Technological Conditions and the Rise and Fall of the Rules-Based System

This paper considers the role played by the evolution of technological conditions in the rise and fall of the rules-based system. I argue that the rules-based system was in fact endogenous to the economic and technological conditions under which it came to be: when industries are competitive, companies are covering their cost of capital, workers are being paid their marginal product, everyone is making a living, no-one is getting obscenely rich, and participation in trade is a win-win proposition. This is approximately the pre-1980s world of limited economic rents, a constant labour share of national incomes and constant returns to scale, as described by the Kaldor facts. The subsequent rise of economic rents induced strategic behaviour which is incompatible with a rules-based allocation of production. Accordingly, the economic doctrines and governance systems developed for the low-rent and low-uncertainty world of the mature industrial economy are not appropriate for today’s rent-rich and highly uncertain world of strategic behaviour and need to be fundamentally reviewed on a first principles basis.