Monday, November 24, 2008

The New International System: The Role of Government

Free markets can be unscrupulously efficient, but unregulated free markets contribute to eco-degradation, starvation and most recently crises in the home, credit and financial markets. A post hoc review reveals that this global economic crisis was caused by doctrinaire conservative economic policies. The tremendous waste of capital can be traced back to the promiscuous lending of the world's central banks (adopted in 2001).

America has some of the freest markets in the world and this has helped to grow the US economy to 13.8 trillion dollars in 2007, one fifth of global GDP, but as we all know now, this market freedom can also have crippling costs.

These events have led Global Politician's Sam Vaknin (PhD), to ask if free markets are dead. "Three of the most important functions of free markets are: price discovery, the provision of liquidity, and capital allocation. In the last 14 months, markets repeatedly failed to price assets correctly. From commodities to stocks, from derivatives to houses, and from currencies to art prices gyrate erratically and irrationally all over the charts. The markets are helpless and profoundly dysfunctional: no one seems to know what is the "correct" price for oil, shares, housing, gold, or anything else for that matter. Disagreements between buyers and sellers regarding the "right" prices are so unbridgeable and so frequent that price volatility (as measured, for instance, by the VIX index) has increased to an all time high. Speculators have benefited from unprecedented opportunities for arbitrage. Mathematical-economic models of risk, diversification, portfolio management and insurance have proven to be useless. Inevitably, liquidity has dried up. Entire markets vanished literally overnight: collateralized debt obligations and swaps, munis (municipal bonds), commercial paper, mortgage derivatives, interbank lending. Attempts by central banks to inject liquidity into a moribund system have largely floundered and proved futile. Finally, markets have consistently failed to allocate capital efficiently and to put it to the most-profitable use."

Free markets may not be dead, but they appear to be under siege. Deregulation is the centerpiece of conservative economics and in the right place and time, deregulation can auger significant benefits. However, the recent dissapearance of over 20 trillion dollars is convincing evidence of the need for greater regulation.

Clearly we need to change our economic focus, we need a balanced approach to managing the myriad challenges we face. Although free markets are invaluable, during periods of economic crises, governments need to actively stimulate markets. A sensible system is one that combines free market democracy with elements of state-capitalism. This approach stops far short of state controlled production or indiscriminate use of capital.

Government investment in innovative commercially viable research and development projects like alternative energy could be worth trillions. This is both industry creation and job creation, just the kind of stimulus the economy needs right now. This would also enhance competitiveness well into the future. Through legislation, regulation and investment, governments can steward our economies without stifling them.

This new international system embraces the unalterable fact of globalization, while understanding that governments have an important role in defining acceptable business practices just as they have a role in legislating civil rights. Limiting unsound or unfair business practices is part of a governments primary mandate. Although corporate entities also have rights, they must be subject to enforceable standards which serve the wider society. Effective legislation and regulation can respect market pressures, while understanding that commerce exists within the context of human welfare.

With appropriate government stewardship, the economy can reflect our values and serve as an instrument of social change. In the wake of the proliferation of Green, we are witnessing the emergence of an ethical-economic world view. There is a growing sense that we can build a more socially responsible, sustainable economy where commerce can be an instrument of social justice.

1 comment:

Ron Robins said...

Very interesting thoughts. I make the case in my blog,
that the real change that has to take place is within our own minds. Seeking fulfillment from within, rather than wholly from the outer material world.

I believe in free-markets, but when everyone lacks inner fulfillment, greed rises to the fore. Central banks and governments lacking discipline in monetary and fiscal affairs also exemplify this point.

It is not that free markets are bad, but it is individuals without inner balance and poise that is at the root of our economic problems today!

Best wishes, Ron Robins