Home .Governing globalization Time for a "mixed globalization"
Time for a "mixed globalization"
Sunday, 08 March 2009 02:11

This year we are celebrating the 20th anniversary of the end of communism and state-planned economies in central and eastern Europe.  And oh what a disaster it was with lack of political freedom, economic inefficiency and poverty.  What's more, communism bred a massive mafia which was corrupt and vicious -- you can't stop capitalist markets.  Today, we are still paying the price as this mafia has spread its reaches globally, and is a major factor in the globalization of economic crime like trade in drugs and arms, money laundering and human trafficking.

This year we are also celebrating the failure of badly and insufficiently regulated financial globalization.  Financial market dealers invented many new tricks for making money, and brought down the whole economy with it.

Economists' reputations are now more tarnished than they ever were, as we are blamed for supporting free and unregulated financial and other markets.  This is not true!

Economists have always believed that markets are not perfect and that many types of market failure require government intervention.  In short, we need a mixed economy in which both government and the private sector play a role. 

Markets do not always capture the full costs and benefits of economic transactions.  The environment is a classic case.  For example, industrial activity, citizens' use of motor vehicles and many other things have adverse effects on the environment that industrialists and citizens do not pay for unless the goverrnment imposes a tax.  The polluter should pay for his pollution. 

This applies at the local, national and international levels.  A carbon tax should be applied to reduce the global warming induced by the use of carbon-based energy.  The sad reality is that governments are not doing their job.  Many polluters do not pay, or do not pay much for their pollution.  Some are even subsisided to pollute!  Certain groups who would have to pay such taxes lobby our governments against imposing them.

Education is an example of where the benefits to society exceed the benefits to the individual.  This calls for government investment in education, since we are all benefiting from the fact that our fellow citizens are educated.  But again, governments are not doing their job well enough, as evidenced in the low levels of education performance in many countries.

Economists call the above examples externalities.  A related concept is the public good which markets would not provide at all even though the social benefits of these good exceed the costs.  Unlike for private goods, consumption of the public goods does not reduce its availability for other citizens.  Also, we cannot stop citizens from consuming a public good. 

The classic example is law and order.  Once provided, it is there for everyone, and no-one can be stopped from enjoying it.  But again, governments are not doing their job very well at any level.  Too many of our cities are unsafe.  In certain regions, piracy is rampant.  And at the international level, we are still far from safe from terrorism.

Another example of a public good is stability of the financial system.  And just as rapid financial innovation required closer government supervision and regulation, it was wound back by due to lobbying from Wall Street.  It does not help when some of the leading regulators are Wall Street old boys, while some of their young staff are looking for a juicy job on Wall Street.

Most economists are not market fundamentalists, even if they observe that government failure is just as common as market failure.  Economists, starting with the very distinguished Paul Samuelson, recognise the desirability of a mixed economy -- an economy where both markets and governments have a role to play, most especially to correct for market failures, externalities and public goods.

For globalization to be sustainable, we must move to a mixed globalization where intergovernmental co-operation actively and effectively corrects the many market failures in global markets, especially for the environment and financial markets.

As I was preparing this note, I came across an interesting article by Nobel prize-winning economist Amartya Sen inspired by his participation in a sympsoium organised in Paris by French President Nicolas Sarkozy and former British Prime Minister Tony Blair.  While the symposium was entitled "New World, New Capitalism", Sen wonders whether the term capitalism is of particular use today.  The prosperous "capitalist" countries all have public sectors which provide unemployment benefits, pensions, education, health care, transport services etc.  In other words, we have always had a mixed economy.

Sen also goes on to salvage the reputation of Adam Smith who is widely believed to be a supporter of the unfettered market.  Sen reminds us that the much-quoted but little-read Smith was very conscious of the shortcomings of the market.  "Smith viewed markets and capital as doing good work within their own sphere, but first, they required support from other institutions -- including public services such as schools -- and values other than pure profit seeking, and second, they needed restraint and correction by still other institutions -- eg, well-devised financial regulations and state assistance to the poor -- for preventing instability, inequity, and injustice."

Adam Smith was particularly concerned about the tendency toward overspeculation which "tends to grip many human beings in their breathless search for profits".  "Discussing laws against usury, for example, Smith wanted state regulation to protect citizens from the 'prodigals and projectors' who promoted unsound loans."

In short, the present crisis is fundamentally due to excessive faith in the market, and the removal of regulations, just when we needed them most to save us from market failures.

In this context, Sen concludes that "The present economic crises do not, I would argue, call for a 'new capitalism', but they do demand a new understanding of older ideas, such as those of Smith...".

Reference: "Capitalism Beyond the Crisis" by Amartya Sen.  The New York Review of Books.  Volume 56, Number 5.  March 26, 2009 -- www.nybooks.com   

 


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