A dose of common sense for the crisis in capitalism

by Kevin Rafferty

HONG KONG — The global economic turmoil has sparked international debate over whether we are witnessing the death throes of capitalism or signs that a “new capitalism” needs to be devised. French commentators have gloated over the end of the Anglo-Saxon way of doing business, citing the need for the state to play a bigger guiding role.

The worrying thing about the state’s guiding hand is that too often politicians, and sometimes bureaucrats, have made spectacularly poor choices. The British motor industry, and the Anglo-French accord on supersonic airliners, offer excellent examples of how easy it is to throw pots of money at hopeless causes.

Even postwar Japan has had its failures: If bureaucrats had had their way, Toyota would probably not have had the opportunity to challenge Nissan, let alone General Motors and Ford.

It should be a matter of grave concern that since the global crisis erupted, vital policies are being made hand to mouth, often by politicians thinking in slogans rather than about the repercussions of their actions. Americans particularly might stop to ask two disturbing but pertinent questions: Has the administration become too close to Wall Street? Has Congress become captive of special interests?

Another worrying factor is that academic economists who have spent years searching after truth, however uncomfortable, have been sidelined. Paul Krugman has a regular column in the New York Times, and Joe Stiglitz gets quoted here and there, but they are voices crying in a wilderness against mainstream policies.

Former International Monetary Fund chief economist Simon Johnson, now back in academia, has admitted that “Most economists suffer from the antiquated belief that if we can just figure out exactly what went wrong, policymakers will beat a path to our door to ask our help in enacting necessary reforms. Unfortunately, the world no longer works that way.”

His followup comments illustrate the skepticism of leftist economists: “Our corrupted government, our criminal business and banking institutions, lobbyists, special interests, and the corporate-controlled media are not interested in fixing this problem. They are making trillions of dollars through a vast scheme that transfers wealth from ordinary American taxpayers and consumers to their corrupt coffers.”

If policymakers want to understand the implications of their slogans rushed into law, they would be well advised to talk with Amartya Sen. The Harvard Nobel Prize winner holds the unique distinction of having been a professor in his native India, at the London School of Economics and at Oxford University, and at Cambridge, where he was the first Asian master of Trinity College.

He told me that when he was having difficulty getting an American hotel to understand the spelling of his name, he resorted to a phonetic explanation — “S for someone, E for everyone, N for no one.” It is a good summary of Sen himself.

Sen believes there is a need for fresh ideas about changing the organization of society that reach beyond the immediate task of dealing with crisis. In some ways it is more important to have a long-term plan at the same time as tackling the crisis since palliative measures may conflict with longer-term needs.

Having distinguished himself across a broad spectrum of economic theory and practice, from mathematical and statistical to philosophical, social and welfare economics, he has a much better grasp than most economists of the nexus between economics and the real world.

In recent discussions, including an important article in the New York Review of Books, Sen addresses these seminal questions, including whether capitalism should be discarded.

He defends Adam Smith, and suggests that John Maynard Keynes and his Keynesian policies are insufficient to deal with the current crisis. Sen points out that Smith did not rely on the virtues of markets alone.

“Smith viewed markets and capital as doing good work within their own sphere,” he said, “but first they required support from other institutions — including public services such as schools — and values other than pure profit-seeking. Second, they needed restraint and correction by still other institutions — such as well-devised financial regulations and state assistance to the poor — for preventing instability, inequity and injustice.”

He also cites Smith as insisting that the essential for markets to operate properly is trust: “Historically, capitalism did not emerge until new systems of law and economic practice protected property rights and made an economy based on ownership workable.

“Smith called the promoters of excessive risk in search of profits ‘prodigals and projectors’ — which is quite a good description of issuers of subprime mortgages over the past few years. Discussing laws against usury, for example, Smith wanted state regulation to protect citizens from the ‘prodigals and projectors’ who promoted unsound loans.”

The quote from Smith calling for regulation is prophetic: “A great part of the capital of the country would thus be kept out of the hands most likely to make a profitable and advantageous use of it, and thrown into those (hands) most likely to waste and destroy it.”

Sen also argues that the oft-quoted Keynesian economics does not offer a sufficient solution to the present crisis, which is marked not only by a massive downturn and reduced incomes for the poorest people in society, but also by a crisis of confidence exacerbating the credit crunch.

He suggests that Keynes’ great rival at King’s College Cambridge, Arthur Cecil Pigou, has more relevant contributions from his work on economic psychology and the ways it can sharpen and harden a recession. Pigou looked at the “psychological causes” or “variations in the tone of mind of persons whose action controls industry, emerging in errors of undue optimism or undue pessimism in their business forecasts.”

The conclusion of Sen is that “new capitalism” is not necessary. What is necessary is a better understanding of old ideas and a clearheaded perception of how institutions actually work, and how smoothly market and state organizations can work together to produce a more decent economic world.

The point of all this is that politicians are likely to blunder and make things worse if they don’t take better advice. It is time for a dose of Sen and his common sense.

Kevin Rafferty is editor in chief of Plain Words Media, a group of journalists specializing in economic development issues. He previously was in charge of Asian coverage for the Financial Times.