As we have been hearing about the legacies of the great minds of economics, a name that has not cropped up much lately is Marx. The first article below suggests that Marx’s ideas live with us in the global economy, and growing inequality has awoken the old guy’s spirit. With it we are seeing a resurgence of the word “capitalism” rather than the more tame “free market”. The second article argues that the global elites at Davos have noticed, and that progressive taxation is ready for a comeback.
It’s becoming increasingly apparent that globalisation is laying bare the contradictions of capitalism.
January 29, 2007 07:45 PM
Could those pontificating at Davos perhaps have missed something? The capitalist system over which they were fussing may be in direr straits than they appreciated. For globalisation, once seen by both its friends and enemies as the apotheosis of capitalism, seems instead to be turning into its nemesis.
We all know that the “free” market can function effectively only when subject to rigorous controls. These entail not just the entrenchment of property rights and the rule of law, but also oversight of the market’s workings, provision of the infrastructure it requires and management of the resources it consumes. Victims of its workings who have the capacity to disrupt it may also need to be appeased.
Nation-states have shown themselves capable of providing these facilities successfully, at least within their own borders. However, businesses are compelled to look beyond the countries that sustain them by the urge to expand their activities. Ironically, the dangers implicit in this paradox were mitigated for much of the last century by the existence of societies based (in theory, at any rate) on the insights of that tireless student of such contradictions, Karl Marx.
Until a couple of decades ago, the cold war kept globalisation in check. However, once it had ended, not only were existing enterprises freer to widen their horizons, but new forces based in formerly communist countries were able to join the fray. In the process, capitalism managed to escape the nationally-rooted constraints that used to moderate its intrinsic absurdities.
The consequences are familiar enough when considered separately. We are all aware that unbridled economic activity is now destroying the world’s climate, water supplies, farmland, forests and fish stocks, while global environmental management remains a dream. We know that mountainous trading, governmental, corporate and personal debt threatens to precipitate world-wide economic collapse, even though only individual states have the means to modify financial conditions.
Less remarked upon is the threat to capitalism posed by the ever-deepening inequality that globalisation inevitably engenders. Within the last two decades, the pay of a typical top American manager has risen from 40 times that of the average employee to 110 times. Meanwhile, more and more ill-rewarded workers are seeing their jobs disappear completely, not just to their even-worse-rewarded counterparts overseas, but to processes, such as computerisation, that squeeze workers out of the economy altogether.
Unfortunately for capitalism, as its victims become more numerous, they also become more powerful. In democracies, the consequences are already being felt. Protectionism is reasserting itself in America, with potentially catastrophic consequences for world trade. In places where capitalism is unaccompanied by democracy, rebellion may take less orderly forms, as burgeoning unrest in the Chinese countryside is already demonstrating.
At Davos, the Yale economist Robert Shiller warned of the threat posed by worker disaffection. His answer was progressive taxation. Sadly, globalisation has made this potential solution as unworkable as some that might once have addressed the other problems of contemporary capitalism. Only national governments can tax, and those that tax more than their counterparts will drive business elsewhere and impoverish their citizens. So, increasingly, they dare not do it.
Nothing but the re-engineering of global capitalism can head off the crisis that is beginning to confront it. Unfortunately, the machinery to perform such a task does not exist. It is to be hoped that the masters of the universe enjoyed their Alpine jaunt this year. In the winters that lie ahead, they may find the mood at Davos growing less cheery.
Target rich or reap growing anger, warn economistsLarry Elliott, economics editor
Thursday January 25, 2007
A backlash against the economic insecurity caused by globalisation is looming in the west unless governments tackle growing inequality by raising taxes on the rich, economists said in Davos yesterday. After years in which workers have received an ever-smaller share of national incomes, business leaders arriving for the World Economic Forum were told to expect a reversal of pro-rich tax policies.
Robert Shiller, a Yale economics professor, said: “We need mechanisms to adjust tax systems so that they become more progressive if inequality gets worse.
“There are people left behind [by globalisation]. We need to take steps now to design a plan so that if inequality gets worse, governments raise taxes on the wealthy. It’s got to be that way.”Professor Nouriel Roubini, chairman of Roubini Global Economics, said the old social contract in which governments ensured good wages, social security and health care was under pressure from the rise of China and India.
Besides higher taxes on the rich, governments needed to invest in training, education and be prepared to subsidise wages. “We have to do something or the backlash is going to be very, very severe”, he said.
Stephen Roach, chief economist at Morgan Stanley, said there were signs that inequality was leading to political shifts. “Look at the shares of national income in the major economies of the developed world. The share going to labour is at historic lows; the share going to capital is at historic highs.
“The [political] pendulum is moving left towards politicians more in favour of pro-labour economic policies. There is potential for a shift in the relationship between labour and capital.”
The warnings came as a PricewaterhouseCoopers poll of senior executives found that the longest sustained period of economic growth since the second world war had left more than 90% expecting their businesses to grow in the coming year – twice the figure five years ago.
Prof Roubini said there was a risk in the United States that the good times were coming to an end.
“The Goldilocks economy is being threatened by the three bears. I worry about a US hard landing.” He described the threats as a housing crash, higher interest rates and – despite the recent fall – the price of oil.