Criticisms
& Caveats
The story so far has
laid the economic groundwork for some of the processes of
globalisation. However, it is clear both that things go wrong, and that
not everyone is convinced that 'all is for the best in this best of all
possible worlds'. One of the most pungent and well-informed criticisms,
especially of the IMF, is the recent book by Jo Stigletz (a winner of
the Nobel Prize for Economics), who was Chair of the US Council of
Economic Advisors to the US President, 1993 - 1997; Chief Economist,
and Senior Vice President at the World Bank, 1997 - 2000): Globalisation and its Critics.
This book chronicles what Stiglitz sees as the major shortcomings of,
especially, the IMF's behaviour and operation, especially with
respect to the Asian Crisis (when a number of Pacific Rim countries
suffered major economic crisis beginning in 1997), and to the
liberalisation programmes followed in Russia following the collapse of
the Berlin Wall.
The major shortcomings of the framework so far outlined can be grouped
under three major headings (not so identified by Stiglitz, though
frequently illustrated by his accounts):
- Economic Caveats
- Institutional & Political Failures - the
rules and conventions of the game.
- Organisational Failures.
1.
Economic Caveats
a)
What the Free Market CANNOT deliver
Institutional
Framework: The textbook free market (specialisation and
trade) requires that there is a socio-economic foundation of accepted
norms, rules, codes and conventions (North and Williamson etc. call
these things 'institutions) which both accept and support the
activities of private enterprise in seeking to provide what the market
(consumers) require and are prepared to pay for. of the market (which is supposed
to ensure that no one can be made better off without making someone
else worse off - the Pareto welfare criterion). Common law (government)
needs to provide:
- Security of property (both private
and public),
- Probity of contracts (and the power to
enforce their honour)
- The outlawing of theft;
- The absence of bribery and corruption
(which might strike some as ironic, given the apparently natural
propensity of people to use all possible means when pursuing their own
self-interest)
The lack of a well developed institutional infrastructure to support
markets is bound to lead to substantial misfunction, if not outright
disaster. With no effective laws and associated police and judicial
systems, contracts will not be honoured, property will be stolen, funds
mis-appropriated - the market system will fail. Many of the
difficulties experienced in the liberalisation of the former Soviet
Union were to be expected in the absence of these vital institutions
(and the associated lack of any common social acceptance of and
legitimacy for the market system). Russia itself was always going
to be especially problematic, since it had never operated effectively
as a market system (unlike most the Central and Eastern European
satelites) having been dragged almost directly from a Feudal system by
the Communist Revolution in 1917. There was no folk memory or
history of market systems to draw on in Russia, whereas there was in
the Central European countries.
Equitable Outcomes: The
free market relies on the pursuit of self-interest - profits and
earnings to make a living, and consumption spending to have a life. The
workings of the system practically guarantee that incomes (and
especially wealth - see below) will become concentrated - those that do
best will prosper more than those who do not, and will manage to pass
on their gains to their heirs and successors. Even in the most
equitable world possible, the simple necessities of providing for
childhood and old age would ensure some significant concentration of
wealth (savings). Suppose that everyone earns the same wage, and
that this wage stays constant throughout the working life (21 - 60),
and that everyone lives to be 70, and that everyone is responsible for
providing for the upkeep of one child (their replacement!), and
their own retirement (at the same level of consumption as everyone
else). Ignoring any compound interest, the necessary savings to finance
this entirely equitable system would concentrate 50% of the
population's wealth in less than 30% of the people, and 30% of
the wealth in less than 20% of the people.
In practice, the pursuit of self-interest rewards the innovative (and
lucky) more than the also rans, and the protection of private
property ensures that these gains will be largely preserved (unless
dissipated by either altruistic patriarchs or stupid and incompetent
successors).
Furthermore, nothing in the free market guarantees that the initial
endowment of the factors of production (land; labour skills, expertise,
capacity; capital or management) of people will be equitable. The free
market is only efficient (could not be bettered in the Pareto sense) in
using these resources
given
their initial distribution amongst the population. This
initial distribution (whenever we decide this should be) will not be
equitable. Those with few resources (low education, little or no
capital, no land) are likely to remain poor, while those unable to
contribute to the economy, for whatever reason, will be destitute.
Civilised societies recognise this, and do something about it through
their governments. Approximately half the total tax revenues raised by
the UK government are used to support the less well-off in one form or
another (pensions, unemployment benefit, social security etc.)
through transfer payments. Another substantial part of tax
revenues is used to provide
merit
goods: especially education and health, where ability to
pay is not regarded as an appropriate or civilised way of distributing
these goods and services. Another part is used to support local and
regional development initiatives (and planning controls), to alter an
otherwise free market distribution of development and growth
geographically to better meet the wishes of society.
One Person, One Vote: Market
signals are provided by prices - the votes about who gets what and what
is produced are pound notes. The rich consumers are necessarily more
powerful (as individuals) than the poor, and have more say in the
outcomes of the free market. However, as Karl Marx observed, if the
rich capitalists only pay attention to their own (rich) needs, which
tend to become more concentrated (though see below), then their markets
will shrink, and the foundation of their own income and wealth will
collapse. So, enlightened markets can be expected to try and develop
their own customers, which involves encouraging and assisting
(within reason) as many people as possible to become richer consumers.
By the same token, providing there is freedom of complete information
(see below), one would expect enlightened firms not to poison or harm
their customers (otherwise theywill loose their livelihoods) or to harm
their workers (or they loose their capacity to produce).
b)
Market Failures
Economic Textbooks typically list the
assumptions of the competitive market to be:
- perfect information: a serious problem, since information is
never perfect (the future is unknown) and seldom common to all sides of
the market - suppliers often know more than consumers, and finding
information, and then processing it into knowledge, is a time and
resource consuming activity. Stiglitz won his Nobel Prize for his
contributions to the theories of imperfect and asymetric information,
which shows,among other things, that these real world features mean
than the otherwise competitive market may not achieve Pareto optimality.
- freedom of entry and exit - there should be no artificial
barriers to either entry or exit - new firms should be able to start
with a minimum of intervention, regulation or red tape, while
backruptcy and exit from the industry should also be as simple (though
fair) as possible (Stiglitz highlights several instances (countries and
time periods) where it hasbeen difficult for firms to go bankrupt, and
thus difficult to reallocate resources to more efficient and better
structured enterprises) .
- many buyers and sellers (failure. especially on the supply side,
leads to monopolies, or imperfect competition, which leads, under
profit maximising assumptions, to firms supplying goods and services at
ineffcient (higher) prices than the competitive equivalent (if there is
one).
- homogenous products (though differentiated products can be dealt
with by defining them as different products, or by considering their
demand as a combination of separate demands for their attributes
(Lancaster))
- private costs and benefits should be equal to public or social
costs and
benefits. Thus, the gains (or costs) to society are exactly represented
by the sum of all gains and costs to individuals and private firms.
In addition to these typical assumptions of the
competitive market as it might be when in equilibrium (balance with the
prevailing conditions), the theory says little or nothing about
the costs and difficulties of transition
or dynamic change. When trade
is opened up between two previously isolated communities, or
within a community previously governed by central planning and command
and control systems, competition says that there will have to be
substantial resource reallocation
- people will have to stop doing what they were doing before, and do
something else. This takes time, effort, and resource, and
will tend to be resisted unless people believe in the benefits.
Unless these benefits are quickly apparent, credibility and
legitimacy of the reforms and liberalisation are likely to be resisted.
It is not hard to believe that many in Russia remain to be convinced
that either the market system is demonstrably better than the previous
Communist system, or that the process of liberalisation is not simply a
backdoor method by which the rich and powerful (especially the US) can
take control of their lives.
c) Economic Malfunctions
Management of whole economies through
appropriate fiscal and monetary policies remains an inexact science. It
is tempting to presume that the simple macroeconomic models (as
outlined in the previous session) are good representations of
reality: capital flows and their control vital: see
here
A key phenomenon to understand here is Capitalism - this goes one
very considerable step further than the story of economic competition,
trade and specialisation outlined in session 2 above, though this fact
is seldom recognised in most textbooks.
2.
Institutional & Political Failures
3.
Organisational Failure
http://www.cedu.niu.edu/~fulmer/groupthink.htm