The extended recent recession and slow economic recovery has raised serious questions about the viability of our western style of free market capitalism.
Angel Gurria, Secretary General, Organisation for Economic Co-operation and Development (OECD) contends “We failed as regulators, we failed as supervisors, we failed as corporate governance managers, we failed as risk managers, and we also failed in the allocation of roles and responsibilities for international economic organisations.”
Gurria says there was also the philosophy that markets needed to function with the least possible government intervention. But that did not mean that they could work without any intervention at all. He contends we also need to "go social" and focus on innovative policies to protect the most vulnerable.
Chandran Nair, founder of Hong-Kong based think tank Global Institute For Tomorrow argues “The extreme form of capitalism which has permeated the world, particularly in the last 30-40 years, is in deep trouble and we are in denial.” He says it is important to understand that fundamental principles of capitalism - that human beings are rational and markets behave rationally, and that markets will assign prices - are flawed.
A fundamental issue that the world will have to recognise, and which Western capitalism has conveniently ignored, says Nair, is that the goods and services which companies and economies seem to thrive on are based on under-pricing resources and externalising costs.
“That game is over and we need a fundamental restructuring - essentially about how people will live, and we need to move beyond simple notions about growth to more sophisticated, nuanced discussions about human progress,” Nair argues.
Tim Jackson, author of Prosperity without Growth - economics for a finite planet, contends “Every society clings to a myth by which it lives. Ours is the myth of economic growth. For the last five decades, the pursuit of growth has been the single most important policy goal across the world. The global economy is five times the size it was half a century ago. If it continues to grow at the same rate it will be 80 times that size by the year 2100.” The problem is, says Jackson, “this extraordinary ramping up of global economic activity is without historical precedent. It is totally at odds with the finite resource base and the fragile ecology on which we depend for survival.”
Western capitalism is structurally reliant on growth for its stability. When growth falters - as it has done recently - politicians panic. Businesses struggle to survive. People lose their jobs and sometimes their homes. Questioning growth is deemed to be the act of lunatics, idealists and revolutionaries.
But economic crisis presents us with a unique opportunity to invest in change, Jackson contends: “ To sweep away the short-term thinking that has plagued society for decades. To engage, for instance, in a radical overhaul of dysfunctional capital markets. Untrammelled speculation in commodities and financial derivatives brought the financial world to the brink of collapse just three years ago. It needs to be replaced by a longer, slower sense of capital. Fixing the economy is only part of the battle. We also have to confront the convoluted logic of consumerism. The days of spending money we do not have on things we do not need to impress people we do not care about are over.”
Bob Burnett, in an article “5 Reasons Capitalism Has Failed,” in the Huffington Post presents this gloomy picture: “The global economy is splintering. U.S. voters hate all politicians and there's political unrest throughout the world. The root cause of this turmoil is the failure of the dominant economic paradigm -- global corporate capitalism. The modern world is ruled by multinational corporations and governed by a capitalistic ideology that believes: Corporations are a special breed of people, motivated solely by self-interest. Corporations seek to maximize return on capital by leveraging productivity and paying the least possible amount for taxes and labor. Corporate executives pledge allegiance to their directors and shareholders. The dominant corporate perspective is short term, the current financial quarter, and the dominant corporate ethic is greed, doing whatever it takes to maximize profit.”
Burnett identifies 5 factors which are responsible for the failure of global corporate capitalism:
Sara Robinson, writing in The Huffington Post, argues “The problem, in a nutshell, is this: The old economic model has utterly failed us. It has destroyed our communities, our democracy, our economic security, and the planet we live on. The old industrial-age systems -- state communism, fascism, free-market capitalism -- have all let us down hard, and growing numbers of us understand that going back there isn't an option.
But we also know that transitioning to some kind of a new economy -- and, probably, a new governing model to match -- will be a civilization-wrenching process. We're having to reverse deep and ancient assumptions about how we allocate goods, labor, money, and power on a rapidly shrinking, endangered, complex, and ever more populated planet. We are boldly taking the global economy -- and all 7 billion souls who depend on it -- where no economy has ever gone before.
Robinson suggest a number of paradigm shift concepts that may revolutionize our economic system and transform capitalism:
Nouriel Roubini, , a professor at New York University,writing in Forbes magazine, argues “It is now clear that this is the worst financial crisis since the Great Depression and the worst economic crisis in the last 60 years. This severe economic and financial crisis is now also leading to a severe backlash against financial globalization, free trade and the free-market economic model. While this crisis does not imply the end of market-economy capitalism, it has shown the failure of a particular model of capitalism. Namely, the laissez-faire, unregulated (or aggressively deregulated), Wild West model of free market capitalism with lack of prudential regulation, supervision of financial markets and proper provision of public goods by governments.”
Nouri says it is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed. It relied on several factors: self-regulation that, in effect, meant no regulation; market discipline that does not exist when there is euphoria and irrational exuberance; and internal risk-management models that fail because, as a former chief executive of Citigroup put it, when the music is playing, you've got to stand up and dance.
Burnett sums up the problem we face well by contending “To survive the coming era, we need to re-imagine what constitutes wealth and well-being and what constitutes poverty. This doesn't mean telling the destitute not to hope for decent housing, adequate food, and some chance at education, as well as some pleasures and power. It means paring back on the mad consumption machine that has been the engine of the global economy, even though what it produces is often enough entirely distinct from what's actually needed.”
Whatever may be the formula for change, some radical change is needed to our Western style of capitalism, which has clearly failed us. Tinkering with the current system won’t do it.