Free-market capitalism is on trial

There is a growing awareness in the rich world that most of the benefits of technology and globalization flow to people who own investible capital and to the well-educated, while the costs are borne by unskilled workers, local producers and people who have little property and savings.
The issue is said to be inherent in policies that extended the role of the free-market beyond 'sensible limits'. These are said to have undermined the essential bargain between labour and capital, and pushed those with few assets into precarious working lives. Rawer forms of capitalism have been identified as unsustainable if too many people do not have capital.
The end of the Bretton Woods period of capital controls in 1973 and the removal of trade barriers in the 1990s established the modern system of free-market globalization. At the same time, domestic policy, particularly in the United States and the United Kingdom, deepened the influence of the market on social life. There were restrictions on the activities of trade unions, deregulation in product and labour markets, and reductions in the size and role of the state.
Just a quarter-century ago, the debate about economic systems - state-managed socialism or liberal democracy and capitalism - seemed to have been settled. With the Soviet Union's collapse, the case was closed - or so it seemed.
Since then, the rise of China has belied the view that a state-led strategy will always fail, and the global financial crisis exposed the perils of inadequately regulated markets. And many free-market economies are suffering from growth slowdowns and rapidly rising inequality.
According to Zac Tate, economic strategist of the Hottinger Group (Capitalism is losing support. It is time for a new deal-published in Agenda weekly of World Economic Forum dated November 16, 2017) the financial crisis has led many to question the legitimacy of capitalism. The verdict, 10 years on, has not been favourable.
In an opinion poll by YouGov, three-quarters of German adults, two-thirds of Britons and over half of Americans believe that, "the poor get poorer and the rich get richer in capitalist economies".
Well-intentioned policymakers believed that the benefits and costs of free-market policies would be shared equally. That belief was found to be wrong because it elided the fact that many people own little more than their skills and their time, and the free-market doesn't guarantee a use for them.
Policies are said to have exposed people to the lottery of free-markets without giving them fair chances of improving their situation. Inequality has increased, and many people are unambiguously worse off. As a result, free-market capitalism is said to have been losing consent.
In this situation, demands for fairness have centered around two ideas. Either there must be a significant redistribution of wealth so that everyone has a fair stake in the economy. Or policymakers must reintroduce protections against market forces for those without the insurance of investible capital. Thomas Piketty, in his bestselling book Capital, advances the first solution; Dani Rodrik, in Straight Talk on Trade, promotes the second.
Each of these in the opinion of Zac Tate should be considered as parts of a new deal on capitalism. But, according to him, there is also a third strand that looks to the future and responds to the thirst for something new.
"It says that capitalism itself must be redesigned. Private enterprise and public policy need to be realigned to the creation of public value and this requires changing how we think about economics.
"That is the thesis of Mariana Mazzucato, who last month launched the Institute for Innovation and Public Purpose at University College London. Mazzucato claims that recent economic thought is out of touch with how capitalist systems actually produce value. While the rich discipline of economics is about much more than the ideal free market, its core models still formalize the idea that wealth is produced almost entirely by competitive private companies. This encouraged policymakers to advance free-market policies that overlook the importance of other institutions and stakeholders.
"Understanding capitalism, however, requires seeing that economies are embedded within social and political institutions. It involves studying the evolving networks between economic actors and identifying historical path dependencies."
Quoting an example, Zac Tate says this broader approach explains why in Germany automation has increased job security and globalization has increased employment. Legal pacts between workers' councils and employers since 1920 enshrine the practice of Mitbestimmung, which motivates business strategies that make machines compatible with workers instead of substitutes for them.
In 2016, together with Michael Jacobs, Mazzucato published Rethinking Capitalism, a collection of articles from distinguished thinkers who challenge the conventional wisdom on a range of topics from fiscal policy to inequality. It concludes that many of our economic theories are not only inadequate but lead to poor policies that often have harmful impacts.
Mazzucato argues that to nurture public value, the state has a key role to play. The state uniquely has the time-horizon and the financial and organizational capacity to create and shape new markets. Embedded in the innovation process with firms and research institutes, it can also influence both the rate and direction of technological development.
For example, in the 1960s, the US government kick-started the information and communications technology industry, financing the research that led to its most basic technologies - the internet and GPS. The US Small Business Administration provided risky but essential early-stage capital to Apple, Compaq and Intel. The FAANG companies (Facebook, Amazon, Apple, Netflix and Google) dominating today's economy are the children of these decisions.
Against this background, some politicians even in the West and the US are no longer defending free-market capitalism in terms of economic growth or the gains from globalisation, says Ngaire Woods (The case against free market capitalism - Neoliberalism has been tried and found wanting. Do modern governments have the tools or know-how to correct it?).
Much of the world has made great strides in making childbirth safer. From 1990 to 2015, Albania reduced its maternal deaths per 100,000 live births from 29.3 to 9.6. China, the poster child for state-led growth, reduced its rate from 114.2 to 17.7.
Meanwhile, the trend in the United States, the paragon of free-market democracy, has gone in the opposite direction, with maternal deaths per 100,000 live births actually rising, from 16.9 in 1990 to 26.4 in 2015. Equally shocking, the morbidity and mortality of white (non-Hispanic) middle-aged men and women in the US increased between 1999 and 2013.
The claim that free-market policies 'slash illiteracy' is also being termed misleading. In England, some 15 percent of adults (5.1 million people) are still 'functionally illiterate', meaning that they have literacy levels at or below those expected of an 11-year-old. Scotland's most recent survey showed a decline in literacy, with less than half of the country's 13- and 14-year-olds now performing well in writing. In fact, if you Google 'successful literacy campaign', the country with astonishing literacy gains that fills your screen is Cuba - hardly a free-market system.
So what measures are needed to get it right? The practical solutions on offer, according to Ngaire Woods, seem to be fairly consistent across the Western political spectrum. Indeed, for all their furious positioning, the differences between left and right seem to have collapsed in this regard.
In the UK, the first suggestion is to ensure economy-wide investment and growth, which will require government intervention. The opposition Labour proposes a National Investment Bank and Transformation Fund to mobilise public investment and create wealth and good jobs.
Second, private-sector leadership must change, in order to prevent short-term thinking, tax avoidance, and other forms of opportunism and personal enrichment. UK's Labour focuses on accountability in corporate boardrooms, while Prime Minister May of the Conservatives calls for giving workers and shareholders a stronger voice in firms' decision-making and ensuring that the largest companies have incentives to think long term.
A third corrective is to improve employees' pay and working conditions. In Britain, even as the economy has grown, wages have been dropping - by 10 per cent from 2007 to 2014. The Opposition Labour promises to take action to stop employers from driving down pay and working conditions. For PM May, 'all work should be fair and decent, with scope for development and fulfilment.' Both make the case for improving vocational training and technical education.
Fourth, in Britain, the government must address the public-housing crisis. In the 1950s and 1960s, an average of some 300,000 houses were being built every year; that figure has now dropped to less than half. The Labour proposes a review of social housing, rent control, and regeneration for the people. PM May has announced the creation of a £2 billion ($2.62 billion) fund for building more council housing.
Finally, Britain needs more effective rules and regulations to ensure that privatised utilities deliver cheaper, more sustainable services. Opposition Labour accuses companies of handing out large dividends to shareholders, while infrastructure crumbles, service deteriorates, and companies pay far too little in taxes. PM May promises to end 'rip-off energy price'.
The orthodoxy established by Margaret Thatcher and Ronald Reagan in the 1980s - to roll back the state, after a decade of profligate and bloated government - is guilty as charged. A new consensus is emerging that more active and effective government is required to boost growth and expand opportunity. The jury is still out, however, on whether governments will be given the tools and support they need to rehabilitate the defendant.