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Monday, 22 August 2011

What is the future of capitalism?

"Doomed" says Roubini, in its place comes elementary economics:  
To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.

The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.

Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalized economy. The alternative is – like in the 1930s - unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.
As every A-level economics student knows the role of government is to minimise market failures, whilst minimising institutional distortions in policy design. This simple rule always gets us away from  ideology and back to basic economics. The government will always have a role to play in shaping markets because it is ontologically prior to the market. The challenge for the policy maker is to identify where government adds real value - very few would disagree that the areas identified by Roubin conform to basic economic steer, namely genuinely public good provision , fostering competition and ensuring long term stability through tackling inequality. You can read more Roubin via Project Syndicate

1 comment:

  1. To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.

    The real question then is - what is capitalism? If it is identified with monopoly capitalism and unrestricted laissez faire, then yes. However, monopoly capitalism is not the only form of capitalism.

    Most countries in the world have mixed economies. It are only the freetrade extremists who want to privatise everything.

    Most countries have public roads, a national postal service, state owned telcos, etc. At the same time, they have less restrictions on ownership of manufacturing, land, etc.

    However, even Japan, South Korea, etc. have privately owned family conglomerates, which have very strong state influence because of their importance to the national economy.

    The Japanese government bailed out Toyota back in 1973, as a consequence of which they could develop the Lexus, which Thomas Friedman then held up as the paragon of what the free market can do (see his book, "The Lexus And The Olive Tree"). No state intervention, no Lexus.

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