Righting global capitalism deficiencies in crisis

By S.P. Seth

SYDNEY (JP): George Soros is not the only international financier ringing alarm bells about the possible demise of global capitalism. The fear was palpable at the recent gathering in Davos, Switzerland, of the World Economic Forum, an influential informal gathering of leaders in business and politics.

According to Claude Smadja, managing director of the forum: "On display in Davos was not just fear about an international economic crisis beyond the control of elected governments, but also deep alarm at spreading disillusionment among ordinary people with the economic policies which have led to this crisis."

He added: "The concept of globalization -- thought of until now as an unstoppable trend -- is under attack and reconsideration, leading today to a perception of global capitalism in retreat."

The Asian economic meltdown is an obvious example of the crisis. Russia's economy, following the capitalist path, is probably in even worse shape. Brazil is also reeling, with likely impact on other South American economies. There are increasing fears the cascading effect of all this might be a global depression on the scale of the 1930s.

What is behind the crisis of the global capitalist system? There is no better person to explain it than George Soros. His critique will not be self-interested, having amassed so much wealth by playing the market over the years.

"The markets are good for expressing individual self- interest," he said in a recent interview published in The New York Review of Books. "But society is not simply an aggregation of individual interests. There are collective interests that don't find expression in market values. These collective decisions, even individual decisions, must involve the question of right and wrong. I think markets are amoral ... but moral values are necessary to prevent their excesses and inequities."

George Soros analyzed the phenomena at length in his recently published book, The Crisis of Global Capitalism. Of course, he is not for abolishing capitalism. He wants its correction through an international regulatory mechanism, lest its distortions and deficiencies result in self-destruction.

His central argument is that currently there is a terrible mismatch between global economy and global society. "We have a global economy without a global society. (And this) situation is untenable."

The free market ideology, which he calls "market fundamentalism", is supplanting the nonmarket sector of society.

In other words, greed and profit motive are eroding political and moral values which underpin societies. And "market fundamentalism", in his view, "is today a greater threat to open society than any totalitarian ideology".

Market fundamentalism represents "a widespread belief that markets are self-correcting and a global economy can flourish without any need for a global society (because) the common interest is best served by allowing everyone to look out for his or her own interests, and that attempts to protect the common interest by collective decision-making distort the market mechanism ... "

This view was adopted and promoted by Ronald Reagan and Margaret Thatcher as "a vulgarized version of laissez-faire economics, turning it into a kind of fundamentalist position".

Market fundamentalism is, of course based on the false assumption that "markets tend toward equilibrium". However, "financial markets are characterized by booms and busts ... The potential for disequilibrium is inherent in the financial system ..." Therefore, unless financial markets are properly monitored and regulated in some way through a global system (without having to abolish individual nation states), the capitalist system has the potential to self-destruct by creating unmanageable social and political chaos.

The main opposition to an international regulatory mechanism for global financial markets comes from the United States. It has so far remained largely immune from the economic crisis in Asia (though its widening current account deficit, and the deepening economic malaise in Brazil, represent danger signals). The U.S. could, therefore, afford to remain distant. Yet it wasted no time in putting together an interventionist rescue operation at home when of one of its major hedge funds, Long Term Capital Management (LTCM), appeared likely to collapse.

The LTCM, with some of America's top economic luminaries, including two Nobel Prize winners in economics, among its personnel, was found to have a market exposure at least 50 times more than its capital. And when it seemed on the verge of collapse, taking down with it large investments and funds from some of America's top banks and financial institutions, the U.S. Federal Reserve feared for the rest of the domestic economy. Which led it to encourage a joint rescue operation last year by a number of banks and brokerage houses with enough capital to make the LTCM viable for the time being.

If the likely collapse of one of America's major hedge funds was perceived to be so dangerous for its national economy, an aggregation of business bankruptcies in Asia, happening all the time, is surely causing tremendous havoc. Hence, the need for a global regulatory mechanism to at least put some curb on short- term movement of foreign funds ("hot" money in search of speculative gains), which contributed significantly to Asian meltdown.

But even though there is now a near-universal recognition of such remedial measures, the U.S. is still for unhindered free markets. According to its treasury secretary, Robert Rubin, who was at the World Economic Forum in Davos, there is "no magic wand" for the world's economic ills. The only durable solution, he said, was to follow "sound economic policy" -- whatever that might mean.

Even former U.S. secretary of state Henry Kissinger thought this was not good enough. He focused on a leadership vacuum in the world, and the imperative need for political decision-making to overhaul the international financial system. "I came here hoping to be reassured that someone knows what is going wrong and what we need to do to fix it," one U.S. business leader was quoted as saying. "(But) I leave here feeling even less confident than when I arrived."

To conclude with George Soros, again from his book: "... I have no hesitation, however, in asserting that the global capitalist system will succumb to its defects ... unless we recognize that it is defective and act in time to correct the deficiencies ... "