6.1. Free trade in question

One of the salient aspects of dreamed globalization is the old belief, supported by a too often truncated theory, in the benefits of the development of trade between individuals and between nations. The idea that there may be losses and gains and thus conflicts is, often, ignored as well as the idea that, inevitably, obstacles or difficulties must be overcome in order to succeed in capturing the desired gains. Ultimate equilibrium, which accounts for new market conditions, is the only situation taken into consideration as if it were to establish itself naturally and immediately. No place is given to the need for coordination, including the means and time to address it. Not considering this aspect gives rise to the ambiguity that surrounds the free trade doctrine.

Adam Smith had warned of the setbacks that could result from this ambiguity. He knew perfectly well that immediate opening up to foreign competition could only cause considerable damage to national enterprises, which would be often driven to excessive capital destruction. He concluded that a fair consideration for the interests of these companies required opening up to be done gradually and announced well in advance so that enterprises could effectively prepare for it.

Undoubtedly, there are mutual gains in trade, but these are potential gains and obtaining them are neither immediate nor even secured, as there are many obstacles and sources of conflict, which call for regulatory mechanisms allowing market adjustments to be made in good conditions, without unnecessary destruction and avoiding disorder. In addition, gains obtained by some are accompanied, in most cases, by losses for others, which requires redistribution actions if the opening is to be accepted. Workers can be particularly penalized when imports concern labor intensive productions or when financial globalization makes taxes weigh increasingly on labor. It is also likely that the higher the gains of some and losses of others, the more the required redistribution will be difficult to implement.

These regulations take place at the level of the nations, including through negotiations and agreements that structure relations between them. These nations can engage in direct conflict with one another when it comes to conquering or keeping markets. However, they are not supposed to compete with one another, like companies that share a market, since the good performance of one nation is not necessarily acquired at the expense of another.

From this observation, it is clear that the development of international trade must be able to effectively enhance growth. The primary reason is, basically, that importing goods formerly produced by local firms frees up productive resources that will be better utilized, which should indeed be favorable to the domestic country’s growth and also to that of partner countries. In other words, according to the theory backed by Smith and Ricardo, the division of labor in its international dimension is, potentially, a growth factor. All that is left to be known is on what basis it operates, how it is likely to stimulate growth and how it is achieved through the necessary and recurrent adjustments of productive capacities⁴.

If there is a problem, it is not so much in the nature or existence of trade that it should be sought as much as in the changes that affect the conditions of this trade, in the modification of the flows of goods and services as well as investment flows following technological or preference shocks.

The transfer of industries from one country to another and the creation of new industries, which replace old ones which have been relocated, open a transition period. The opening of trade entails not only the systematic questioning of the existing division of labor, which results in changes in the specialization of countries involved in international trade, but also in an increasing international fragmentation of production processes constantly worked at. Enterprises geographically distribute their activities, choose to export, decide to outsource or invest abroad to respond to technological opportunities and market conditions. Their performance, and ability to create jobs, including in their country of origin, depend on their international integration. This fragmentation, as well as the increased modularity of production processes, leads them to choose complex organizational strategies for outsourcing activities, to import intermediate products and to invest abroad, all of which change according to the opportunities that emerge and constantly modify the geography of the world economy. The transformation of value chains raises the issue of where this value is captured and its impact on investment strategies. In short, a complex creative destruction process is implemented that drives employment and income trends that are necessarily perceived as a direct consequence of the opening of markets and international or interregional trade. Nations are involved in this process and continue to play a role in its orientation because they remain the place where political decisions are made.

Distortions that disrupt trade and influence macroeconomic results are first of all internal distortions. The often defended argument is that these distortions are due to wage rigidities that prevent an efficient reallocation of resources. Thus, when international trade damages sectors with a high intensity of unskilled or semi-skilled labor, as would a biased technical progress to which it is assimilated, the only obstacle that would prevent the capture of trade gains would be the downward nominal wage rigidity of the workers concerned. Transfer or relocation would then cause an increase in unemployment rate, which would, somehow, replace an increase in wage inequalities, which should, however, only be temporary. The appropriate policy would then be to encourage greater flexibility of the labor market with the joint aim of promoting effective reallocation of resources and the return to full employment while accepting more inequalities.

Sticking solely to adjustments in the labor market is, however, illusory. The distortions recorded are first of all real distortions that affect the production capacity structure, whether it is the products or the production methods that change. They are not intrinsically related to specific behaviors or institutions, but to a fact: it takes time to build a new production capacity that gradually replaces the old one that is being destroyed⁵.

This production difficulty is obviously not exclusive to open economies. In this context, it takes a particular dimension insofar as the opening introduces competition in terms of wage costs, which, together with the working of financial markets, may lead to greater flexibility in labor markets, in other words structural reforms whose impact must be carefully measured.

6.2. The illusory promise of structural reforms

Institutions and market forms, adapted to the task of ensuring the viability of an economy subject to recurring structural breaks, are themselves a product of evolution as are technologies and preferences. Far from being predefined, they emerge as a result of the change process, reacting to crisis situations or responding to a shock. It is in this regard that institutions characteristic of the Welfare State (or Social State) established themselves after the Great Depression. Thus, new rules are now proposed if not imposed to address the specific constraints of the new globalization. These are part of the belief that it would be enough to make markets more flexible and in this way create a system of incentives that are supposed to ensure an optimal situation almost instantaneously.

The focus is then exclusively on supply conditions and requirements that are supposed to affect potential growth through this channel alone. The medium- or long-term equilibrium referred to is characterized by a natural unemployment rate and a potential growth rate that have to obey supply forces (labor and technology supply), which could only really be reached in fully competitive markets.

Growth arising from trade expansion is rooted in innovation activities that generate a process of both destruction and creation of jobs. The necessary reallocation of human resources requires this professional and geographical mobility. The main obstacle to restructuring and growth would then lie in rigidities specific to the labor market and goods markets.

The argument advanced in support of this assertion is that since investments in new technologies are very risky, they would lead to significant job creation and destruction. The difficulty of dismissal would then become an obstacle to the implementation of these investments, which are, however, investments that generate the highest productivity gains. The degree of flexibility of the labor market would guide technological choices in a more or less growth-promoting direction. Countries with rigid labor markets would be expected to specialize in low and medium technology (old technology) sectors, unlike countries with flexible markets where companies would choose to invest in leading-edge sectors.

Structural reforms in goods markets, as they increase the degree of competition (by reducing the degree of monopoly), would favor the reallocation of production from low productivity sectors to those with higher productivity gains and thus increase the average productivity of the economy. Structural reforms of the labor market, by eliminating rigidities, would allow a reallocation and reskilling of the labor force, so that the supply of jobs in new sectors would respond faster to a higher labor demand. Together, these reforms would increase productivity and potential growth rates. The so-called natural unemployment and vacancy rates would be all the higher as the intensity of job creation and destruction flows is stronger and the growth rate is higher. Unemployment would be a search unemployment, its duration normally short since it will only be an issue of matching job seekers with job vacancies except, of course, in the case of market failures attributable to rigidities.

If we consider creative destruction as a simple matter of matching labor supply and demand within new activities hit by significant turbulence due to very strong competition, then unemployment is effectively a search unemployment. This means that dismissals concern skilled workers who can easily move from one company to another and from one job to another. Here, job destructions are the result of a selection of companies competing with each other through innovation. This selection results in a redistribution of jobs without significantly altering the total employment since the winners recover all the assets. Employees will migrate more easily from one company to another where the same skills are required, which is often in the same geographical area. There is indeed a prerequisite: workers should have the required skills that make the option of leaving a job to find another credible. Winning or surviving companies should, moreover, have an interest in this mobility, from which they expect knowledge and skills transfers that are useful for their projects. They will undoubtedly carry out wage increases all the more easily as they are in a situation of monopolistic competition in their market that guarantees them relatively captive customers.

It is highly unlikely that the institutional protection of employment constitutes a real obstacle to its redistribution and becomes a reason for companies not to engage in innovative activities. While employees expect to easily find a job, companies can expect that breaks will occur without major difficulty. This is evidenced by what happens in specific employment areas because of the highly technological nature of jobs offered and occupied, though subject to rules that foster rigidities. Dismissed workers quickly find, on the spot, a job corresponding to their skills as in areas where labor markets are far less rigid, such as in Silicon Valley, with as (as a corollary) not a reduction in wage costs but, on the contrary, an increase in the remuneration paid to employees. The mobility, most often voluntary, of highly skilled workers is, in fact, in no way affected by the rules governing labor markets.

Things are different when job destructions concern declining activities because they require a professional and geographical mobility of related workers that takes time. Labor market institutions, such as collective bargaining, minimum wage, employment protection laws and unemployment benefits, are undoubtedly rigidities that make job creation less attractive for employers and easier for workers to defend their obsolete jobs. The dominant theory is that this results in a rise in unemployment rate by preventing some wages from dropping and an alteration of income distribution by artificially increasing the relative wages of workers in declining activities. However, reducing job protection and decreasing wages to encourage mobility is not a solution. All depends on what really happens to labor resources immediately and later as the hysteresis phenomena take place.

The hypothesis that can be formulated is that structural reforms, far from leading to an increase in productivity, could create real obstacles to innovation, the main obstacle being the development of forms of dualism within each country and between countries. This will be the case when creative destruction is the result not only of the selection of companies which are all engaged in new activities but of the disappearance of old activities and the creation of new ones, a transition that takes time and requires reconversion of activity. It is difficult, in this case, to stick to the identification of possible long-term configurations of the economy without having to worry about the sequence of events that may occur as a result of the existence of flexible markets: a sequencing that can lead to dualism.

In fact, the resources released, far from being directed to advanced technology activities with higher remuneration, may likely be forced to move to activities where the jobs offered are low or unskilled, sometimes part time and most often precarious. The multiplicity of jobs held by individuals during their professional life may well fall within this precariousness rather than reflect the multiplicity of professions successively practiced and corresponding skills due to technological changes. In this case, high employment entry and exit rates would be indicative of the precariousness of jobs rather than the intensity and speed of the innovations that companies undertake.

The drop in wages of dismissed workers from industrial sectors in difficulty and hired under precarious contracts in activities often protected from competition, emanating from outsourcing and of low productivity, shows the impoverishment of large segments of the population, which will result in a decline in domestic demand. It can only be contradicted by the granting of consumer credit to these impoverished households, which is not without risk if the insolvency should push the economy into crisis, as was the case in the United States in 2008.

This drop in wages also affects human capital accumulation conditions and, consequently, potential growth. Financially constrained workers will have neither the time nor the financial means to be trained, even if they are encouraged by the wage gap with skilled workers and this, since the credit market is not perfect, it is not possible for them to pledge a contingent loan on their future income.

The dualism that sets in, being synonymous with widening inequalities and decline of the middle class, affects the demand structure. The wealthiest households buy luxury goods that are manufactured in small quantities, sometimes abroad, or financial and real estate assets. The poorest households abandon domestic products and buy products manufactured at low cost in low-wage countries. A form of deindustrialization takes place, with the effect of reducing productivity gains, export capacity and the potential growth rate. There is only one response to this: when the strategy conducted by companies and supported by government results in growth being based on exports of industrial products or, more precisely, on a sustainable trade balance surplus if ever it were to have any meaning in the long term.

In short, the clearest result of the search for labor market flexibility may well be a polarization of jobs between highly skilled, highly paid jobs and unskilled, low-paid jobs, with a decrease in medium wage. It is very similar to an internal devaluation that would better be referred to as wage deflation and whose real goal is to increase the market shares of domestic companies and attempt to base growth on a sustainable trade balance surplus for the country.

Also, it is not labor market rigidities that guide investment and technological choices in a way that is unfavorable to productivity and growth but the development of dualism in the labor market, which goes hand in hand with a regressive change in the nature of employment contract and decrease in medium wage, affecting the economy’s structure and development capacity. This is undoubtedly the reason why, during the last period, productivity gains were so low in the United States and euro area countries, despite significant differences regarding employment protection, competition intensity in goods and services markets, as well as the weight of the public sector and taxation.

6.3. The obsession with competitiveness

Whether structural reforms or macroeconomic policies, their implementation framework remains that of nation-states which, in response to international economic relations disorders, are sacrificed to the dangerous obsession with competitiveness.

The pursuit of competitiveness by a nation defined by its borders remains a complex subject. Some challenge the term itself that cannot be applied to a nation and would only make sense for a company. It is true that a company whose market shares are reducing to the point where it can no longer pay its employees and suppliers is bankrupt. It is also true that, for a country, in theory and in practice, and for the future, a trade surplus may be a sign of weakness and a deficit a sign of soundness. Everything will depend on what the state of trade balance implies for employment and investment. It is true that if a company in a particular sector gains market share, this is necessarily done to the detriment of its competitor, because the employees of one company are not the buyers of the other’s products. In contrast, it is also true that when one country exports more to another, it can be assumed that the additional revenue earned by the former will, in part, fuel demand for the benefit of the latter that could invest and make up its deficit. The profits of one become the benefits condition for the other provided there is enough time to obtain them. This back and forth justifies an international trade whose purpose is a better use of resources worldwide, with the benefits being shared by all, if not even equitably shared. This storytelling makes sense. It does not mean that conflicts have disappeared along with borders, though.

In a context of increasing returns, the territorial distribution of activities becomes conflictual when it is more equal (or less unequal) and the per capita incomes of the countries concerned get closer. Indeed, as long as one country concentrates most industries, it becomes important that many of such industries relocate to another country. This allows the former country to concentrate its resources on a smaller number of activities and benefit from higher productivity gains. As for the other country, it will gain from developing an activity with increasing returns to scale. This is no longer the case beyond a certain threshold. When the distribution of industries is relatively balanced, any geographical dislocation of an industry is a loss for one country and a gain for another, even as global income increases⁶. However, the environment concerned is, most often, a monopolistic competitive global market, in which companies from each country have niches that all have the characteristic of offering increasing returns. Gains or losses from the redistribution of activities and trade vary within reasonable limits and remain relatively evenly distributed⁷.

Nevertheless, trade surpluses or deficits, which result from obvious competitiveness gaps between companies and discrepancies in levels of development, may persist durably, if only because their reduction takes time. They require appropriate economic policy responses, whose aim is to make possible what some have called the return journey, that is, the setting up of a mechanism whereby the income earned by some becomes a demand for others. This will require that financial flows that are supposed to go from surplus to deficit countries should fuel productive investment in the latter countries rather than getting lost in the financing of unproductive activities. Time is also required, the time needed to build new productive capacities.

Two conceptions clash. One consists of relying on markets that should be freed from all obstacles and recognizing the determining role of price flexibility, whether in terms of depreciation or appreciation of exchange rate, and wage decreases or increases. The other preserves the principle of public regulation. The first of these conceptions is based on the idea that disequilibria can be quickly if not instantly resolved by pricing changes while its implementation paradoxically contributes to exacerbate them. The second recognizes the recurrence of these disequilibria and underlines the required means to contain or solve them and the time to implement them. The first concedes to the obsession with competitiveness while imagining an ideal world without borders. The second does not concede, but, by continuing to give States a role in the coordination process, it recognizes the existence of these borders as well as the possibility for these States to access mutual and equitably shared gains.

6.4. The dilemma of borders

In yesterday’s world, global regulation took place within the limits of nation-states, economic policy tools implemented at this level aimed at meeting an overall performance goal specific to each, in conjunction with a solidarity objective that ensured political and social coherence.

Nations are diverse, if only because of differences in endowments and institutional architecture arising from culture and history. But the convergence of real performances is possible, provided that trade leads to specializations with comparable virtues in terms of productivity gains. Commercial surpluses and deficits naturally exist, but the conditions for their absorption also exist, which are through cross financing and investment flows. Such a convergence is, inter alia, conditional on the regulatory intervention of governments, which have to make it possible for capital flows to feed productive investments, notably by imposing a financial organization capable of fostering patient capital.

It is only when territories are regions with no real regulatory powers that real divergences become unavoidable and that resource transfer mechanisms have to be implemented. The issue concerns declining and growing businesses that referred to declining and growing regions. Effective regulation has a double aspect. On the one hand, taxes are levied on the income of the wealthiest territories that can help in financing the social expenditures of territories in difficulty. On the other hand, geographical mobility causes workers to leave declining businesses and territories to join growing businesses and territories. These regions, therefore, share the same destiny and constitute a national community.

The landscape might become more complex. Territories can develop activities that fall largely under the category of unproductive activities by benefiting from expenditures made from incomes that could be called transfer incomes, earned by workers in the public sector, employed in other regions or by inactive people. Areas of productive investment are then separated from those of final consumption. Economic stabilization efforts have, beside their overall short-term positive effect, a medium or long-term detrimental distorting effect. A social and economic conflict potentially exists, which could question the coherence of the nation.

Globalization promotes the actual irruption of such a conflict. Far from eliminating borders, it changes their position. Claiming an abolition of borders means abandoning an institutionalized solidarity between the rich and the poor, between expanding and declining regions, in favor of spontaneous solidarity that would be the fruit of a supposedly perfect market game. Yet, this solidarity has no real nor theoretical existence. To be convinced of this, one only has to recall that a general market equilibrium is, theoretically, compatible with a very unequal distribution of income and wealth⁸. Conversely, several fracture lines emerge because of the competition between different institutional systems, which create so many new borders. These fractures, far from being resolved because of market action, keep deepening, paradoxically signaling the sustainability of national spaces as areas of expression of social divisions along with their new fragility.

The first of these fractures is created by companies that have internationalized and preserved their specific business model, conditioned by the institutions of their country of origin, but have tried to take advantage of the legal systems of the countries to which they have outsourced some part of their business. Fragmenting and relocating production allowed them to operate under different legal rules, particularly social and tax rules but without having to abandon the business model that gives them a comparative advantage⁹. Institutional differences become a weapon of competition between companies, but also between nation-states, with some compelled to abandon whole parts of their social model¹⁰.

The second fracture is more directly geographical in nature. Within States, less productive regions are no longer a market for productive regions, and the latter are refusing to carry out the transfer of hitherto existing income, leading to a break in solidarity as well as a weakening in the means of stabilization. Geographical dualism sets in, which may be reinforced by structural reforms¹¹.

The third fracture concerns specifically European nations which, after choosing a more complete integration and introducing a single currency, found themselves in the position of having to adjust to disequilibria by carrying out wage deflation, at the risk of creating the conditions for a direct confrontation since each of them is looking for an increase in its market share¹². Moreover, after escaping exchange rate crises, they had to face sovereign debt crises. The reason for this is that the public debts of different countries are mostly held by nonresidents when the latter arbitrate between these debts in a context where the Central Bank does not, in principle, have the power to buy them up. The fear of a default by any State, due to liquidity shortage, makes investors to refrain from subscribing to new bonds, precipitating the dreaded liquidity crisis, even though the State involved remains solvent¹³. Wealth transfers occur from the most indebted to less indebted countries, well beyond the initial differences in real performances that are thus increased.

Should we then take advantage of these fractures and weaknesses that they create by finally relying on the regulatory function of markets alone, or should we continue to remind ourselves that public action can never be neutral and that the challenge is to find a coherence that is necessarily part of the long term?

6.5. The temporal coherence of public action

If the world were in a state of general equilibrium, it would be imperative to impose a strict neutrality on governments with regard to monetary and fiscal policies. Only market failures attributed to institutional rigidities, obstacles to their proper functioning, could justify government intervention, as would be the case of an insufficient deepening of financial markets, preventing recessions from having their cleaning effect and selecting efficient activities and companies. Correcting these failures is supposed to allow the restoration of the principle of neutrality.

In fact, it is absurd to conceive the working of the economy that would be based on the belief in the existence of market conditions guaranteeing stability, that is, the convergence toward a single or even optimal equilibrium. Presuming that government action may be neutral is an illusion that is based on the idea that disequilibria are solely attributed to the government and that the private world is a world of enduring harmony.

Economic policy cannot be neutral even when it claims to be so. This is particularly evident when the search for budget balance, following a drop in demand and tax revenues, leads to a situation where growth is de facto, penalized, deficit is widened and debt increased. This elementary lesson seems to have been forgotten in favor of the belief in the existence of an attractor solely determined by technologies, preferences and institutions rendering the value of the Keynesian expenditure multiplier equal to zero, whereas setting ourselves medium and long-term goals cannot be reduced to the definition of a pre-built future that would imply making the present necessarily transitory, if not anecdotal. Schumpeter criticized Keynes for regarding the short run phenomena as having nothing to do with the changes affecting capital stock and technology¹⁴. He was right. But he only reinforced Keynes’ fundamental idea that the long term is nothing but the product of events that follow each other in the short term.

The role of public authorities is much broader and probably less ambitious than some economic theories claim or that policy makers who are inspired by it or whose actions are justified by it a posteriori. It is true that the choices of private actors respond to those of economic policy and change with them, making it problematic to meticulously regulate the economic situation. But it is also true that economic policy choices respond to the choices of private actors, since there is not, on the one hand, a world that is always in equilibrium (that of private actors), and, on the other hand, a world that should be forced into equilibrium (that of public actors). These two worlds, neither of which is in equilibrium, are in permanent interaction.

Developing a long-term vision means creating the conditions for coordination between multiple and independent actors over time, enabling them to acquire the information needed to commit, thus minimizing the risks associated with the irreversibility of their decisions and creating the necessary trust. It is illusory and dangerous to reduce this trust to a belief or message of neutrality, in any case impossible, from the government. Yet this is what theorists do by imagining that the newfound virtue of governments finally working toward restoring public accounts is enough for private actors to start consuming and investing.

When a restrictive monetary policy, inspired by the concern for neutrality and dedicated to reducing inflationary pressures, constrains investment, as was the case in Europe in the 1990s, the fluctuations profile is modified. The recurring lack of adequate investment has the effect, cycle after cycle, of reducing the growth rate consistent with price stability and increasing unemployment rate, which does not accelerate inflation and is what some would call an equilibrium unemployment rate, where reduced investments today mean low production level tomorrow and consequently, a more quickly reached inflationary barrier.

A constraint imposed simultaneously on budget deficit nurtures and aggravates fluctuations. It induces a decline in public spending during a recession, amplifying deceleration and helping to reduce the duration of the subsequent recovery phase by weighing on public investment. It gives free rein to the possibility of lowering taxes without a corresponding decline in public spending during expansion periods, creating inflationary pressures that can in turn cause a tightening of monetary policy and premature turnaround of the economy. No effective constraint is introduced in the cycle’s expansion phases, but recessions are amplified, which cannot be interpreted as deviations from a predetermined trend, but as a phase of an essentially endogenous evolution that budget constraint helps to shape¹⁵.

The reality is that disequilibria are inevitable because of innovation and the uncertainty that characterizes it. They follow one another and can be amplified, dampened or compensated over time as a result of interaction between corporate behaviors and public policies. Instead of trying, in vain, to eradicate them ab initio, their occurrence should be accepted when they contribute to the step-by-step regulation of the economy.

When inflation and trade deficit are the consequence of the choice to rebuild a destroyed economy or to innovate, meaning that demand arising from the payment of wages has no immediate counterpart with regard to supply of consumption goods, they appear as the condition of their future extinction and should not be systematically challenged. It is precisely because we endow ourselves with the means to invest at the required level that we will have, in the long run, a new production capacity that could meet, in the future, domestic or foreign demand and therefore, extinguish inflation and trade deficit. There is of course a condition for this: that the investments made are effectively productive investments.

When borrowers have to clear their own debts rather than invest or consume, there can be no question of seeking to reduce the public debt instantly, whereas the increase in such debt is the required transition to its extinction in future. It is not because private agents are under the obligation to clear their debts, that the State must do the same, quite the contrary. When public debt follows the clearing of private actors’ debts that has become inevitable, private actors who are still heavily indebted are above all sensitive to their current income. They are forced to have a short-term vision. Budget austerity implemented to reduce public debt with the hope that these actors will spend more, anticipating to pay less tax in future, is illusory. The fall in current incomes will translate into a further drop in consumption, at the risk of reducing tax revenues and further increasing public debt. On the other hand, the State can borrow, using resources that had not been employed, provided that it carries out expenditures that are useful for growth. It offers an outlet for savings that have become in excess. Interest rates, far from increasing, can even decrease. Expenditure financed by public deficit, by maintaining or increasing the current income of private actors subject to a liquidity constraint due to excessively high debts, can enable the economy to avoid unemployment increasing and deflation while highly indebted private actors restore the equilibrium of their balance sheets. Increasing public debt does not reduce current consumption, while the subsequent repayment of this debt will reduce future consumption for the benefit of the economy over the entire period. In other words, an excess supply of goods and unemployment during a first period can be followed by excess demand and inflationary pressures in a second period. Therefore, increasing public spending today and correlatively increasing public debt will reduce excess supply and current unemployment, while taxing incomes after will subsequently reduce excess demand and inflationary pressures. Public deficit today may seem like the guarantee of future incomes likely to allow the recovery of taxes required for the reduction of public debt. The real question is knowing how long a budget deficit should be accepted before public spending can be, in turn, relayed by private spending. The temporal coherence of economic policy responds to the poor temporal distribution of uncorrected excess demand due to a lack of intertemporal price adjustment.

When public expenditure is solicited, its nature must be considered. If the accepted deficit is indeed transitory, it should be ensured that this expenditure induces private investments that enhance future productivity gains and growth. Moreover, we should less expect a rapid, if not immediate, multiplier effect through consumption, which is more likely to run against bottlenecks due to lack of capacity than an induction effect that takes time. Such an effect can only exist on two conditions: that public expenditure is complementary to future private investments¹⁶ and that the latter benefit from patient capital.

6.6. The institutional challenge

The first globalization, that of the late 19th and early 20th Century, was in a context of persistence of the imperial form of government, with nations and their colonial empires confronting the Central Empires. A second globalization, that of the post 1945 period, was an orderly opening of trade, which witnessed the development of nation-states with recognized borders replacing the empires. The cooperative nature of the relations among the nations of the Western world was then affirmed at the time when it became a real solidarity space¹⁷. The third globalization, which took off in the 1980s, weakened the nation-states, dominated by the search for sudden and rapid mobility of resources at the risk of growing disorder instead of an institutional regulation guaranteeing control of the long term, which is commanded by reason.

The diversity of capitalisms, along with their borders, is thus theoretically challenged in favor of a largely imagined unique social order, even though it remains an opportunity as well as a necessity.

Rather than trying to force individuals to conform to rules that are supposed to ensure full competition, the central objective of the governments of different States should be to facilitate the development of various institutions, consistent with their history and culture, likely to foster innovation, learning, the reliability of commitments and ultimately the achievement of effective, equitable and sustainable results.

Therefore, one of the principles of a sound globalization should be to recognize the right of each country to safeguard its specific institutional choices and refuse to accept the imposition of a race to the lowest fiscal or social bidder, which has become the true meaning of the search for common institutions and is far from optimal.

Laws, regulations, conventions and customs promote rights and privileges, duties and obligations that form the basis of social order within which individuals build their social life and pursue their economic objectives. A totally inflexible base prevents any necessary adaptations in a changing world and would eventually be destroyed. A totally flexible base as imagined by some theorists, who see globalization as the means to achieving such a base, in no way constitutes a social order but rather a source of instability. A political equilibrium must be found that respects the diversity of systems.

This equilibrium was found, after the Second World War, with the Bretton Woods agreements, whose virtue was to create the conditions for a gradual opening up of economies while leaving nation governments the freedom to manage their economic policies within the framework of their own institutional diversity by pursuing the double objective of economic efficiency and social justice¹⁸. It was broken in response to the geopolitical upheavals that occurred in the 1970s.

It is illusory to imagine restoring the lost cohesion by working toward the creation of a supranational monetary and financial government as some people propose at the European Union level, since this government would have no other function than to apply rules aimed at an imagined neutrality and that the States concerned would not have the means to maintain or rebuild their industrial development potential and pursue their solidarity objective.

Thus, the essential principle should be to seek a multilateral institutional system that is able not to maximize the volume of real trade and financial flows in the world but to allow nations to pursue their economic and social goals with their own institutional arrangements and whose guiding principle would be to ensure that the various actors fit into the long term, with one of the dimensions being the slowness and gradualness of the necessary adjustments. International trade agreements should, therefore, include safeguard clauses on the condition that they are subject to negotiated implementation procedures, with their purpose being to give actors the time to adapt and thus avoid unnecessary physical and human capital destruction. Such clauses would be seen not as violations of rules ensuring the proper working of markets but as a guarantee of the sustainability of international arrangements which foster an orderly liberalization and are compatible with democracy¹⁹.

The acceptance and implementation of these arrangements would be an essential step toward the maintenance and geographical extension of national systems constituting social, tax and environmental laws meeting solidarity and efficiency objectives. The control of resulting capital and goods movements would encourage companies and governments to make long-term investments that enhance stability and development²⁰.

Conversely, forms of integration, which are encouraged by lobbies or individual interests, are far from being justified in terms of efficiency and equity, whether it be the role played by large companies that intend to unduly strengthen the protection of intellectual property rights in trade agreements, played by multinational firms that plan to prosecute States in special arbitral tribunals, and the role played by banks and other financial institutions that intend to prevent any effective control of capital movements. In any case, the only tangible result is to undermine public action whose raison d’être is, at the same time, the equity and sustainability of globalization. The damage is primarily inflicted to regulation mechanisms that States should possess²¹.

The forms of integration chosen by the European Union do not meet the objective of reconciling this integration with the maintenance of a certain autonomy of member States. The outbreak of the sovereign debt crisis, which jeopardized the survival of the euro zone and the possibility of addressing it again in future, led to the formulation of proposals illustrating a conception of the working of the economy that remains essentially timeless. This concerns, on the one hand, preventing national banks from financing public debts and thus breaking the vicious circle between public and bank debts, and, on the other hand, putting these public debts under the control of financial markets in order to encourage governments at any time to seek the balance of public accounts. Although technically complex, the contemplated rules are part of the idea that there exists an optimal and stable state. By doing so, a double deadlock arises, on the divergence of domestic situations and the time needed to address it, the opposite of the doctrine that governed the Bretton Woods agreements. There is great risk in seeing this divergence widening and nations isolating themselves in the name of a poorly understood competitiveness for lack of understanding why and how disequilibria interact with each other over time.