A New Economic Model? Revisiting Capitalism and Implications of Global Economy

On May 14, 2012, MarketWatch featured an interesting article written by Jason O'Mahony discussing the possibility of a new economic model for the world. The heading to the article stated that "picking either unregulated capitalism or stifling socialism is a false choice." O'Mahony: "Watching the US GOP on the right and assorted Greek communists on the left, it's easy to assume that there are only two directions for Western society to go. We must, it seems, kneel before the golden calf of the free market or chant at the smoke and mirrors of pain-free socialism. Seriously? Those are the choices?"

By way of a number of observations on human economy, O'Mahony's commentary discussed the question of whether we can "assemble a new model that reflects the society we want to live in." The thrust of O'Mahony's argument appeared to be that the concentration of wealth with an emerging "economic aristocracy of the megawealthy" substantially threatens the capitalist system. Even so, "[c]apitalism, for all its flaws, has still proven to be the most effective way of encouraging innovation and wealth creation." O'Mahony alluded to a comparison of the products of capitalist systems with the products of communist systems; "very few of the products produced by genuinely communist countries have survived communism, short of the ones that can kill you."

Whereas capitalism has proven itself to be historically effective in creating wealth, O'Mahony argued that "[c]apitalism will only survive with the consent of the great majority." And in light of the negative effects of the concentration of wealth, he suggested that those in the West could look to the "Flexicurity" of Denmark, which "offers an interesting social-contract model between employers and employees." From the article: "The deal, broadly speaking, is that employers can hire and fire with relative ease, allowing them to adapt to changes in the market. In return, employers pay taxes to fund a generous social safety net to sustain prospective employees when they are between jobs."

With the prospect of striking a balance between capital and labor in the interest of spurring economic activity, capitalism could further "as a force for mutual good". O'Mahony also suggested that a balance must be sought between freedom and the redistribution of wealth; he put forward estate taxes as an "effective means" of not interfering with wealth creation. O'Mahony went forward to suggest that for all the advantages of the free-market system, "the period of its greatest triumph" was in the midst of government regulation. In mildly defending government regulation, O'Mahony cited examples such as the UK's National Insurance Act of 1911, the creation of Medicare and Medicaid, and even "Obama's saving of General Motors". From the article: "[T]he center-left across the West has taken just enough cream from the top to fund the social stability that is vital for the free-enterprise system to prosper in." O'Mahony concluded in asking, "[I]s it the progressive and thoughtful centrists who will once again save capitalism?"

Whereas O'Mahony's insights are quite thought-provoking and interesting, his perspective seemed to lack the sharpness and definition necessary to move forward toward a new economic model. Despite the suggestion that a better social-contract is necessary, one could argue that free-market capitalism is already "a force for mutual good" in that individuals treat each other as traders in the marketplace. One thing significant to take away from O'Mahony's observations is that the ongoing global conversation on free-market capitalism involves serious issues of viability with respect to the status quo. On the one hand, capitalism is good for wealth-creation and innovation. On the other hand, capitalism can lead to social stratification and the concentration of wealth, which can give way to social instability and systemic collapse.

O'Mahony seemed to suggest that some form of "wealth redistribution" (perhaps via a transition toward the Nordic model) may be necessary for capitalism to remain viable. He boldly stated near the beginning of the piece that "[a]t this stage of human development in the West we can eliminate poverty". O'Mahony alluded to Biblical language in wondering whether we must "kneel before the golden calf of the free market", but even aside from the free market being considered a golden calf, I am reminded of the verse, "There will always be poor people in the land." Even so, one could argue that poverty is relative.

Whereas a transition toward a mild redistribution of wealth in the West could be seen as desirable for capitalism's viability, one must also take into account the environment in which the Nordic welfare state has been able to exist. The US is not like Denmark, Sweden, or Norway. Scholars discussing the the Scandinavian welfare state in the book The Nordic Model have conceded that "the Nordic countries are small and ethnically homogenous, and they were so notably at the time that the welfare state developed." Even further, "[e]thnic homogeneity is conducive to the emergence of trust, the key ingredient in 'social capital', which is widely believed to improve the efficiency of society by facilitating coordinated action." Interestingly, this "ethnic and religious homogeneity" could be viewed as fostering "a high level of trust of citizens and the emergence of a relatively incorrupt and efficient public administration."

According to The Nordic Model, whereas the Nordic welfare state is a social contract, "[e]xpectations and trust are essential" for the system to work and remain viable. From the book: "The system is based on social cohesion in the sense of a perception that we are all, in one way or another, in the same boat."

Now, in light of contemporary socio-economic problems in the US and Europe, how confident can we be in saying that we are all in the same boat? In an economy where young adults are encouraged to take on excessive debt for college with the hope of one day finding a job in a weak labor market, one has to wonder if the pie is only so big.

I have already discussed at length how bringing the Nordic model to the US is possible in theory, but most likely impractical for the time being. That being said, O'Mahony's discussion reveals some crucial dilemmas with respect to the global economy and contemporary geopolitical realities. As I have written previously, "[a]t the end of the day, there is something to be said for socio-political cohesion and societal cooperation ... in making a society function and an economy work." Even in light of O'Mahony's aspirational observations, a lack of trust can be overpowering, a formidable barrier to economic growth and prosperity.

As Graham Summers eloquently discussed on Zero Hedge in March 2012, until trust is restored in the economy, "there will be no recovery". Summers: "Without trust, democratic capitalism cannot function." Whereas trust in the marketplace was damaged in the global financial crisis, Summers noted that "[t]here has never been a collapse from which the US did not recover nor has there ever been a boom that has not been followed by some sort of collapse. That is the nature of democratic capitalism: boom and bust." Ergo, trust in the system must be restored in order for there to be an actual, viable recovery.

On May 4, 2012, a Zero Hedge post from George Washington discussed that a lack of trust is ruining the economy. From the article: "The signs are everywhere: Americans have lost trust in our institutions." And even more interestingly, "It's not just the US ... trust in institutions is plunging worldwide." Washington went forward to argue that this "lack of trust is killing the economy". From the article: "[The] loss of trust is arguably the main reason we are stuck in an economic crisis." Washington's analysis suggested that compromised trust in the marketplace may be fueling deteriorating economic conditions.

I would go so far as to argue that problems with trust in institutions cut also to questions regarding the legitimacy of the capitalist system going forward. In other words, the loss of global trust extends beyond individuals, firms, governments, and institutions and has developed to a point where the legitimacy and viability of the free-market capitalist model have been called into question -- perhaps not so much as to the nature of the capitalist game, but more to the players in the game and how the game is played. Would you want to play a game of Monopoly where one or two players could manipulate the rules at will or cheat without repercussion? Or where one player could simply print money on his own? What would be the point in playing such a game of Monopoly where the rules are not followed? Thus, we find apathy and alienation. And in light of a loss of trust in institutions and governments, how do you restore the faith and trust of an entire planet? Is such an achievement even possible?

O'Mahony's discussion suggested that government intervention may be necessary to maintain capitalism as a system. He also noted that "it has been progressive politicians of the center and left who have adjusted capitalism to save it from revolution." But what is interesting about our contemporary period is that one could argue that this global spirit of protest and rebellion is slowly and subtly turning into a spirit of apathy and resignation. The situation with the Occupy movement illustrates how protest is turning into apathy. One has to wonder how feasible economic growth and prosperity are on a small planet with an apathetic, weary, distrusting populace.

Whereas one may want to seek out a new economic model to redeem the world from poverty, pain, and suffering, one must also take into account the global loss of faith and trust that is arguably exacerbating global financial woes. But again, what would it take for humanity to regain a sense of hope and trust? Before we start thinking about a new economic model to fix the global economy, perhaps we need to do a bit of soul-searching first.