Monday, November 10, 2008

Market Capitalism Questioned

Despite Barack Obama's presidential victory in the United States, the financial crisis will erode the ability of the United States to promote market capitalism, it seems. Richard Haass wrote an excellent op-ed over the weekend called "What the Recession Means for Foreign Policy." Not only did he predict the reduction of U.S. foreign policy tools such as defense spending and foreign aid, but he also said U.S. capitalism will come into question:

One other adverse consequence merits mention. The appeal of free markets is much diminished. The ability of U.S. officials to preach persuasively on the virtues of market reform is all but gone. The backlash against markets will almost certainly go too far, with adverse results for economic recovery and democracy around the world.

We are already seeing increased anti-Americanism, the result of perceptions that the global economic slowdown had its roots in the U.S. mortgage market. Globalization itself is further tarnished. What we can expect is heightened state intervention, protectionism and mercantilism as governments look to enter into arrangements that guarantee preferential outcomes.

Susan Aaronson wrote a similar argument in Policy Innovations last week in her popular article "Financial Crisis Hurts U.S. Soft Power." Like Haass, she predicts traditional policy tools will be weakened and, like Hasss again, U.S. market ideology will take a hit:

First, America's global standing is, to a great extent, reflective of how it projects its power, relates to other countries, and keeps its commitments to them. If the global financial meltdown makes life worse for the world's poor, many people may link the U.S. model of democratic capitalism with global misery. They may be less receptive to economic and political strategies presented by U.S. diplomats and NGOs. Meanwhile, the financial crisis will make American taxpayers less able to provide generous levels of foreign aid to help the world's poor.

Second, although many countries will be desperate for investment, U.S. investors could come under considerable pressure to create jobs at home. U.S. tax policy is likely to favor domestic job creation and investment in the U.S. market. Meanwhile, U.S. investors may be less welcome abroad than, for example, Chinese or Indian investors—Americans and Europeans are more likely to demand transparency, accountability, and human rights.

Will people associate U.S. power with "global misery" or with the opportunity and pluralism that Obama's victory represents? Perhaps both. I am speaking at a conference with the European Parliament in Brussels this week called "Ethics in Business - Corporate Culture and Spirituality." In February, I am speaking about a very similar topic in Tokyo. There is clearly a demand for reflection on the future of market capitalism.


Anonymous said...

The financial crisis erodes the attractiveness of the AMERICAN form of capitalism and the AMERICAN model of the free market. It is important to realize that there are indeed OTHER forms of capitalism in the world that these may become more attractive. Hopefully, the transformation promised by Obama will modify the discredited U.S. model.

Devin Stewart said...

I am glad someone brought up this point. Is the current financial crisis a failure of American capitalism?

I was wondering if this view would come up during my trip to Brussels last week. Fortunately, it did not. During my speech on the future of capitalism, I asked the audience if anyone could identify the precise origin of the crisis, and not one person raised their hand. To the comment on American capitalism, I would just offer a couple of comments: One is that this crisis is global; no major economy--no matter its variation of governance--is invulnerable. Yes, the crisis had much of its origins in the United States, the causes and impacts are global. Second, the global economy has created more wealth and has raised more people out of poverty than could have been imagined 20 years ago. Finally, American capitalism has morphed many times over the past century. I might suggest we rediscover some of the first principles of capitalism: real, broader profit and real, long term prudence. I would agree that consumerism should be reexamined but, ironically, we will need fiscal and monetary stimuli to get out of the crisis. As Paul Krugman recently noted, any fiscal stimulus less than monumental will be insufficient.

The global debate so far to the crisis has been mostly non-ideological. This is promising: the world needs to cooperate and stay open.