ECONOMICS: by Colin TeeseNews Weekly
The taming of unbridled free market capitalism
, October 31, 2009
So far as the financial crisis and its aftermath are concerned, the internet is awash with views, speculation and advice from Northern Hemisphere experts about what happened, why and - most important of all - what are the longer term implications for the real economy that actually produces goods and services.
This writer is fortunate enough to have Patrick J. Byrne - also a News Weekly
commentator - to guide him through this maze towards the most telling and useful opinions. The content of this article relies heavily on having access to such background information.
It is still widely believed among the most authoritative policy-makers and opinion-formers in the Northern Hemisphere - most notably in the United States and Britain - that the global economy is basically sound and that, after a short period of minimal disruption, everything will return to what they consider "normal". These views are faithfully echoed in Australia.
In a challenging article in the McKinsey Quarterly
(July 2009), Ian Bremmer, who conducts his own political-risk consultancy, Eurasia Group, observes that corporate leaders and investors continue to act as though globalisation and its outriders still dominate, and will continue dominating the way the world is managed as the rich economies emerge from deep recession.
(The points Bremmer makes could certainly be directed towards Australian business. However, he is interested in a much broader and more influential sweep, encompassing most of what we regard as Western capitalism.)
As with most commentary one need not accept all of the assumptions underlying his views. Nevertheless he makes an important contribution to the debate.
It is Bremmer's view that the free and deregulated capitalism of the "Washington Consensus" variety made it possible for the West's already wealthy nations to accumulate even greater wealth. And, in a globalised free market economy, the economic benefits flowing from this arrangement were made possible only by the absence of political interventions.
The Western developed economies hoped that the emerging economic powers, Russia, China and India, would in time give up on tight political control over their economies. Bremmer has dismissed this as a misplaced hope. It made no sense to wait patiently for them to give up the idea of strong political direction and come into what he calls a "state of grace" with the West's free market model. At least for them, political control has delivered better outcomes.
There are, it will immediately be recognised, a number of fairly sweeping assumptions in this analysis - not least that free and deregulated economics in the West has delivered notably better outcomes; and that these have come about thanks to the absence of political interference.
Before taking issue with these opinions of Bremmer, it is worthwhile to spend a moment or two examining some of his further underlying assumptions.
Notwithstanding his commitment to free market ideology, he is convinced that the old orthodoxy has been definitively overturned. In the aftermath of the financial meltdown, governments all over the West are intervening in their respective economies. Bremmer readily concedes that this form of political intervention has been both inescapable and inevitable to ward off the possibility of social upheaval in the wake of a prolonged slump and unemployment.
He knows (and probably laments) the fact that these considerations have shaken the "true believer" faith of many free marketeers. But those issues aside, Bremmer believes that the emerging heavyweight economies, in setting their own course for economic development, have called into fundamental question prevailing free market orthodoxy.
For the emerging economies of Russia, China and India, the road to prosperity was plainly based upon the idea of public wealth, investment and enterprise. Western business, confident of its free market ideology, has picked up on none of this.Backward step?
More perceptively, Bremmer distils from all of this the beginning of an era of what he calls "state capitalism". For him, this is a backward step. Serving both political and economic aims, it cannot, by free market definition, maximise economic efficiency. And, of course, it arrests the march of globalisation.
He goes further: he believes that the new orthodoxy of state capitalism is already a driving force in economic affairs. Some 75 per cent of oil reserves are in the hands of state-owned companies. The 13 largest oil companies are state-owned; in 14th place is the biggest private company, Exxon Mobil.
China, India and Russia are in all of this up to their ears, and it goes beyond oil. It covers defence, power generation, telecommunications, minerals and aviation. These developments are built on the back of what we now identify as sovereign wealth funds (SWFs), huge government-owned funds, in the emerging heavyweight economies. Western developed economies are following suit and establishing their own SWFs.
Economic power is increasingly being aimed at national rather than global ends. Moreover, because this process is empowering the emerging economic heavyweights, it seems certain to disturb long-standing economic, political and strategic balances.
As these influences take firmer hold, there is a turning away from the cherished belief in the ideas of deregulation and free trade - not least in the US, which up to now had been the home of free market ideology.
Bremmer acknowledges that this shift in the West's behaviour is a necessary part of social stability programs in the face of rising unemployment. He believes, however, that this change will endure long after the world emerges from recession.
Bremmer's belief in the superiority of free market systems obliges him to hope that "state capitalism" cannot, and should not, endure. His main purpose is to warn business that it must, well into the future, contend with a world in which domestic politics exerts an ever larger, more restrictive, more unpredictable and enduring influence over business life. For how long he cannot say. There are many contributing influences, the precise impact of which cannot for the moment be evaluated.
Much of Bremmer's analysis, brilliant as it is, should not be allowed to pass uncontested. Many, including this writer, believe there is no evidence to support the view that deregulated free markets deliver the best economic outcomes.
In 2006, the Washington-based Center for Economic and Policy Research (CEPR), in a report entitled "The scorecard on development: 25 years of diminished progress", demonstrated otherwise. It compared the same countries' growth in the period 1960 to 1980 with that of 1980 to 2000, based on each country's purchasing power in the two periods. It showed that all income groups, except the poorest, were worse off in 1980/2000. Of the 175 countries surveyed, only China and India did better in 1980/2000. And they chose the "state capitalism" model. Free market circles dismissed the study, arguing it was impossible to measure and compare purchasing power across countries. But, of course, that argument cuts both ways. If gains or losses can't be measured, then that applies equally to statistical assertions made by free marketeers.
Thus, Bremmer's claim that free markets deliver better outcomes than "state capitalism" does not necessarily hold.
Other criticisms can also be made of unregulated free markets. We know that free market policies have delivered a huge shift in income distribution away from labour and towards capital. This shift - in combination with globalisation, free trade, free capital movement and unmanaged exchange rates - has so unbalanced the international economy that, two years ago, the world was taken to the brink of financial collapse.
No less fundamentally, a Minnesota agricultural bank economist, James Kielkopf, has aimed further criticism at Bremmer.
Kielkopf asserts that Bremmer's propositions about state capitalism only hold if you believe that the US is merely one nation state among many, rather than an imperial power with important economic, political and strategic interests to defend. If the latter is true, then the US's first consideration must be to defend those interests by whatever means are necessary and appropriate - regardless of whether or not it puts a particular economic ideology at risk.
Kielkopf points out that "private capitalism" - an issue of primary importance to the US -, has been "just a collateral victim" of the crisis. Defending it currently entails, on grounds that Bremmer himself accepts, large-scale state interventions in the economy to head off the possibility of social unrest.
If the rise of free market ideology is merely part of the political actions aimed at the preservation of the US overall strategic position, rather than - as Bremmer believes - a product of historical inevitability, then defending the purity of an ideology can never be an end in itself.
Whether consciously or not, the US seems to take that point. Right now, the Obama Administration's purpose - in the context of the US place in the world - is to ensure that private capital can continue to enjoy a comfortable and prominent place. If, given what is happening around them, the best way of safeguarding that objective is to embrace interventionist capitalism, then that must be done - regardless of what that means for free market ideology.
Thus, Kielkopf concludes, if massive Keynesian-type interventions are needed to help the US to recover from recession, then that is what must be done - as is the use of various international institutions, such as the World Trade Organisatioin, to compel other states to fall into line with its intentions relating to trade flows and other efforts to rebalance the world economy.
In the present context, such policies seem to be the only sensible alternatives - if only because they can be accommodated within the framework of what is happening in what Bremmer calls the "emerging heavyweight economies".
Sitting here watching from the other side of the world, one ponders an interesting question. What kind of reaction can we expect to all of this from our local brand of economic ideologues?Colin Teese is a former deputy secretary of the Department of Trade.