The recent crisis in the financial markets marks the end of an unprecedented era of naive belief that free capital flows and unfettered markets are the cure for all the world’s ills. That the private sector was going to solve all problems, if only governments would get out of the way, forgetting that monopolies, greed, and abuses of all kinds can occur if those entrusted with managing people’s money and assets are not supervised and held accountable for their actions.  In so doing they falsely invoked the authority of Adam Smith[1], and they took the world, or at least the OECD countries, into the worst crisis since the great depression.   

 

But their positions were founded on a biased and inaccurate reading of Smith and the legacy of economic thinking, from Smith to Keynes. Keynes, of course, argued that well designed and well-timed government interventions could temper the worst impacts of the business cycle rather than exacerbate it. No, those advocating policies of trickle down, lower taxes and deregulation and reduced surveillance of the private sector all follow a political agenda, supported by some economists, and represented in the Washington consensus of the 1980s, and the thrust of the Reagan-Thatcher years to increase reliance on the private sector and reduce the role of government. If indeed those views had validity in the excessive regulation and red-tape that existed in the 1980s, pushing these same ideological arguments in western countries today is really to swing the pendulum much too far in the other direction. The results are clear in the unprecedented scale of the debacle of 2007-2008, some of whose consequences are still with us today.

 

Adam Smith was a visionary and incredibly perceptive person who correctly understood that the real wealth of nations was in the production of farmers and artisans and in the transactions of traders and not in the accumulation of gold and silver in the coffers of the king. He also recognized the value of the market mechanism referring to his now famous image of an “invisible hand”[2].

 

But Smith also recognized that public goods will not be produced by the private sector, and that the public must take on that responsibility for the benefit of the nation[3].

 

Finally, and perhaps most prescient of all, given the mess we are in with the banking and financial sector today, it is amazing to hear how he called for the proper regulation of the banking sector over 230 years ago. Adam Smith offered these powerful comments on the necessity of  prudential regulation of banking, even if it appeared to be a limitation on personal freedom, which he advocated and defended:

 

“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law, not to infringe, but to support.

 

“Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”

 

So let me challenge the assertions of those who claim to follow in Smith’s footsteps and want only to deregulate the private sector. Let me state the case for a new kind of globalization, one that would advance human welfare as it promotes sustainable development. 

 

“...exploitation of the world market [has] given a cosmopolitan character to production and consumption in every country. … All old-fashioned industries have been destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilized nations....In place of old wants, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations.”

 

Contemporary as they sound, these words do not come from the present. They are from Karl Marx and Friedrich Engels’ The Communist Manifesto of 1848. The pangs we are feeling today are remarkably similar to those felt in the industrial revolution two centuries ago. The question before us is whether we have learned from that experience to design a more humane way of dealing with the inevitable wrenching that accompanies such processes of change.

To avoid repeating the problems of the industrial revolution, we must harness the emerging universal values of our common humanity, and create a coalition of the caring.

 

We must recognize that the private sector will not take care of public goods, and that the public must remain engaged to deal with market failures and public goods.

 

We must change the calculus of our economics and finance, to internalize the full social and environmental cost of our decisions.  Some headway is being made on this at the local level, but we have certainly not even begun to introduce the global costs of local actions at the level of national policy.  Carbon emissions continue unabated and are factored as zero costs in investment decisions. We must rectify our national accounts that count a forest standing as zero and give it a positive value only if it is chopped down.

 

We should measure the growth in our capital stock not just the growth in the volume of our activities. We should be concerned with nurturing natural capital and building human and social capital as much as we are about economic growth.

 

All of that is possible. It will not diminish the vibrancy of the entrepreneurial spirit, but it will help make new investments environmentally friendly and socially responsible.

 

 

To respond to shocks and make effective use of new opportunities, governments must have effective action in some key areas:

 

First, real participation in global decision making: Problems today confront government beyond their borders. All governments need to collaborate in an effective international machinery of decision-making to take action against environmental problems and the chaotic structure of our markets and the multiple levels and overlapping jurisdiction that govern human action in the world of the 21^st century.

 

Second: credible macro-management of the economy. The preeminent role of government in setting and maintaining the proper macro-economic fundamentals is essential for any effective growth, as well for a well-functioning competitive economy. The costs of severe austerity measures in a period of limited or zero growth is felt primarily by the poor and destitute. It is that just balance that governments should seek to reach and maintain. It is something that requires judgment as well as political skill, but it is an essential part of designing sound policies for the future.

 

Third: flexible institutions.   The one common denominator of the global knowledge driven economy of the new millennium is the pace of change itself. The successful, competitive economies of the future, those that will be creating the jobs and the prosperity for their people will be the flexibility of their institutions. 

 

Fourth, facilitate the flow of knowledge and information. The future will require more access to open communications and information at a speed that will defy our current thinking and that will exceed most of what we can today imagine.

 

Fifth, investment in human and social capital. Education and health and nutrition of persons are a primary competitive asset as well as being the best investment that societies can make. For both equity and economy, it is essential. But equally important is to strive to build up the shared values, the legitimacy of the institutions of mediation in a society, for that is the essential glue that holds societies together and allows them to function. That is their social capital.

 

 

The capitalist system, the most creative and productive system devised by humanity, is still in need of a profound humanist critique. There are many people, this author included, who believe that the presence of hunger amidst plenty, and other social problems are NOT a necessary price to pay for the robustness of the economy. Many of us believe that the ruthless allocative efficiency of the market must be tempered by a caring and nurturing society.

 

There are those who still argue for “trickle down”… But, as John Kenneth Galbraith once said: “Trickle-down theory - the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.”

 

We need insightful critiques of the global markets of the post-modern knowledge-based capitalist society of the 21^st century which do not adequately recognize environmental, human and social capital. There is a real need for such a critique to redress the imbalances in thinking that would have us accept rising inequality, marginalization and poverty of the weak and even reduced economic growth and consumption, as an acceptable sacrifice to the altar of fiscal rectitude…

 

Regretfully that is what is advocated by those who still consider that the holy trinity of fiscal balance, trade balance and (where it applies) exchange rate balance are the essential goals, and who try to achieve them by a standardized recipe of deregulation, trade liberalization and privatization… They are carry-overs from the by-gone era of the so-called “Washington Consensus” and the Reagan-Thatcher policies of the 1980s.    

 

Today there are those – in the euro zone for example—who still argue that this vision of fiscal rectitude and debt rescheduling, should be pursued … even at the cost of unemployment rates that exceed a quarter of the labor force, and which among youth reach astronomical levels of over 50%, not counting those who got so discouraged by the long lasting character of this condition that they stopped looking for work, and therefore do not appear in the statistics.

 

 

 

I would like to ban the word “free markets” from our lexicon, because it has been misinterpreted in so many quarters. A totally “free market” is an invitation to predators. What we really mean is “competitive markets”. 

 

All competitive markets require an effective state apparatus behind them: property rights, binding contracts and effective judiciary to name but a few.  They also require surveillance and transparency with properly audited financial data. Insider trading is criminalized and prosecuted. Anti-trust laws to prevent monopoly are in place, and are enforced.

 

 

 

It is time to redesign the paradigm of international governance to introduce a more proper reflection of the power distribution of the world and the ethical representation of the inhabitants of the planet than that which was designed into the UN at the end of WW2. The G-20 is an improvement over the current distribution of the Security Council, but it is not an adequate substitute.

 

It is time that we recognize the needs of the planet, of environment, of sustainable development in a new framework for international decision-making which would take into account the interaction of human transactions with the global climate and our planetary and local environments.

 

It is time that we designed new goals for post-2015 that will ensure that the benefits of education, health and nutrition reach all the human family.

 

It is time that ethical views governed how we judge the policies we adopt, in full cognizance of their human and social impacts.

 

It is time to protect the advantages of the global and local “competitive markets” and nurture equity as much as innovation and entrepreneurship.

 

It is time that our top political and economic decision-makers act wisely to achieve all of that, in keeping with the words often addressed to jurists : “go forth unto the world and fashion those wise constraints that make people free”.     

 

Thank you.

 

 

 

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