Balancing act: the state, the markets, the future.
This crisis does not mark the end of capitalism. But as we know, there are many different varieties of capitalism, from the more laissez-faire versions of the United States and Great Britain, through the middle-of-the-road versions found in Germany, France, Canada and Australia, to the social democratic versions of Scandinavia and on to the stateled capitalism that accounted for the rise of Japan, Korea and Taiwan and that, in various forms, is now being followed by China, Russia and Brazil, as well as the resource-rich economies of the Gulf Cooperation Council.
This debate, of course, is not new. In 1997, John Kenneth Galbraith delivered the first annual Keith Davey Lecture at Victoria College in Toronto, in which he examined both the strengths and weaknesses of capitalism. Despite its flaws, capitalism, Galbraith said, had clearly delivered a productive and innovative economy capable of creating goods and services in abundance. In the world that exists, he continued, "there is clearly no plausible alternative. The age of presumed choice between alternative economic systems is over" But that did not mean turning the world over to free market zealots. Indeed, it is through the efforts of what he called "the socially concerned" that capitalism has survived.
"Capitalism in its original form was an insufferably cruel thing," said Galbraith. "Only with trade unions, the protection of workers and workers' rights, pensions for the old, compensation for the unemployed, public health care, lower-cost housing, a safety net, however imperfect, for the unfortunate and the deprived, and public action to mitigate capitalism's commitment to boom and slump did the market become socially acceptable." Yet since the Thatcher-Reagan revolutions and the ascendancy of free market zealotry, there had been an incessant effort to undo these reforms in the name of returning everything to the market.
Richard Posner, a highly respected Court of Appeals judge in Chicago, has been closely associated with the free market school that represents the core of the University of Chicago's faculty of economics. In his latest book--The Crisis of Capitalist Democracy--he reveals himself to be a strong Keynesian, observing that Keynes is constantly attacked by free market, small government conservatives in the United States (this is true in Canada as well). Posner dismisses the theories of rational expectations and efficient markets, each of which is used to justify light regulation and free market capitalism.
Keynes gave us the theory that explains the business cycle and how government can ameliorate its excesses. He taught, Posner says, "that there is more that government can do to arrest a downward economic spiral than just pushing down interest rates. It can offset the decline in private consumption in a recession or a depression by increasing public investment. When we say that the government builds highways, we mean it buys highways from private contractors." The more it buys, the more investment, income, output and employment are enhanced. The stimulus packages in the recent crisis are Keynes's grandchildren, as Posner remarks.
Posner makes it clear that he, like Galbraith, believes in capitalism. "But capitalism is not a synonym for free markets," Posner says. "It is the name given to a complex economic system with many moving parts." It includes not just buying and selling and investing and borrowing but also "a system of laws for protecting property and facilitating transactions, institutions for enforcing those laws, and regulations designed to align private incentives with the goal of achieving widespread prosperity." But, he insists, "if the regulatory framework is defective, it must be changed, because competition will not permit businessmen to subordinate profit maximization to concern for the welfare of society as a whole, and ethics can't take the place of regulation."
Although Posner does not use these words, this is the role of the state--to address the flaws of capitalism and ensure that the wider goals of society are being achieved. Business, as we have seen repeatedly in Canada, will fight policies that are clearly in the public interest but that force business to change practices or products. Current examples include the urgent need to deal with climate change and, in public health, to seriously reduce the use of salt and sugar in processed foods and fast food restaurant meals. Leaded gasoline, CFCs and tobacco have all led to pitched battles in the past. Laissez-faire or free market capitalism will not address these issues.
The private banking system, a key part of the capitalist world, is inherently unstable, Posner argues, and if it fails it can bring down much of the rest of the economy with disastrous consequences. "That is one reason a capitalist system cannot consist of just free markets." In Canada, for example, we need the Bank of Canada and the Office of the Superintendent of Financial Institutions, with effective regulatory powers and oversight, to keep the banking system working, as they showed they could in the recent crisis.
In the U.S., Posner argues, the root of the financial collapse in September 2008 was "a failure of regulation, compounded of unsound monetary policy and deregulation, nonregulation, and lax--excessively permissive--regulation of financial intermediation." Financial markets, it turned out, were not self-regulating but this view had become orthodoxy as a result of policy capture by free market ideologues. Yet as Posner argues, "if the consequences of a firm's bankruptcy for the economy are catastrophic, it is government's responsibility to force the firm to take fewer risks than are in the firm's self-interest to take. It is no different from forcing a polluting enterprise to reduce its polluting at the cost of sacrificing some profits"
Posner believes that major changes are necessary in the way the capitalist system functions. But, if the U.S. is also to address its growing burden of debt, the necessary changes "may be especially painful and difficult because of features of the American political scene that suggest that the country may be becoming in important respects ungovernable. The perfection of interest-group politics seems to have brought about a situation in which, to exaggerate just a bit, taxes can't be increased, spending programs can't be cut, and new spending is irresistible" One reason for this is that "campaign contributions--insulated in the name of the Constitution by a conservative Supreme Court from effective limitation--make the legislative system one of quasi-bribery"
Joseph Stiglitz, a Nobel Prizewinning economist, offers his own sharp critique of free market thinking in his latest book, Freefall: America, Free Markets and the Sinking of the World Economy. He underlines the importance of government in the economy, including the importance of having a vision. Stiglitz reminds us that "the big question in the twenty-first-century global economy is, what should be the role of the state?" For him, the answer is fairly clear: the state should combine social justice, opportunity and equity or fairness with the market's power for innovation. The question is how to strike the balance--a heavy-handed state will squash innovation and investment while a light-handed state will fail to constrain the excesses of the free market economy or ensure that prosperity reaches all. The role of the state should include maintaining full employment and a stable economy, promoting innovation, providing social protection and insurance, and preventing exploitation, Stiglitz argues.
In other words, we need to create what Stiglitz calls "a New Capitalism" based on new levels of trust between the financial community and the rest of society, and on a new level of trust in the workings of democratic institutions and government. But this comes back to restoring political institutions and political life. The political influence of special interest groups makes "rational policy making all but impossible," Stiglitz contends. In the U.S., campaign finance and powerful lobbying have ended serious political debate on the public interest in favour of advocacy for the private interests of the powerful and wealthy. Fortunately, in one of his final pieces of legislation, Jean Chretien brought in political financing rules that sharply curbed the use of big money in Canadian politics.
For Tony Judt, the late British-born historian who lived in New York, the seeds of the economic crisis were planted well before it hit; he argues in Ill Fares the Land that "for thirty years we have made a virtue out of the pursuit of material self-interest." Since the 1980s, he argues, western society has been obsessed with wealth creation, "the cult of privatization and the private sector," ignoring growing inequality. Above all, he contends, we have been obsessed by "the rhetoric which accompanies these: uncritical admiration for unfettered markets, disdain for the public sector, the delusion of endless growth"
But, Judt says, "we cannot go on living like this" The crash of 2008 "was a reminder that unregulated capitalism is its own worst enemy: sooner or later it must fall prey to its own excesses and turn again to the state for rescue. But if we do no more than pick up the pieces and carry on as before, we can look forward to greater upheavals in years to come" The problem, though, is that "we seem unable to conceive of alternatives" For much of this short book, Judt traces how the Left lost its way and why the great role of social democracy in the 20th century has largely dissipated in the face of the battle for minds waged by neoconservatives in championing the role of free market capitalism and the notion of government as the problem.
He blames the breakdown in support for collective goals and community on both the Left and the Right. In the 1960s, he argues, baby boomers entering university had only known a world of improving living standards, access to medical services and education, a sense of upward mobility and, above all, a sense of security. "The goals of an earlier generation of reformers were no longer of interest to their successors. On the contrary, they were increasingly perceived as constraints upon the self-expression and freedom of the individual" The transition from a society with shared goals and interests to a world of individualism was well underway.
The tragedy today is that the new generation appears to be taking the next step--distancing itself from political life altogether, so that democratic institutions and attention to broad social problems, such as the growth in inequality and problems of poverty, the need for public goods such as education and a clean environment, and a more acceptable form of globalization are neglected until an even bigger crisis emerges. Yet, as Judt stresses, elections are "our only means for converting public opinion into collective action under law." The challenge is to restore faith in our political institutions.
In some important respects, as Judt shows in a series of graphs, Canada has produced a better society than either of those centres of free market capitalism, the United States and Great Britain. We have a better rate of social mobility--the ability of people to move out of poverty--than the U.S. or Britain. We have a fairer society in that income inequality is not as great. And we have longer life expectancy, which is probably the best marker of a country's overall performance. In addition, Canadian schoolchildren perform better than their American counterparts. Americans have a higher per capita gross domestic product but that tells us nothing about how its wealth is distributed. To be sure, the Scandinavian countries, and especially Sweden, do better than we do. We do pay more in taxes than Americans, but we also get value. Knowing that all Canadians have access to public health care and other social measures is better than building a society of gated communities. More importantly, a strong social framework will make it easier to deal with the huge changes we face in the years ahead. It represents a form of social solidarity that underlines community at a time when the U.S. and Great Britain in particular have embraced an excessive individualism. We are not immune to that same pressure and conservatives would move us much further in that direction.
Canada has evolved with a different capitalism from the United States for a number of reasons. One may be that the origins of our political institutions are different. Parliamentary government evolved from the Crown, whose mandate was to act on behalf of the people. The American congressional system was founded on the fear of government, so, through intricate checks and balances, it was more difficult for government to act. Our history is also different. Canada has been engaged in a nation-building exercise from its inception--a nation of vast distances and a thinly spread population. When Canada was established in 1867 we had a population of only 3.5 million people, and even in 1945 we had just 12.1 million people. This has meant a different role for government, one where government was much more engaged in economic development, from transcontinental railways and electric power utilities to a national airline, a protected national banking system and support for the resource industries. Crown corporations--state capitalism--are a significant part of that story.
The notion of sharing was an important part of Canadian development, given our small population.
That has helped Canada remain a united country despite its vast space and distances and the temptation of the United States, and despite linguistic differences and the more recent mix of cultures. All of this has shaped our own form of capitalism and our own ideas on the role of the state. Although the differences should not be exaggerated, there is a Canadian approach that, I would argue, has served us well.
But there is no doubt that the emerging powerhouses among the BRICs--Brazil, Russia, India and China--are changing the global dynamic. This is why we have moved from the G7 to the G20, and this global shift of power is something we will have to get used to--even more so in the years ahead. Moreover, assuming the world is able to work its way out of the crisis (and this includes the U.S. dealing with its huge fiscal, political, social and environmental challenges) and we avoid the traps of protectionism and competing regional trade and currency blocs, then it will not be surprising if the role of Chinese state capitalism also diminishes.
The biggest test for market capitalism moving forward is outlined in Losing Control: The Emerging Threats to Western Prosperity, by HSBC chief economist Stephen King. Not only are some of the major western economies facing an extended period of fiscal austerity and stagnant incomes. But as the population and economies of the BRICs grow, these countries will put strong upward pressure on the price of food, energy and minerals so that workers on stagnant incomes and seniors and others in the West on flat incomes may actually experience a decline in living standards.
It is not a happy prospect. Workers in the West will face a world of smaller income gains, pensioners will find life increasingly difficult, and western societies will be forced to sell assets to the BRICs and will lose control of many key industries, King argues. As for today's children, they will be forced to compete for the best jobs against graduates from emerging world universities and to pay high taxes to repay the debts of the current generation. Moreover, governments will have to pay more attention to redistribution; otherwise, popular support for open markets and trade--and other aspects of globalization--will wane, leading to a much uglier world.
Any move to protectionism and other barriers in an effort to defend western interest "might be a vote winner, but it would ultimately be a job-loser," King warns. The experience of the 1930s Great Depression makes that clear. We need the wisdom to recognize that the West will lose in a relative sense, but that is better than the entire world losing in an absolute sense, King concludes. But that means we really need to think through the role of the state and how to make capitalism work for all.
Increasing the risk of protectionism and a slower economic recovery is the emerging threat of a sovereign debt crisis in the western world. In the early 1980s a debt crisis in the developing world sprung forth. In 1997 the Asian financial crisis hit the world, spilling over into Russia and South America and leading to the establishment of the G20 in 1999. Now, we see signs of a rich-world sovereign debt crisis, as a succession of governments face huge fiscal deficits. These have been triggered by the need to respond to the recent financial crisis with rich stimulus packages that led to massive deficits, but this only accelerated a fiscal crisis that would have emerged in the not-too-distant future. The unravelling began in Ireland, spread to Greece and now threatens Spain and Portugal. Greece had to be rescued by its Eurozone partners since it could not raise new funds in financial markets. At the same time, Britain's new coalition government has been forced to embark on what may be the harshest dose of austerity ever experienced by the British in peacetime, with the risk of civil disorder, while Japan's latest government has been forced to recognize that its huge public debt and rapidly aging society will require truly tough measures to correct.
This leaves the United States, where a large budget deficit is sending the debt level soaring while rising costs of social security and health care mean the deficits and accumulating debt could increase through much of the next decade. The U.S. Congressional Budget Office estimates the fiscal deficit in 2010 will equal 9.2 percent of GDP (compared to 3.1 percent in Canada), and this follows a deficit equivalent to 9.6 percent of GDP last year. Moreover, the U.S. has depended on foreign government and other foreign entities to finance 48 percent of its US$8.8 trillion of debt, and this dependence will continue.
The uncertainty arising from the risks of a sovereign debt crisis will make financial markets more skittish, put upward pressure on interest rates, slow the recovery, generate more speculation on the future of the U.S. dollar, risk increased protectionism and make it harder for poorer countries to raise the capital they need. As the U.S. increases its foreign borrowing, it must also increase its payments to foreign creditors. If the U.S. fails to deal with its economic challenges, the fallout would be especially hard on Canada, with new barriers to trade, slower U.S. growth and a collapsing U.S. dollar.
Even without a U.S. fiscal and currency crisis, for Canadians the question is where our country will fit in this difficult new world. What we can say is that it will not be easy. The nature of international competition will become more intense, and Canadians will have to fight much harder for jobs and investment. There will be a continued role, although evolving, for the state in enhancing the knowledge-based economy--research and development, infrastructure, risk sharing in advancing new technologies, education and skills development, and finance. This will not be laissez-faire capitalism or state capitalism but something in between. Social policy will present new challenges. The losers in economic transformation need assurances they will have a place in the future world. Income inequality will be a major challenge, as will dealing with an aging society. We will face both costs and opportunities in dealing with climate change and transforming our energy systems.
The most difficult and crucial decisions will be political. It is in Parliament where we will make the spending choices, design the incentives to ensure that market decisions deliver broader social benefits, pass the laws through which we govern ourselves and determine the nature of the country. Today, too many Canadians look upon Parliament and politicians with disdain. Bright people who are needed in our political life are not participating. Politics has been hijacked by its ugly side of negative advertising and opportunistic actions. At a time when we must grapple with a scale of world change never experienced before and must redefine the future role of the state, our politicians are missing in action. But reinvigorating our political life is our most urgent challenge as we navigate a very different but nonetheless capitalistic world.
David Crane is a journalist with a strong interest in political economy and globalization. He can be reached at <email@example.com>.
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|Publication:||Literary Review of Canada|
|Date:||Sep 1, 2010|
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