Rethinking the Market Economy

New Challenges, New Ideas, New Opportunities

J. Lambin

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137392916
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

This book explores the changing socio-economic and technological landscape of the 21 century and what it means. It adopts an industrial economic approach, whilst proposing a road map leading to the adoption of a 'societal market economy' model as an appealing and politically acceptable third-way between capitalism and socialism.

1

The Market Economy System in Question

The 2008 economic crisis has triggered a flow of articles and books predicting the end of the market economy system and recommending an exit from the capitalism, allegedly accountable not only for the current economic and financial disaster, but also for the destruction of the environment, the deepening of income inequalities and the consumption society’s materialism. The crisis has shaken public trust in the market economy and several economists¹ believe that, to drive recovery, new models of capitalism must be embraced. Will society maintain the individualistic business model of capitalism that created the crisis with recurring structural public deficits, excessive rewards for bankers and traders, costly bailouts for the banks and austerity for the people, or will society develop and implement a new balance between state, business and society? How can the capitalist system be amended and economic mutations adopted without altering its core principles? Several economic and social changes are currently taking place in the world and in the European economy as a consequence of the economic crisis. This subject is today a worldwide debate.

The main flaws and challenges of traditional capitalism

The forces and the flaws that threaten the market economy arise within a complex and dynamic socio-political system which generates positive and negative feedback loops.² Some consequences, positive and negative, are generated by the market system, while others arise from external sources.

Fragility of the financial system

The 2008 financial crisis has showed that when financial flows are unmanaged and unregulated, consequences can be devastating for the economy. What the financial crisis has revealed is the decoupling between the international financial world and the real economy. Does the financial system create value for those working in the real economy or does it function in a closed world, only to the benefit of speculators, traders or shareholders?

Decline of industrial capitalism

Industrial capitalism generating endless material growth is incompatible with the long-term viability of the planet and is bound to decline, as natural resources are increasingly scarce. The role of intellectual resources becomes fundamental. To the creation of value through material production is added the creation of value through the production of knowledge. There is no limit to knowledge in the production of wealth, as it relies on imagination, creativity and the development of new technologies. But the change is not obvious.

Environmental degradation

Industrial growth is associated with environmental degradation, the deterioration of the environment through depletion of resources such as air, water and soil, the destruction of ecosystems and pollution. Sustainable development and a green economy are the only options to reverse the environmental degradation. Corporations have to redefine their product concepts and their business practices in a way that could improve the functioning of a sustainable market economy.

Vulnerability of global trade

The collapse in international trade during the 2008–9 crisis is exceptional by historical standards. Relative to economic activity, the drop in global trade of 2.8 per cent is an order of magnitude larger than that observed in the previous post-war recessions, with the exception of 2001. The collapse appears to be broad-based across trading partners. Trade with virtually all parts of the world decreased by a similar order of magnitude,³ but the market share of developing economies is growing.

Asymmetry among capitalist economies

Increasing poverty, unemployment and inequality rates challenge the optimistic idea that economic growth benefits all. Implementation of the capitalist system in the world is asymmetric: some countries have opted for a type of “cutthroat” market capitalism that generates greater inequality, but more innovation, and creates technology leaders, while others free ride on the cutthroat incentives of the leaders and choose a more “cuddly” form of capitalism aiming at improving quality of life. Paradoxically, those with cuddly rewards structures, though poorer, may have higher welfare than cutthroat capitalists.⁴

Pitfalls of global capitalism

The International Monetary Fund (IMF)’s thrust for capital-market liberalization for all nations was driven by financial-market ideology. This dictum held that all countries should open their markets to trade, direct investment and short-term capital, as quickly as possible. Many developing nations were not prepared to assimilate this change. Even the IMF now warns that a high degree of openness to global capital can be dangerous. Some countries face such immense challenges that it could take a decade before they benefit from the lifting of trade and financial barriers.

Failure of the rule of law

The rule of law implies that every citizen is subject to the law. It stands in contrast to the idea that the ruler is above the law. The rise of corruption, tax evasion, political dictatorship and expropriation in some parts of the world make it difficult to operate a market economy that respects property and human rights and upholds contracts. When bribes rather than competition determine winners, investments in innovation are discouraged. Radical movements, terrorism and wars undermine peace and security and disrupt the system.

Rise of state capitalism

State capitalism designates a market economy system where the state controls the majority share or the entire capital of so-called strategic enterprises. States embrace capitalism for their own political purpose in line with the national interests and for political gain. States are using markets to create wealth to maximize their power. To the extent that giant nations like Russia, China and India play by their own rules they have the potential to disrupt free market capitalism. Should industrialized economies reinforce the role of the state?

Inadequacy of institutions

Governments and existing international institutions are not able to deal with these challenges. What is missing is global or world governance. Global governance implies the political interaction of transnational actors aimed at solving problems that affect more than one state or region when there is no power of enforcing compliance.

International migration

International migration is both a cause and a consequence of an interconnected global world. About 180 million people worldwide live outside their country of birth. Future pressure for international migration will be great, driven by differences in demographics and real incomes between countries. These cross-border movements of population tend to trigger protectionism and anti-immigrant political reactions. The major issues surrounding international migration are how countries can be helped to adapt to large-scale migration, and how its global and local development impact can be improved.

For many years, under the stewardship of the USA and the domination of American industries, the simplified formula was “free-market capitalism plus democracy”. The question raised by David Rothkopf⁵ is whether or not this model is still relevant in the twenty-first century. Are there other models better adapted to the new economic situation created by the international crisis? Will it be state capitalism with Chinese characteristics? Will it be the democratic development capitalism of India and Brazil? Will it be the entrepreneurial small-state capitalism of Singapore and Israel? Will it be the stakeholder capitalism of Germany and the Scandinavian countries? Will it be the European safety-net capitalism of France and of southern European countries or Obama’s American capitalism? Will it be the popular capitalism recently promoted by the UK Prime Minister David Cameron?⁶ Each of these models has distinctive characteristics, which have instructive value for this debate.

The seven pillars of the capitalist system

The in-depth comparative analysis of the different capitalism models prevailing in the world economy shows that the capitalist system can indeed take diverse expressions, but that several permanent characteristics exist and are observed in every capitalist model.⁷ I call them the pillars of capitalism. The seven pillars are:

1. entrepreneurship and innovation,

2. private and legitimate ownership of production means,

3. objective of market needs satisfaction,

4. freedom of choice for consumers,

5. privatization of profits,

6. existence of a social security net for the workers,

7. active presence of the government.

Country by country within the world, cultural and legal differences exist in the implementation of those principles, and in particular of the last two, but these differences do not deeply affect the ideological foundation of the capitalist system. For example, the intensity or extent of the social dialogue and protection varies country by country, but it nevertheless sanctions the idea that a social security net is the indispensable complement of any economic activity. Among the EU28, with the exception of the UK and of Poland which have opted out, the European Social Charter is the reference framework for harmonizing the social protection systems. Similarly, the capitalist system implies an active role for nation states, not only as protectors of the common interest and as a welfare state, but also as catalysts of social and economic development. Large differences exist among countries, but governments are always present.

The European Union

The European Union (EU) has the largest, wealthiest economy in the world and is the world’s first trade power. Trade within the EU accounts for more than one third of the world total. The EU economy is expected to grow further over the next decade as more countries join the Union – especially considering that the new states are usually poorer than the EU average, and hence the expected fast gross domestic product (GDP) growth will help achieve the dynamic of a united Europe. The European Union or EU28 is a supranational union of 28 European states, the most recent acceding members being Romania and Bulgaria, which became full members in January 2007, and Croatia, in 2013. It has many functions, the most important being the establishment and maintenance of a common single market, consisting of a customs union, a single currency (adopted by 17 of the 28 member states), a Common Agricultural Policy and a Common Fisheries Policy. To create the single market, the European Commission also undertakes various initiatives to co-ordinate activities of the member states. The EU has evolved over time from a primarily economic union into an increasingly political one. This trend is highlighted by the increasing number of policy areas that fall within EU28 competence: political power has tended to shift upwards from the member states to the EU Commission and the EU Parliament. Since 2008, prolonged economic pain has started to erode confidence in the idea of a unified continent and in the benefits of membership.⁸ This disillusion effect is probably caused by the lack of coherent political and strategic vision among the member states. The official entry of Croatia to the EU in July 2013 and the confirmed candidacies of Serbia and Turkey suggest that the attractiveness of the EU is still very strong.

The capitalist system cannot be circumvented

Despite the shortcomings of the capitalist system, one must acknowledge that there is no real and credible alternative. F...

Table of contents

• Cover
• Title
• Contents
• List of Figures, Tables and Examples
• Preface
• Acknowledgements
• 1 The Market Economy System in Question
• 2 A Stabilized and Regulated Financial Market
• 3 A Sustainable Economy
• 4 A Green Economy
• 5 An Innovative Economy
• 6 A Global and Local Economy
• 7 A Knowledge-Based Economy
• 8 A Digital and Networking Economy
• 9 A Distributed and Collaborative Economy
• 10 A Social Economy
• 11 A Humanistic Market Economy
• 12 Happiness and Well-Being
• 13 State-Led Market Economy
• 14 Toward a Societal Market Economy
• Select Bibliography
• Index