fine and Saad-Filho, 2004). In addition to this materialist concept, Marx possessed a dialectical approach due to the ever-developing process of societies under the class struggles of mode of production (Fine and Saad-Filho, 2004). Therefore, Marx determined the basic characteristics and contradictions of the capitalist mode of production within the frame of the dialectical materialism and he also analyzed the sources of the historical developments and its dynamic according to this approach. In other words, the mode of productions, social relations and historical developments are analyzed under the dialectical materialism approach. Hence, this kind of analysis is constituted the first main property of the Marxian approach.

   Secondly, the Marxian labor-value theory is the other important characteristics. Actually, the ideas of Ricardo has crucial importance in the Marxian labor-value theory. However, Marx constituted its own theory different from the Ricardo (Fine and Saad-Filho, 2004). According to Marx, it is not sufficient to base the sources of value just to labor-time like Ricardo. The main reason is to have the advanced commodity production system and the exchange-value and the use-value should be examined very detailed under this commodity production (Fine and Saad-Filho, 2004). In other words, Marx differed the exchange-value and the use-value within the commodity (Fine and Saad-Filho, 2004). Every commodity has use-value and the exchange-value is the indicator of equivalence value between the commodities. In other words, the use-value provides comparison between commodities. At this point, the relations among the labor and the value become clear. However, what is the main factor behind the comparison?  Briefly, it is labor which produces use-value in the production process. In other words, the main characteristics of all commodities are to be a labor products (Fine and Saad-Filho, 2004). Of course, in the analysis of the capitalist relations, the money should be add to this concept. However, I will not mentions on that. So, this brief explanations about the labor and value is the second break point from the Keynes and Minsky. For instance, the labor is the building stone for the capitalist mode of production according to Marxian approach, however, for Keynes and Minsky, labor is a production factor.

   Thirdly, another important difference of Marx from Keynes and Minsky is shaped in the explanations of the production process. Rather than the simple commodity production (C-M-C), in the advanced capitalism there is a different production style (M-C-M') (Fine and Saad-Filho, 2004). Marx pointed that the capital has an expansive characteristic because of the profit motive Fine and Saad-Filho, 2004). The production process can be depicted as

M – C (MoP and LP)...P...M'

   Capitalists pay money-capital (M) in order to purchase the commodity inputs (C) which are means of production (MoP) and the labor power (LP) (Fine and Saad-Filho, 2004). The sources of this money-capital can be acquired by borrowing or internal funds. These inputs creates the productive capital (Fine and Saad-Filho, 2004). Production proceeds by working of these inputs. The result is the different than M. In the phase of production (P), there will be created more surplus value. That why, at the end of exchange, M' will be exceeded the M. The difference constitutes the surplus value. However, M' is also constituted the sources of profits. However, capitalists should reduce the costs from that M' in order to reach the net profit. The factors can be the payments of an interest or dividends (or some sort of financial payments), taxes, reinvestment costs, advertisement costs, non-productive costs and also bribes. On the other hand, the part of P...M' shows the point of the capitalist crises. Any problems in the transition process from P-M' can lead to capitalism into crises (Fine and Saad-Filho, 2004). The problems can be figured as insufficient demand, excess supply or the disproportionately of capital. This point leads us to the analysis of surplus value and  the concept of exploitation.

   As it mentioned above, class struggle has an important role in the Marxian approach. The capitalist class tries to repress the labor class in the production process. That's why, there is a continuous struggle between capitalists and labors. The main aim behind that repression depends on  the creation of the surplus value. There are two types of surplus value which are absolute surplus value and the relative surplus value (Fine and Saad-Filho, 2004). First of all, in the basis of the increase in absolute surplus value, it is found increases of working time without increases in the wages (Fine and Saad-Filho, 2004). Furthermore, the consolidation of the production and the increase in commodity production can also increase the absolute surplus value (Fine and Saad-Filho, 2004). Finally, with a constant working time, increases of the productivity can also provide increases in absolute surplus value (Fine and Saad-Filho, 2004). Secondly, by way of decreases in the value of labor power with the improvements of the commodity productions the relative surplus value can be increased (Fine and Saad-Filho, 2004). For example, work day can be remain same, however, the surplus value can be increased by way of reducing the payments of labor power ratio in the actual work day. Because surplus value represents the exploitation rate, increase in these two kinds of surplus value also means the increases in the exploitation rate.

Creative Destruction and the Rate of Increase of Total Output: Schumpeterian Approach

   Finally, I will handle the arguments of Schumpeter whose ideas have a significant role in the economic literature. I will focus on his famous book which is Capitalism, Socialism and Democracy. The issue about the industrial development of capitalist society was placed at the center of Schumpeter's ideas. He was concerned on the dynamic development model rather than static development model. In that point, according to Schumpeter, development was the transition from old equilibrium point to the new equilibrium point where the production and industrial relations developed (Schumpeter, 1942). So, one of his crucial factor so as to achieve that point was entrepreneurship and entrepreneurs (Schumpeter, 1942). The main aim of an entrepreneur was to impel of the inactive entrepreneurship by creating innovations (Schumpeter, 1942). In other words, it indicates the transition from static to dynamic position by that innovations. He also discussed that these innovations within his theory of  '' Creative Destruction '' (Schumpeter, 1942). Depending to these brief explanations, I will point on two important issues of Schumpeter which are the rate of increase of total output and the theory of creative destruction.

   Primarily, I begin with an explanation with the rate of increase of total output. According to Schumpeter, first criteria about the economic realization was the total production (Schumpeter, 1942). However, he found that the calculations of the changing as problematic for the amount of produced goods (Schumpeter, 1942). Therefore, Schumpeter (1942) pointed about that '' for not only the material and the technique of constructing such an index, but very concept of a total output of different commodities produced in ever-changing proportions, is a highly doubtful matter ''. In my opinion, he has an approach which is not compatible with the Marxian crisis theories such as under-consumption. According to Schumpeter, it did not exist any historical development as Marx stated that wealthier people would become more wealthier and poorer people would become more poorer (Schumpeter, 1942). In other words, it did not exist any change in the income pyramid (Schumpeter, 1942). Also, the wages and the other income types did not change (Schumpeter, 1942). Moreover, he stated that the poorest part of the population would have been flourished with the renewal of capitalism towards the 50 years from 1928 to 1978 in the lights of his calculations of the rate of increase of total output and of the general statistics (Schumpeter, 1942). However, in my opinion, it contrast with the Marxian historical development theories of capitalism. In short, there is no such a meaningful insights within the frame of profit motive and the surplus-value theory. As a comparison, there will be a critique of Schumpeter's rate of increase of total output towards the issues between 1980 – 2007 within the income distribution concept. On the other hand, he also focused on the sociologic data which were specified the increases and decreases of economic activities as a part of analysis about the capitalist development process. In that point, the revolutions were an important indicator. According to Schumpeter (1942) '' these revolutions periodically reshape the existing structure of industry by introducing new methods of production, new sources of supply, new trade routes and markets to sell in and so on. This process of industrial change provides the ground swell that gives the general tone of business: while these things are being initiated we have brisk expenditure and predominantly '' prosperity '' and while those things are being completed and their results pour forth we have elimination of antiquated elements of the industrial structure and predominantly '' depression ''. Furthermore, we can see that he often related the consumption increases and the increase of the welfare. According to Schumpeter, in all periods, we encounters of an increase in consumption (Schumpeter, 1942). There is a factor which increases the wages (Schumpeter, 1942). In that matter, capitalist mechanism plays a strengthing role for the welfare of masses (Schumpeter, 1942). In other words, the development in the production increases specify the capitalist progress. At last, Schumpeter stated that the unemployment was a tragedy in all situations (Schumpeter, 1942). Removal of an unemployment would be the most important characteristic of socialism (Schumpeter, 1942). As Schumpeter (1942) mentioned that '' the real tragedy is not unemployment per se, but unemployment plus the impossibility of providing adequately for the unemployed without impairing the conditions of further economic development ''. However, in my opinion, if we take this issue from the Marxian point of view, capitalism does not need any support to the unemployment in some situations. The reason is the necessity of the repression of the wages. Also, that is conditioned the creation of the '' Reserve Army of Labor ''.
  
   Secondly, I will mention about the creative destruction concept of Schumpeter. The Marxian surplus value theory was supported to Schumpeter's creative destruction concept. According to Schumpeter, new consumption materials, new production methods, new transportation methods, new markets and new types of industrial organizations were both the factors that provided the capitalist development (Schumpeter, 1942). Opening of new markets and foreign markets, transition from handicraft workshops to extensive factories kept to capitalism in renewal form. Also, these factors continuously were destroyed the old ones and were created new ones. As Schumpeter (1942) mentions '' this process of creative destruction is the essential fact about capitalism. It is what capitalism contains in and what every capitalist concern has got to live in ''. Within that frame of creative destruction, Schumpeter analyzed the problem of capitalist development in two ways: first, because capitalism has a long development path originating from the factors placed on the system, it should have to analyze in long-time period. Second, the analysis of the factors of the system could provide a more strong points within the organic development process of capitalism (Schumpeter, 1942). Furthermore, innovative entry by the entrepreneurs was the disruptive force that sustained economic growth within the frame of creative destruction and it caused the powerful changing in the capitalist structure (Schumpeter, 1942). In other words, he specified that these innovations undermined the capitalism's own institutional frameworks (Schumpeter, 1942). Naturally, these would have a negative effects within the frame of economic development and the crises. As Schumpeter (1942) stated that '' in breaking down the pre-capitalist framework of society, capitalism thus broke not only barriers that impeded its progress but also flying buttresses that prevented its collapse. That process, impressive in its relentless necessity, was not merely a matter of removing institutional deadwood, but of removing partners of the capitalist stratum, symbiosis with whom was an essential element of the capitalist schema...The capitalist process in much the same in which it destroyed the institutional framework of feudal society also undermines its own ''.

Conclusion

   In this article, we focused on three different approaches which were Minskian, Marxian and Schumpeterian. We first began with a short explanation about the background of the Minsky's financial instability hypothesis which based on the ideas of Marx (1976), Fisher (1933) and Stiglitz and Weiss (1981). After these explanations, we stressed on the strengths and weaknesses of Minsky's approach within the frame of the financial instability hypothesis. On the one hand, the strengths of that approach included the relations between the price and profit; financing of investment harmonizing with the uncertainty and the risk factor; and the critique of the neoclassical synthesis. On the other hand, the weaknesses included the absence of an analysis of class conflict and the insufficient explanation of the reasons of people's indebtedness. Secondly, we stressed on the Crotty's arguments about the roles of money, credit and financial intermediation in Marx's crisis theory. These arguments gained a new perspectives on the analysis of the financial crisis theory of the Marxian approach. Thirdly, we pointed the difference of Marxian approach against the Minsky and Keynes. So, we tried to explain the Marx's method and his economics, labor-value theory, surplus value theory and the source of exchange. Finally, we showed Schumpeter's ideas about the capitalist crises depending on his arguments which were the rate of increase of total output and the theory of creative destruction.




REFERENCES

1) Crotty, J. 1985. '' The Centrality of Money, Credit and Financial Intermediation in Marx's Crisis Theory: An Interpretation of Marx's Methodology ''. in S. Resnick and R. Wolff, eds.

2) Fine, B. and Saad-Filho, A. 2004. Marx's Capital. Pluto Press.

3) Fisher, I. 1933. '' The Debt-Deflation Theory of Great Depression ''. Econometrica.

4) Keynes, J.M. 1991. The General Theory of Employment, Interest and Money. New York: A Harvest Book.

5) Marx, K. 1976. Capital. Vol 1. London: Penguin.

6) Minsky, H. 1986. Stabilizing an Unstable Economy. Yale University Press.

7) Minsky, H. 1992. '' The Financial Instability Hypothesis ''. Working Paper No. 94. Jerome Levy Economics Institute.

8) Minsky, H. 1993. '' Finance and Stability ''. Working Paper No. 93. Jerome Levy Economics Institute.

9) Stiglitz, J. and Weiss, A. 1981. '' Credit Rationing in Markets with Imperfect Information ''. American Economic Review 74(3).

10) Schumpeter, J. 1942. Capitalism, Socialism and Democracy.



23 Mart 2012 Cuma

Coercive Competition, Financialization and Labor Relations of the Post-1980 Period

Introduction

Since 1980, capitalism have experienced a dramatic change in its dynamics. Rise of the finance, ascent of neoliberalism and the spread of the globalization into the social structure were both come into the picture in that period. On the other hand, although, wage increases have interrupted or nearly decelerated in post-1980 era; the technological developments have increased, the productivity of labor have increased, the financial assets and the financial incomes have escalated, and the profit rates have drawn a stable or somewhat an upward movement rather than its falling rates of the 1950-1982 period. Also, despite the inequality and poverty were increasing, the balance sheet of the privileged capitals were expanding. For example, the U.N. 1997 Human Development Report pointed that ''More than a quarter of the developing world's people still live in poverty...About a third-1.3 billion people-live on incomes of less than $1 a day...and in industrial countries more than 100 million people live below the income poverty line''. These conditions continued more dramatically in its 1999 report: ''The income gap between the fifth of the world's people living in the richest countries and the fifth in the poorest was 74 to 1 in 1997, up from 60 to 1 in 1990, and 30 to 1 in 1960...By the late 1990s, the fifth of the world's people living in the highest-income countries had a %86 of the world GDP [output]-the bottom fifth just %1''. Also, in the light of these conditions, the total outstanding household indebtedness ratio have increased as a percentage of disposable personal income, however, the hourly earning did not increase too much as the change in indebtedness (Crotty, 2002). Along with these facts, the financialization has placed as a new dominant factor in economic and social relations. Thus the size and the power of the financial institutions, financial markets and its activities have significantly increased. These conditions offer so many important clues to understand the aim of the neoliberal development and the capital movement in that era. In general, the real wages have fallen, the indebtedness against the households has increased, the gap between rich and poor has widened in favor of rich, the inequality ratio has expanded, the unionization has limited and approximately 1.3 billion people were pushed to the poverty and misery. As it will be mentioned in article, the capitalism together with its neoliberal policies have curbed the falling rate of profit, the growth of finance have gone together by indebted the households and addicted itself, the gap between productivity of labor and wage ratio have widened and a reserve army of labor have made up at the expense of labor.

After three decades of coming into existence of neoliberalism, it can be now argued that its benefit is not the benefit of the majority of people. Briefly, the structure of neoliberalism depends on four basic processes which are deregulation, liberalization of the labor markets, privatization of the public structure and the abolishment of the barriers for trade for the economic integration. Also, the government interference has abolished in the neoliberal era, so that the global integrated economy would work efficiently. In its economic part, the interest rates would be determined in efficient markets, inflation would become the main issue for macro policies and there would be no excess supply because each supply would create its own demand. In other words, Say's Law would be operated perfectly in the neoliberal era. With liberalized markets, the output level would be increased and the productivity growth would be assured in developing countries. Moreover, these developments would bring average real GDP growth in all over the world and the divergence of income ratios and inequalities and poverty would be diminished. However, besides these foresights, the figure of capitalist development in common with the neoliberal policies did not move along in this way. According to Crotty (2000), the global income has slowed, the rate of growth of capital accumulation and productivity growth has deteriorated, real wage ratio has declined, inequality has risen in most countries and average unemployment rate has risen in the neoliberal era. Moreover, the average interest rate was %1.6 between 1959-1982 period but increased to %4.2 in average between 1982-2008. In that point, briefly, I want to explain the importance of real interest rates for that period of time. In my opinion, these high real interest rates have caused three consequences. First of all, because of these high real interest rate, the role of the finance have caused to increase the assets values and incomes. Secondly, the level of investment for developing countries have diminished in favor of developed countries. They have created a trade opportunity at the cost of developing countries. Finally, it has increased the income inequalities because income transfers from workers who have borrowed with high interest rates, to finance who have achieved high returns. On the other hand, increasing level of unemployment was another crucial indicator for post-1980 feature. For example, according to OECD ''Economic Outlook'' of 2009; the unemployment rate was %3.2 in 1960-73, %5 in 1973-79 but increased to %7.2 in 1979-1989 and %7.1 between 1989-95.

All in all, the paper handles four basic issues of post-1980 which are the decline in growth ratios, ascent of financialization, increase of coercive competition and low but stable profit rates. However, the aggravation of labor conditions are made up the basic factor of the center of these four issues. In other words, I think that the most crucial feature of the post-1980 is the change of labor relations in favor of the capitalist class. That's why, the arguments about these four issues will be evaluated with the changing role of labor class conditions.

Slowdown of the Growth Rates

The slowdown of the world economic growth is one of the most important issue in the neoliberal era. For Crotty (2000), the main source of slow growth in the global neoliberal regimes is the declining aggregate demand growth. Also, according to Crotty (2000) there are 6 important constraints which lay under the decreasing aggregate demand:

Slow growth of wages and mass consumption

The evolution of the global financial system

Restrictive impact of the pace and the character of global investment on growth

Restrictive fiscal policy

The expanding role of international institutions such as the IMF and World Bank

A severe weakening of East Asian type of models of state-guided development

I want to stress two of them which are slow growth of wages and mass consumption and restrictive impact of the pace and the character of global investment on growth. First of all, together with the impacts of the slow growth of wages and the mass consumption on aggregate demand, I see this situation as an important cause of the run up of the finance and then the rise in the overall rate of indebtedness. High real interest rates and rising debt burdens have constrained corporate and household spending (Crotty, 2002). Also, the decreasing level of wages for households and the productivity decline of corporations have addicted them to the finance capital in the long-run. Furthermore, there was an increasing share of income transfer from borrowers (as the households or corporations) to the lenders ( as banks or the other financial institutions) with a post-1980 high level of real interest rates. These incomes have created a positive impact for the downturn movement of the profit rates because of the facility to find resources for the real sector. In other words, both of the low costs as a result of the wage decreasing and the facility to find resources could be expressed as a restrictive factors to fall in profits.

Apart from these factors, there could exist a conflict between low wages and the aggregate demand: If the resources found easily and this could be proved with the increasing rate in the indebtedness, where was the basic and hidden relation between demand and wage? In my opinion, this issue of fact can be summarized like this: Formerly the reductions of the wages could compensate the paybacks of the debts as took for this reductions. However, rapid rise of real interest rates caused more share of wage to discharge the debts. So, while the households could pay indebtedness with their wage fraction, now the huge part of the wages which have been used for consumption, have made use for the interest paying. Alternatively, for example, they have made use for the payback of the credit card debts in 2000s. The fact that debt created new debts could be indicated as a reason of increasing poverty rates in the post-1980 era. As a result, there was experienced a slowdown in aggregate demand.

Furthermore, the negative effect of the flexibility of labor market have had an important impact on these issues. For example, the deunionization process, weak government support for collective bargaining, using of temporary labor by corporations and cheap workers were some consequences of the flexibility of labor markets. All of these examples have worsened the roots of the above conditions. As a result, although, approving to the downward movement of the aggregate demand, there were also another inverse situations which interrupted the downward movement such as the remove of the barriers for indebtedness together with the deregulation policies.

Secondly, I want to stress on the restrictive impact of the pace and the character of global investment on growth. Crotty (2000) states that ''the growth of investment spending has slowed in neoliberal era due to not only to high real interest rate, but to sluggish aggregate demand growth as well'' and also he adds that ''slow demand growth retards investment, which in turn further slows demand growth in an ongoing multiplier-accelerator process''. Although, I agree that declining investment affects the growth, I think that there come into being a failure of the neoliberal policies in that juncture. As it mentioned above, one of the hinge was the global economic integration of the post-1980 era. Moreover, the low interest rates and tariffs and the remove of quotas would help these development. However, there has been a downward movement of investment spending within the 30 years periods to 2011. Furthermore, this movement has deepen in the current crisis of 2008. The high interest rate is well indicator but I also want to add that 4 different reasons:

Increasing unemployment rates

Increasing competition

High price ratios

Insufficiency of government support

Primarily, the high unemployment rates constitute an important reason for excess capacity. This is also caused either wait as inventories for a following periods and value losses in the products. As a result, it increases the costs in terms of corporations, addicts more to the finance sector, causes lack ability to payback of debts, being a bait to large corporations and finally, in the form of collapse, it adds new unemployed army to the current unemployment. Together with that these are both possible, they are placed as a sub-reasons of slow growth in the neoliberal era.

Secondly, fierce competition also deteriorated the investment. I want to explain it like this: you can not change the fixed capital in the long-run. For this reason, on account of increasing competition in neoliberal regime, it moves down on the wage level to create a cost advantage. However, the paradox begin there: This situation can cause downward movement in the aggregate demand and reduce the investment spending.

Thirdly, the another important characteristic is an increasing rate of monopolization in the neoliberal era. Besides monopolization creates the price advantage by the market control on one's own, it has an inverse impact upon the investment spending in the period of economic crises. Consequently, it engenders a pressure upon the profit rates. To eliminate this pressure or to keep it stable, sometimes monopolies move to a price increases. However, in the period of low real wages and high interest rates, the price increases cause a negative movement on investment and also decreases the growth rates.

Finally, the minimization of the government support in the neoliberal era is another source of the slow growth. For example, instead of the high real interest rates, the income transfers with low rates by government have reduced much relative to pre-1980 process.

The Financialization Process in the Neoliberal Era

The another important feature of the post-1980 period is the financialization and the hegemony of the finance on nonfinancial corporations (NFCs). There is no doubt that the finance has exceeded its limits and it has increased its importance with the rise of neoliberal policies in the post-1980 era. Alongside with the above mentioned things, the financialization have had a great importance on the economy in that period. On the other hand, these things have had a great impact by the increasing rate of finance on the economy. In my opinion, it was clear by the increasing effect of financialization on the corporations. For example, Crotty (2002) offers three stylized facts about the condition of most NFCs in the neoliberal era:

1. First, slow demand growth and more intense competition reduced average NFCs profit rates well below their Golden Age levels.

2. Second, while NFCs investment spending eventually declined, coerced investment delayed the decline and limited extent of its fall.

3. Third, the gap between internal funds and investment in both real and financial assets, forced NFCs into ever-rising indebtedness.

The last part of the third fact presents us an important point for financialization which is ''forced NFCs into ever-rising indebtedness''. So, why have the finance loom large accompanied by the neoliberal policies in this era and why have it become one of the most important feature of post-1980 process? Briefly and simply, I can say that the financialization process was an engendered process for which to restrict the falling rate of profit in the neoliberal regime. For example, according to Orhangazi (2011) and Crotty (2002) that the profit rates before tax revenue points a stable view after a 1982.

Furthermore, it has brought control and hegemony of finance upon the NFCs along with the increasing rate of indebtedness. Finance become a significant tool for non-financial corporations to support both their sales and profits (Orhangazi, 2011). Also, the debt ratio per person have shown a dramatic increase and the large part of the wage have gone to the finance as an interest payment. Total credit market debt of all sectors as percentage of GDP rose dramatically (Crotty, 2002). Corporate and household borrowing raised indebtedness further in the 1990s; by 2001 debt was %280 of GDP, almost double the ratio in the Golden Age (Crotty, 2002). Also, as Orhangazi (2011) states ''While household consumption was increasingly financialized in this era, the relationship between financial markets and nonfinancial corporations also changed significantly''. Furthermore, the rate of financial assets value and the financial income share in the GDP have rised in this period. Moreover, the other prove of the finance hegemony can be found to indicate that profits in financial industries have risen much faster than in NFCs (Crotty, 2002).

Besides these things, the global economic integration in which neoliberalism have aimed in macro level, have expanded by financialization together with the abolishment of capital controls all over the world. That's why, the money flows across countries have risen dramatically in comparison with pre-1980 process. For example, by 1989, it was $590 billion and by 1989, it reached to $1,5 trillion daily flows between countries (Crotty, 2002). Against the pre-1980 policies, neoliberalism have yielded different innovations to support these developments. Also, global financial interests increased their influence over fiscal policy in this era (Crotty, 2002). For example, the debt burden of the government as a percent of GDP have increased, the high unemployment rates have caused the interest payments increase and tax revenues of the government have diminished. Moreover, the control mechanisms of the IMF and World Bank have grown against the developing countries in this neoliberal era. Thus, these institutions have helped to spread the neoliberal policies all over the world. As Crotty (2002) implies that '' the IMF and World Bank took control of policy making in a growing number of developing countries that, having initially opened their financial and product markets to some degree, ended up with serious balance of payments problems that forced to seek IMF and World Bank assistance''.

In these financalization process of the neoliberal era, the another crucial development was the takeover movement. What the 1980s takeover movement did accomplish was to force the financial or portfolio view of the firm on nonfinancial corporations management. They have begun to spread their investment plans to short-time horizon rather than pre-1980 long-time horizon. A shift in the the strategy of large nonfinancial corporations was hence identified as a switch from long-term investment strategies to maximization of short-term financial gains and distribution of earnings to shareholders in the forms of dividends and stock buybacks (Orhangazi, 2011). This shift was also valid for an individuals within a different shape as a stock and equity. For instance, the retention of stock period has reduced to one-year or less. On average, stocks are now held for just one year (Crotty, 2002). In my opinion, the the most noteworthy impact on the time-horizon difference was the increasing destructive/fierce competition. Beginning of the shift in time-horizon difference with the hostile mergers and acquisition movement in the 1970s, it has given a signal of the inception of the finance upon the nonfinancial corporations and thus, it has increased their debt ratios which have taken from the finance sector. The main aim was being a maximization of the shareholder value, so that the maximization of the production aim has resigned to second plan. On the other hand, the stock and equity allocations have expanded, so the liabilities in balance sheet have shown an explosion for some large nonfinancial corporations. That's why it has increased the transfer costs and the rate of indebtedness to the banks and to the other financial institutions. As Orhangazi (2011) states ''takeovers faciliated by financial markets have been effective in breaking labor contracts and forcing wages down''. In that juncture, the reason appears why the indebtedness rate of households have boomed and the reason can explain why the profit rates of the firms have drawn a stable movement. For Palley (2010) and Dumenil and Levy (2004) advance the argument that redirecting income from labor to finance has been a hallmark of the financialization process (Orhangazi, 2011).


As it mentioned above, the slowdown of the income and profits have been compensated by borrowing or by the individuals' dividends, interests and holding gains on assets who have had a stocks or equities. For instance, the rise of the shareholder value movement caused the dividend payout ratio to double from mid 1980s to the late 1990s, severely draining NFC funds (Crotty, 2002). Also, Orhangazi (2011) describes it as wealth effect created through the rising assets. However, together with the instable values of these assets according to firms progress in the market, these could be as a cost for the individuals.

Furthermore, the other valued areas were the mutual funds and insurance companies in the stock market after 1980 period. Technical progress in an information processing, a steep decline in trading commissions and liberalization of regulations on the composition of institutional portfolios led to a continuous rise in the percent of stock held by institutional investors in the 1980s and 1990s (Crotty, 2002). It might be a reason for the stable profit rates of post-1980s. It shows either increasing and decreasing picture but always comes to the initial level.

Also, there was a situation which was a high costs of external funds. For example, Crotty (2002) states that NFCs responded against it with two innovative ways. First, an increasing percent of NFC investment funds were used to acquire financial assets. Second, firms created or bought financial subsidiaries, and expanded those financial subsidiaries already in existence. He evaluates these things which I also accept, as a financialization of the nonfinancial corporations in the neoliberal era.

Coercive Competition

In this part, I want to stress on the competition issue which has varied in post-1980. Global neoliberalism has destroyed the pre-1980 effective government policies of economics and it has also destroyed the conditions required for a productive relationship between the state and the market. On the other hand, it has also changed the structure of the competition. In the neoliberal era, Crotty (2000) calls that as ''coercive competition''. Before the conditions of the coercive competition, I want to show some details of the Golden Age period of competition structure. Here some points :

The social contracts between the labor and the firm

The absence of cross-border mobility for labor

Importance of the domestic economy with high employment; low indebtedness; high real wages; strong unionization; bargaining power; high mass consumption; tightly regulated financial markets which were just the main area to provide a source for production and investment, not for their own profit; regulated business and social welfare system

Long-term planning horizon for an investment

High-labor relations with job security system

Redistributive taxation

Government-led expansion in an industries


However, the macro problems such as stagflation, oil crisis, the collapse of Bretton-Woods system, the downward movement in an investment spending and the production in the late 1970s caused a breaking point against to the inner dynamics of the high-labor relations in 1980s. Together with these issues, the competition became a coercive with cut-throat pricing, destructive oligopoly rents, over-investment and debt financing. The attempts to recover profitability included breaking up labor's power with the help of anti-labor policies and globally relocating production to low-cost sites (Orhangazi, 2011). For example, these are some points that show the changes of dynamics of the labor relations in the period of coercive competition:

Slash labor costs through downsizing and wage cuts to survive beyond the short-run time period

Conflict-driven labor relations policies

Attacks to unionization and bargaining power

Repeduate existing ''implicit contracts'' with workers and suppliers

Temporary workers as a cheap labor

Creating a reserve army of labors

These were the results to stand strong against the fierce competition in the neoliberal era.

Also, there were another developments to survive from coercive competition such as technical changes to take advantage of the ever larger returns to scale, cost reduction and finding a new geographies in developing countries. However, the fierce competition have continued with its increasing rate of excess capacity, low profits and financial fragility in that period. As a result, more competitive pressures brought tax cuts in favor of wealthy class, social spending cuts against labor class, flexibility of labor markets, low wage labor system and declining job security.

In conclusion, the conditions of the financial markets in the coercive competition of the neoliberal era can be summarized as:

Highly speculative and coercively competitive
Banking and currency crises together with the risky asset investments, high risk-premiums to interest rates and IMF and World Bank austerity plans and pressures
Increases in the indebtedness of households and nonfinancial corporations that creates financial fragility
IMF and Central Banks bailouts

The Change in the Profit Rates

The another crucial feature of the post-1980 was the low but stable profit rates. The profit rates had a downward movement between the periods of 1950-1982 (Dumenil and Levy, 2005). For so many disciplines argued that the economic problems which were lived in the late 1970s, were the cause of the falling rate of profit. They also implied that capitalism experienced different economical problems and the neoliberal developments of post-1980 because of the decline in profit rates. However, the arguments which were consistent with the Marx's formulation of the profit rates, were not explaining the ongoing process of post-1980. In general, while the fact that the profit rates fluctuated in this era as increasing and decreasing, it presented a stable picture with its low rates relative to pre-1980 condition. So, what are the reasons of these low and stable profit rates in the neoliberal era different from the pre-1980 downward sloping movement of profit rates? I want to draw up these factors as increasing size of the finance, the development in technology for finance, a destruction of the labor class conditions and the increasing rate of monopoly power in core industries.

From the beginning of mid-1960, there were reductions in the labor productivity and the labor costs. The reasons that lay under these conditions were the technological developments, increasing competition in the markets and the falling rate of profits. There was a lag adjustment of the growth of real wages to the deterioration of the performances of technical change (Dumenil and Levy, 2005). However, this technological developments with the decreasing price of raw materials have widened the gap between the labor productivity and the wage rates. The abolishment of the barriers to find a resources have also expanded this progress and have fed to the recovery of the profit rates. Furthermore, there were differences about the profit rates of the financial corporations and the nonfinancial corporations. For Dumenil and Levy (2005), in a definition of the profit rate abstracting from financial relations (measured after the tax but prior to the payment of interest, and over tangible assets), the profit rates of the nonfinancial corporate sector displayed the now familiar pattern in three phases: (1) the rise into the 1960s bulge, (2) the decline from the mid-1960s to the early 1980s, and (3) a recovery period of 1980s. However, there was an important impact of these financial relations in terms of nonfinancial corporations. Especially, the increasing effects of the net interest, dividends received, asset gains, the shareholder ratios and inflation targeting changed the falling rate of profits of pre-1980 to the indirect contradiction.

Moreover, the another important factor that has affected the profit rates was the high real interest rates. The end of inflation and large interest rates during the neoliberal decades have modified the profit rates (Dumenil and Levy, 2005). I think that these have got two effects on profit rates. First, the high interest rates had negative impact on the net interest and asset values which were also related with profit rates. Also, it caused decreasing of the investment spending that affected the profit rates. Second, the high real interest rates affected negatively the share of the stock. In addition to low wages, the decreases on the values of stocks have diminished the purchasing power which have had a downward movement effect on aggregate demand and then the slowdown of the growth rates.

In conclusion, because of high rates of interest of post-1980 period, the cost of the indebtedness have raised in the neoliberal era. For instance, overall, corporations benefited in the 1970s of the large reliance on indebtedness at a low cost, and this pattern was reversed during the 1980s and 1990s (Dumenil and Levy, 2005). I want to offer another two factors which were important on the profit rates: (1) the devaluation of debt by inflation (Dumenil and Levy, 2005) and the taxation. In the neoliberal era, while the low inflation rate has affected the financial incomes in a positive way, on the other hand, it has reduced the financial costs. It has created a beneficial situation for which has had a high debt ratio firms and impeded the profit rates reduction. Also, together with the reducing tax rates, the removal of the redistributive taxation system of Golden Age were another important factor to prevent the decrease in profit rates. The reduction of taxation had a powerful countertendencies effect vis-a-vis the decline of the profit rate (Dumenil and Levy, 2005).


Conclusion

The neoliberal era of post-1980 was an era of the abolishment of the social rights and the welfare of labors which acquired in the ''Golden Age''. That era has witnessed to the decrease in real wages and increasing rate of indebtedness, increase in an unemployment rate all over the world, progress of deunionization, change in the taxation at the cost of labor, diminish of the bargaining power, increase in the level of reserve army of labor, abolishment of job security, rise in inequality and the spread of poverty and misery. In addition to, the neoliberal era was an era that has witnessed to the slow growth rate, the rise of the financialization and coming into being of a coercive competition. Although the labor conditions have affected negatively together within the lights of these things, it has also led the destroying conditions both in the real and financial sector, bubbles and increasing rate of financial crises, social and economic disorder and the shift of capital accumulation process to the financial sector. Thus, the 2008 global economic crises have brought the inquiry of the neoliberal policies and has made it necessary for the new social order.


REFERENCES

Brenner, R. 2000. ''The Boom and The Bubble'' New Left Review no.6.

Crotty, J. 2000. ''Slow Growth, Destructive Competition, and Low Road Labor Relations: A Keynes-Marx-Schumpeter Analysis of Neoliberal Globalization'' Political Economy Research Institute (PERI) Working Paper no.6.

Crotty, J. 2002. ''The Effects of Increased Product Market Competition and Changes in Financial Markets on the Performance of Nonfinancial Corporations in the Neoliberal Era'' Political Economy Research Institute (PERI) Working Paper no.44.

Crotty, J. 2002. ''Review of Robert Brenner's The Economics of Global Turbulence'' The University of Massachusetts.

Dumenil G. and Levy D. 2004. Capital Resurgent: Roots of the Neoliberal Revolution. London: Harvard University Press.

Dumenil G. and Levy D. 2005. ''The Profit Rate: Where and How Much Did It Fall? Did It Recover? (USA 1948-2000)'' http://www.jourdans.ens.fr/levy/.

Dumenil G. and Levy D. 2005. ''The Real and Financial Components of Profitability (USA 1948-2000)'' http://www.jourdans.ens.fr/levy/.

Orhangazi, Ö. 2011. ''Financial vs. Real: An Overview of the Contradictory Role of Finance'' Political Economy Research Institute (PERI) Working Paper Series no.274.

13 Kasım 2011 Pazar

Evanescent Protocol: Kyoto

In our century, one of the most important problem which humanity lives, is definitely the environmental pollution. So many points that are shown as a reason for this environmental pollution such as profit ambition, power dash, market failure, property rights and also the capitalism as a mode of production. There are so many definitions in different disciplines of environmental pollution. In that case, we should categorize it in an economical terms. Moreover, to do this, we should undertake the capitalist system as a whole and then analyze its effects on the environmental pollution very deeply.

When we look at the historical process of the environment issue in an economic concept, we see that this notion has almost a new characteristic in it from the beginning period of mid-20th century. Environmental economics is a subfield of economics that relates to the with the environmental problems. As National Bureau of Economic Research Environmental Economics Program quotes that Environmental Economics undertakes theoretical or emprical studies of the economic effects of national or local environmental policies around the world. Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste and global warming. Righ along with this quotation, in general, it combines the welfare economics and the theory of economic growth with more recent perspectives on the political economy of choosing policy tools and the ideas of sustainable development. There is a point in an environmental economics that so important to analyze its gravity which consists of the externalities as one of the most critical element of market failure. The common definition is that an externality exists when a person makes a choice that affects other people that are not accounted for in the market price. On the other hand, the basic definition comes from also by Heller and Starrett that defines externality as a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of Pareto efficiency. In an economic literature, externalities mean in which the unfettered market does not create an efficient output. Thence, to correct this such market failures, it gives some solutions which are advocated for some externalities include environmental regulations, qoutas on pollution, taxes and tariffs on pollution and dirty subsidies. Just at that juncture, the concept of negative externalities take a very important place to understand and analyze the environmental pollution/degradation. As we know that the negative externality is an action of product on consumers that imposes a negative side effect on a third party; it is a social cost. Many of these costs are related with a deep environmental consequences such as climate change, global warming, systemic risk, air pollution, water pollution, soil contamination, radioactive contamination, increasing rate of greenhouse gas, carbon emission and so on... These different kinds of environmental pollution goes into the atmosphere causes progressive natural instability, disorder and discomfort to the ecosystem. For example, apart from its death effects on the human body, for an environmental effects, the carbon dioxide emissions cause ocean acidification, the emissions of the greenhouse gases leads to global warming which also affect the ecosystem in so many ways and soil can become infertile and unsustainable for the plants. We can accrue these examples in so many different types of causes. Because of these negative externalities and its death effects, many nations worldwide has come together in many times and different forms to protect the environment from the adverse effects of pollution and thus to regulate various types of pollution as well as to cut back the high levels of pollution. Although there are lots of pollution types, the greenhouse gas emission is a leading one both for economic discipline and the environmental degradation.

Generally speaking, greenhouse gas emission is a kind of gas that absorbs or emits radiation. This is also a fundamental cause for the greenhouse effect. The primary greenhouse gases in an atmosphere are carbon dioxide, methane, nitrous oxide and ozone. Contribution of the each gases to the greenhouse effect is affected by the characteristics of the gas, its abudance and its indirect effects. The carbon dioxide is one of the most important greenhouse gases. It is also the basic one in an analysis of the environmental economics to understand the binary relations between economic concept and the environmental degradation concept. It should also ascertains more deeply to understand the relations between nations on the issues of the emissions trading, environmental tariffs and taxes environmental pricing reforms, tradeable pollution permits, personal carbon trading and low carbon economy as well as importance of the other greenhouse gases. Admittedly, the problem is related with the economics to a large extent. That's why, the negative externality engages an important place in that situation. In this way, the difference between the social marginal cost and the marginal cost (supply) to a position of demand shows an imbalances also for an economics and environmental degradation. When a negative externality occurs then social marginal cost exceeds marginal private cost (price) and therefore private optimal output is higher than the social optimal output. This divergence between them is also resulted with an inefficieny in resource allocation. Producers of the externalities don't have consider the effects of their actions on others. Especially within the globalization process, these negative effects have started to limit with some agreements and deals worldwide. In this regard, Kyoto Protocol has one of the most important deal for all industrialized and industrializing countries.

The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change (UNFCCC), aimed at struggling global warming. It is an environmental treaty achieving the stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous interference with the climate system. It was adopted on 1997 in Kyoto, Japan, at first hand and entered into force on 2005. Literally, 191 nations have signed and ratified the Kyoto Protocol as of September 2011. Under Protocol, 38 countries which are termed as ''Annex I countries'' commit themselves to a reduction of four greenhouse gases (the most important one is carbon dioxide) and all member countries give general commitment. They agreed to reduce their collective greenhouse gas emissions by %5.2 from the 1990 level. These countries have limited to the 16 billions tons of carbon dioxide in years 2008-2012 because of the increasing importance of global warming. However, if the nation which is not disposed this limit then it can sell its permits to another countries within an open market operations. In contrary to this, if the nation which is come to limit then it can purchase permits from another countries with the same way of open market mechanisms. However, in this position, there come into being a considerable problem which is these permits put a new face on things such as being a financial assets like something that can be sell or purchase. That's the reason, it brings the question what are the main weaknesses and the strengths of Kyoto Protocol. For a deeper analysis and understanding, it should have fallen to heart of the main points and should also have compare with the other pollution control methods related with in mitigating the greenhouse gas emissions and protecting the global climate as a whole. First of all, I can start with some weaknesses of the Kyoto Protocol. In my opinion, the main causes of the weaknesses lay down on the flexibility mechanisms of the Protocol. These are emission trading and joint implementation which defined under the Kyoto Protocol intended to lower the overall costs of achieving its emissions targetings. These mechanisms enables countries to achieve emissions reductions or to remove carbon emissions for the atmosphere with cost-effectively and also to allow 38 Annex I countries to meet their greenhouse gas emission limitations by purchasing greenhouse gas emission reductions credits from elsewhere through four different; financial exchanges, environmental finance, projects that reduce emissions in non-Annex I countries and from other Annex I countries. However, the problem starts with this cost-effective/minimizing concept because in some ways, it results with creating negative externalities and disequilibrium between private marginal cost/benefit and the social marginal cost/benefit. First of all, the emission trading is most widespread one between the other mechanisms. Definitely, it is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants. Generally, a government authority sets a limit on the amount of a pollutant than can be emitted. These limits sold to firms in the forms of emission permits. However, the total number of permits don't exceed the limit. Firms that need to increase their emission permits must buy from those who require fewer permits. In that point, there can be created an issue because it shows the difference of pollution levels among the developed countries and developing countries. Because the developed countries can use the cost-efficient mechanisms with high rate of technologies then they sell their permits in which have low-level technologies countries. In effect, the buyer is paying charge for polluting, on the other hand, the seller is being rewarded for having reduced emissions. It reminds one thing. Although there is a limit on pollution, the situation of the pollution have a continuity. For example, some corporations, firms moves for having a high rate of profit even if they pollute under the limt, they sell it. In many cap-and-trade systems and carbon trading mechanisms, organizations which do not pollute may also participate such as for a firms in United States as a seller. Some economists urge that the use of market-based tools like this emission trading to adress environmental problems instead of prescriptive command and control regulation. It is criticized for being into three reasons: (1) for being excessively rigid, (2) insensitive to geographical differences ,and (3) for being ineffecient. However, they argue that emission trading requires a limit to efficiently reduce emissions and the limit has a governmental regulation mechanisms so if there is a failure to reduce emissions is often punishable which increases the costs of production. Thus the firms choose least-cost way to abide with the pollution regulation. Related with the emission trading, there are two important criticisms which also support our views. First of all, Lohmann in New Scientist magazine of science argues that trading pollution allowances should be avoided as a climate change policy. He gives reasons because, firstly, he supports that global warming require more radical change than the modest changes driven by previous pollution trading schemes. That's why, he also suggests that it requires nothing less than a reorganization of society and technology that will leave most remaining fossil fuels safely underground. His suggestions, in my opinion, is accurate because carbon trading or emission trading as a whole encourages business as usual as expensive long-term structural changes will not be made if there is a cheaper source of carbon credits. Furthermore, another one of the most important criticism come from Annie Leonard emphasized three factors: (1) unjust financial advantages to major polluters resulting from free permits, (2) an uneffectiveness of the system caused by cheating in connection with carbon offsets, and (3) a distraction from the search for other solutions.

Emission trading is the fundamental flexible mechanism in a Kyoto Protocol and I think that the most important weakness for an accurate application to the greenhouse gas emissions control and to stop the global warming which was briefly summarized above paragraph. However, there is also another mechanism that those reduce the power to foreclose the benefits of Kyoto Protocol which is the Joint Implementation. In general, it helps countries with binding greehouse gas emissions targets meet their obligations. For exmaple, a joint implementation suggests that any 38 countries for Kyoto Protocol can invest in emission reduction projects in any other developed countries as an alternative to reducing emissions domestically. Thus, countries can lower the costs of complying with their protocol targets by investing in greehous gas reductions in any other developed countries where reductions are cheaper and then applying the credit for those reductions toward their commitment goal. However, in that position, I have some criticisms about this because it restricts the targets and benefits of the Kyoto Protocol and also restricts the amelioration of global warming. First of all, it can cause concern of imitiated emission reductions. In that situation, leakage is very important that if joint implementation project implies increased emissions elsewhere then the net effect on emission reductions of that project may be limited. Secondly, its complexity as in the process of credit mechanism for Joint Implementation project is another one. It may release the low degree of coordination between joined countries to a portocol. Finally, it brings the question that who will bear the risk of uncertainties among countries.

Thirdly, the last weakness of the Kyoto Protocol is related with the coercion of the environmental effectiveness of the protocol includes three aspects: (1) proposals to allow emission credit for agricultural activities, forest degradation and regrowth, (2) ''unlimited'' use of Clean Development Mechanism (another flexibility mechanism of the Kyoto Protocol; I think that it has some benefits but its unlimited using cause degradation) would allow industrial countries to increase their own mechanism with no guarantee that emissions were reduced elsewhere by a compensating amount and (3) unlimited hot air emission trading threatens to undermine the integrity of the emission trading system as well as increase emission more than would otherwise be the case. Finally, by the way, the Kyoto Protocol calls for the industrialized countries to mitigate greenhouse gas emission %5.2 below 1990 levels by 2012 but the U.S. as a largest producer of greenhouse gases, emiting %20 of the world's total, isn't part of it.

Contemporary production processes use fossil fuels such as oil, which release risky amounts of greenhouse gas emissions into our atmosphere. Moreover, these emissions from agricultural practices, land use change and forestry, and other industrial activities have led to immensely increases in an atmospheric concentrations of different gases, the most important ones are as we know carbon dioxide and methane. As we mentioned above that the Kyoto Protocol is one of the most important formation acting globally to stop the climate change and global warming within a limitation of greenhouse gases. Besides the weaknesses of the protocol, there are also a strengths of the Kyoto Protocol. The potential benefits from Kyoto, basically, are captured by the avoided damages from climate change. Some damages for climate change can be organized as rises in average temprature, less potable and clean water, less biodiversity and severe weather changings. I think that the four principals of the protocol are the most important strengths of the future environmental issues.

1) The principal of commitments. These are related for both countries which are binding to the Kyoto Protocol. This lies mainly in the establishing commitments for the reduction of the greenhouse gases that are legally binding. Separating the countries in different parts makes an important attitude to control the global degradation with making commitments possible.

2) The principle of implementations. The countries are required to prepare policies and measures for the reduction of the greenhouse gases. Furthermore, they are required to increase the absorption of these gases and utilize all policies.

3) Minimizing impacts on developing countries by establishing an adaptation fund for climate change.

4) The principle of compliance. Establishing a committee to enforce compliance with the commitments under the protocol.

These four different principle also shows the consolidation of so many different countries against the climate change. Thanks to this, the utmost importance of the Kyoto has its own power to put together these countries to stop the climate change and makes binding policies for both countries as accepted globally. Moreover, Kyoto does not only make a point of developed countries, but also features on the developing countries and industrializing countries. One of the most important mechanism and strength of the Kyoto is the clean development mechanism which is related with this issue. Definitely, the purpose of the clean development mechanism is to promote clean and sustainable development in developing countries. It is one of the Protocol's project based mechanism in which is designed to promote projects that reduce emissions. It is based on the idea of emission reduction production. The economic basis for including developing countries in effects to reduce emissions is that emission cuts are thought to be less expensive in developing countries than developed countries. It is designed to start off developing countries on a path towards less pollution, with industrialized countries paying for these reductions. There are two main concerns about this mechanism which are additionality of emission reductions produced by the clean development mechanism and imposing projects that are contrary to the development interests of host countries.
Moreover, clean development mechanism plays three important roles in reducing the amount of future climate changes: improves the cost-effectiveness of the greenhouse gas mitigation policies in developing countries, helps to reduce leakage of emissions from developed to developing countries, and finally the boosts transfers of clean, less polluting technologies to developing countries.

OTHER TYPES OF POLLUTION CONTROL MECHANISMS IN ADDITION TO KYOTO PROTOCOL AGAINST THE CLIMATE CHANGE


1) Environmental taxes: It refers to taxes intended to promote environmentally sustainable activities via economic incentives. The policy of proposal may attempt to maintain overall tax revenue by proportionally reducing other taxes (like human labour and renewable resources). These taxes are looked like a Pigovian taxes (attempt to make the private parties involved feel the social burden of their actions). We know that the existence of externalities have a negative effects on environment. To the extent that these environmental taxes, firstly, correct for externalities such as pollution, greenhouse gases. Taxing the negative externalities usually are needed exerting a burden on consumption, and somewhat since the poor consume more and save less a share of their income. Moreover, an environmental taxes can have a future design in which modest consumption levels are priced low and higher consumption levels are priced at a higher levels.The basic one, similiar concept to pollution tax, is a cabon tax:

Carbon Tax
: It is kind of environmental tax levied on carbon content of fuels and form of carbon pricing. Since greenhouse gas emissions caused by the combustion of fossil fuels, a tax on these emissions can be levied by taxing the carbon content of fossil fuels. These taxes offer a potentially cost-effective means of reducing greenhouse gas emissions. Also, it is like a Pigovian tax similar to another environmental taxes. They help to address the problem of emitters of greenhouse gases not facing the full social costs of their actions. It affects disproportionately low-income groups. These taxes, in other words, using tax revenues to favour low-income groups. Thus, it would bring the prices closer to the social degrees. In that situation, it aslo shows its efficient characteristics. In an economic concept, the carbon taxes of its social cost is the marginal cost of emitting one extra tons of carbon dioxide. So, if social cost estimates are complete, a carbon tax should be set equal to its social cost. Emission permits can also have a value equal to its social costs. Although a number of countries have implemented carbon taxes, there are some difficulties with these taxes. According to the Carbon Trust, a carbon tax suffers from combining a set price for carbon along with a transfer of revenue from industry to government. As a result, a revenues can be misguided or it can increase the level of poverty related with an unequal distribution. Secondly, these taxes are whether the emission reductions they bring about actually exist; that is, additionality of emission reductions according to Carbon Trust.


2) Environmental Tariff: It is an import and export tax placed on products being important form, or also being exported to countries with substandard environmental pollution controls. They can be used as controls on global pollution and also be considered as corrective on climate change. It is used because there are some debates on the role that increased trade as internationally plays in increasing pollution. U.S. was the originator of a legislative proposal suggesting an environmental tariff be applied against exporting countries whose exports gained significant cost advantages due to less stringent environmental regulations. This proposal stated as ''International Pollution Deterrence Act of 1991''. On the other hand, these kinds of tariff were not implemented in the past because they were not sanctioned by multilateral trade regimes such as WTO and GATT so that now in so many countries it criticizes considerable and calls for reform for it. For instance, many newly industrialized countries and underdeveloped countries thinks that impose pollution control like tariffs as suspicious. They see that as threat to growth, decreasing impacts on standards, and tactics for developed countries like U.S., China and for Western Europe.


3) Environmental Pricing Reform
: It is the process of adjusting market prices to include environmental costs and benefits. For this theory, externality exists where a market price omits environmental costs/benefits. So, self-interested economic decision in some concepts can lead to environmental harm. Thus, environmental pricing reform can be economy-wide, or more focused on environmental issues, mainly climate change like environmental tax or tariff. It includes green tax-shifting, tradeable pollution permits, or the creation of markets for ecological services. Those are both related with the economic instruments for environmental protection.



TURKEY CASE IN KYOTO PROTOCOL

Turkey is always placed as a special characteristics for its geographical and environmental position all over the world. That's why, it is opened to some difficulties of environmental problems.
Besides its geographical position, the most of the environmental problems for Turkey are basically caused also by the fact that it is developing country for many decades. From the beginning of the time period of development, the governments has supported rapid industrialization, so it has sometimes caused unregulated urbanization and environmental problems. Of course, in this process, environmental regulations were blow over. In Turkey, industrial pollution control is often seen as an exchange among clean environment and economy in terms of employment, production and growth. Thus, the firms are continued to pollute rather than turn back to environmental mentality. However, after a sharp pressures from the side of European Union in the beginning of 21th century, this mentality has been slightly changing at the end. So, the the road of the Kyoto Protocol appeared. Turkey announced in June 2007 its intention to sign the accord but without having any emission targets which was first agreed upon by world governments in 1997. The government postponed signing it for more than a decade because of concerns about the cost to the economy. Signing the Kyoto Protocol does not put an additional burden on Turkey until 2012. It is not obliged to reduce their greenhouse gas emissions to 1990 levels between 2008 and 2012 like the other 38 Annex I countries. Turkey will get involve in climate change decisions post-2012. However, by signing the Kyoto Protocol, Turkey has undertaken the responsibility of passing the necessary legislation to lay the infrastructure for fighting climate change after 2012. Economically, its estimated cost of changes in infrasturcture 58 billion euros. Also, long-term success requires national and international multi-disciplinary efforts by Turkey. Turkey felt an exchange among clean environment and economic-industrial development.

In my opinion, Turkey should have a special position like Annex I countries because albeit it does not emits as much as these countries, turkey has specific geographic location so it affects their ecological system profoundly. First of all, to being in a Mediterranean region is a considerable risk. The most striking effects of climate change on Turkey are expected to be water scarcity, deforestration, drought (especially in Anatolia) and ecological degradation. It is vulnerable to the potential effects of the climate changes. That's the reason, I think that two of the flexibility mechanisms which are tradeable emission permits and joint implementation, should be restricted for Turkey. For example, if Turkey does not exceed the limit of the emission, it should not act as a buyer from other countries' surplus. On the other hand, the protocol should have specified some acute punishment if the limit exceeds. For instance, these punishments can be in a production areas and can also be in an international trade areas with restrictive policies. On the other hand, countries like Turkey's position can be supported in various types such as finacially to change its production mode into green-technologies. Furthermore, Turkey should adopt into more renewable resources. These kind of resources are so important for Turkey because its geographical position also restricts to abate its wastes within a professional way. These wastes can mainly cause air pollution which has a serious problem leading relatively high social and economic costs in Turkey. Moreover, Turkey should use different types of pollution control devices in their industries. The basic ones are dust collection systems, industrial wastewater treatment and scrubbers (baffle spray scrubber, mechanically aided scrubber). Finally, there should be constructed a special regulation and monitoring pollution institutions to determine environmental taxes and tariffs for Turkey. In a conclusion, as a new country, Turkey, in a Kyoto Protocol, for now its regulations and policies have an initial quality. However, in future period of the environmental issues, the above mentioned rules or tools should have mentioned in these protocol for Turkey. Because the increasing rate of average temprature has began to cause water shortages in major cities as well as agricultural areas. Also, this factors may lead food scarcity and poverty in the near future that create pressure for migration that can cause social instability.