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After the Crisis: What Kind of Capitalism?

Published on June 28, 2010 by: in: Economy

Jażdżewski, Żakowski, Sobolewski, Bochniarz, Winiecki, Rybiński, Gutkowski

crisis

Leszek Jażdżewski: The greatest economic crisis of last thirty years seems to be over. But the example of Greece shows that the restitution will not be easy. The econimies of almost all of the developed countries are groaning under the weight of their debts. The public debt of the United States has reached 12 billion dollars (that is 90 percent of its budget) and is still rising. Niall Ferguson warns us and recalls past cases of world’s superstates falling  suddenly and unexpectedly when small vacillation was enough for the gap between commitments and their resources led to a catastrophe. The issue of the crisis, analysed throughout by the media and economists from all around the world, has become the question to answer in a serious debate of the world and economy order.

The word ‘crisis’ has been perpetually used over last two years, hundreds millions have been spent, the state has considerably enlarged its share in economy at cost of a massive public debt. The greedy bankers have been generally reproved. It does not seem, though, that all that rhetoric and extemporaneous national interventions have brought about the change of the paradigm, just like it had been changed by the slumps of the 30s and the 70s. Or perhaps is it just a illusion as we lack the distance? Are we  – after the time of New Deal, FDR and Keynes, Reaganomics and Friedman – approaching a new era, for instance the era of Obama and Krugman?

Jacek Żakowski: There is no new project and the old one has declined in meaning. No one has come up with a thesis of forming of a new paradigm publicly, but the intellectual breakthrough is behind us. The two rationales have been discredited intellectually and by the reality. The first one: that the markets regulate themselves, and the second one: the rationale of the rational expectations controlling the market. It is hard to maintain the opinion that the government regulation is unnecessary and it should be restrained. The establishment, which has been forming for the last 25 years and has educated thousands of its economists, will never discard its own theory of market’s self-regulation, only because it has failed.

Economy as a social science with political associations, where power plays matter, represents distinct lobbies. It is difficult to break through with rational opinions and it is hard to officially push ahead something that is called into question by economists. We have got rid of the economic variation of hepatitis C. The reality we are facing is though and complex, there are no universal rules valid for everybody. We are dealing with small steps, careful analysis, precise tools. Not an axe but a laser, although it is easier with an axe. We still want to believe that ‘there is no alternative’ , but in reality there is an enormous variety of paths we need to go by.

Jan Winiecki: I would put it differently. People criticising capitalism have been always by the score. They simply become loader when troubles arise, for example during the previous crisis wave on the turn of the 60s and the 70s. But the capitalism is not to blame for what happened.  There were three reasons for the American crisis, which has spread all over the world.

Firstly, Greenspan’s politics. He – when conducting self-criticism – forgets that he is a president of not a private bank but the national central bank and it is his policies, not the bankers’ work, what destabilised the economy (banks reacted on the policies). The central bank used to intervene only when the economy slowed down, never when it expedited rapidly (connect the dots!). Secondly, also the pressure of the social politic with the theme of wide accessibility of dwellings on the financial markets brought about the crisis. The constant emphasis on lowering the credit standards for the less-earning (or not earning at all!) caused the erosion of standards of granting mortgages. This way the European and American standard, spreading for 100-150 years (20% of prepayment, 80% of credits for the period of 20-30 years), became an exception, not a rule. In 2006, just before the crisis started, only one third of American credits were up to the standards. Moreover, the state politicians are also to blame. In many states the ‘no recourse’ principle was introduced. It meant the possibility of dispensing with every kind of liability by the loaner by giving bank their keys. It only dampened the level of self-discipline of borrowers.

Credit bureaus are also said to be to blame. Only because of the wrongly designed regulation from 1976, a small group of such agencies has become the virtual monopolists in assessing the creditworthiness. We should remember what Adam Smith once wrote: “The spirit of a monopolist is narrow, lazy and mean”. In fact, this deleterious regulation is just a part of the third field of the state’s responsibility for the crisis. Numerous analysts point out to a whole string of partial regulations of financial markets, which had influenced the structure of commercial banks’ assets, instead of making it safer.

The enthusiasts of DIY in the regulation system have not drawn conclusions. Those who brought on the crisis to the American and world economy are still designing our world according to their – amateur and flattering the public’s – expectations.

Krzysztof Rybiński: Ca. 1350 AD, near the Nanjing port, trees were planted because the Chinese Emperor planned to send the Chinese flotilla abroad in 50 years. During his numerous journeys and for almost 100 years before Columbus, general Zheng travelled half of the globe, established relations, tried to recognise other cultures, hired translators. He demanded only that the other nations would surrender and accept the Emperor’s authority. For over 100 years there was no other place like China, where the technology and tactical thought would be so advanced. Not until later, the centre of the world moved to Europe (Venice, Genoa, Amsterdam, London) and the to the USA (Boston, New York). Today, in the time of the Internet, the centre of the world has moved far West – to California, which, if it were a country, would be the sixth of the biggest.

The history has come full circle. After 700 years we are in Asia again. In some time, the bee’s knees, the new politic, cultural and economic centre and the heart of world innovations will appear in Asia once more. It should not be recognised as a kind of new order, but rather as a return of the old one.

The theory and practice of economy is also changing. During the period of the Asian crisis the IMF recommended full liberalisation and rising of the interest rates to stabilise the rate of exchange and the speeding up the privatisation, although today they say otherwise. There are no universal truths and answers. From the one point of view, we see the history repeat itself and the centre moves to Asia, from the other, the economy is remarkably weak as a discipline which is not able to come up with an enduring notion of the reality for longer than 10 years. I do not expect anything new to emerge in this situation. I am much worried by the policymakers consoling one another and repeating constantly the same ideas how to renew the world after the crisis. A few potent financial institutions led to the crisis, and they are still growing in power.

Henryka Bochniarz: There was a film about a London broker ‘A Good Year’. I saw it couple of years ago together with a group of young stock-jobbers, for whom it was obvious that one could earn a million dollars, taking shortcuts, in one day. Now, as it has turned out, the formula is quite different. Greed and impunity, which made this crisis so severe, are not accepted. This is the main moral venting from the situation. We have to take into account human behaviours and rationalise them. There is no deft state  without a deft market.

I look at the crisis with great optimism, which stems from my experience as an entrepreneur – somebody who set up a company in 1990. I witnessed a few such breakdowns and every one of them brought about something valuable: made one verify their strategy, thinking and behaviour. We will not find any fantastic device that will solve all our troubles, but we will be able to map out new tasks. If only it happened, the world would be so much better. We should keenly observe the shares of individual players in economy and watch the both sides of the pitch, instead of just assuring that the rapacious bankers have their earnings radically cut. Blaming them for all what happened is oversimplifying the issue. The politicians, who in 1999 introduced a change into credit regulations in the US, bear the blame.

In Poland there was economic freedom  in 1990 and 1991. One could actually set up a company in five minutes then. Afterwards we introduced another regulations to block this freedom without making the market more efficient. If we keep on claiming that we are the ‘green island’ and nothing else, this green island will turn red. We should start to talk about it. If something works, it does so in small structures: on the level of entrepreneurs and non-governmental organisations. Unfortunately, we have a very feeble administration and giving it larger power would mean getting rid of all what we have managed to achieve during the last 20 years. We should draw from our own experience, not just imitate others’ solutions. The key to success is discussion. Less ideology, more practice.

Szymon Gutkowski: I can confirm that the biggest companies of various trades were established at the beginning of the 90s and those several years give them a great advantage.  The Internet companies are the sole exception. Every state intervention has its consequences for the entrepreneurs. The ‘green island’ effect turned up just in time. 20 years after the transitions and reforms it makes us feel a lot better. Up until now, Polish successes were not numerous. And suddenly, in the most important valuation for the European economy we are the leaders, the ‘green island’ in the red sea of recession. It can have its effect of the self-esteem of Poles. What is important, also ordinary people discuss the issue. I believe that we, as a society, have the chance to be proud of Poland and the green and red map became even at one point a new national emblem. However, everything must be done to retain the pace of economic development. The image of “thrifty” Poland is being created by the Polish managers, many of whom have a firm position in global companies. So we have more than Chopin, of whom it is hard not to make a mention this year. When thinking of Chopin and the future it is worth remarking that in his music he also placed the Chinese soul and sensibility – today most of the distinguished Chopin players are Chinese. If the Chinese 50 years before the planned journey planted a forest, we should start learning Chinese and Chinese culture. We will not benefit from it, but our children will.

Ludwik Sobolewski: Yesterday I was at the Parliament, which is the church of democracy as an idea of social organisation. The democracy is much imperfect, but we do not have anything better, the same applies to capitalism. The capitalism of the largest on the financial markets banks proved to have a built-in element of self-destruction. It is the easiest to say that a financial institution is to blame. A financial institution is impersonal, it consists of shareholders. Capitalism, which relies on the stakeholders who demand the income, is a mechanism of self-destruction shows that it is an imperfect phenomenon and the role of the state as a regulator is essential and it carries also the responsibility for the quality of this regulation.

Economy is not only a phenomenon which may form into a science. It is a science which already exists and it rests of the ‘to my mind’ formula. It is improper to discuss the economic issues as if they were some kind of natural phenomena. We let the economists use the language which makes us think of them as of the representatives of some natural science. But it is a science of man and society. Of society also in crisis, not only in the material but also in the psychological sense. The bourse is not just an invisible hand, it is a conglomerate of emotions which can influence the individual actions but also the behaviour of the collectiveness. We should consider what is economy and capitalism for us.

L.J.: Has the crisis undermined the theory of rational choice popularised by the followers of Milton Friedman? Has it proved that a human being, developed according to Keynes in the book of Akerlof and Shiller, is directed by animal spirits?

J.W.: There is such philosophy, established by Tomas Kuhn, Michael Polanyi and von Hayek, which divides knowledge on communicable and non-communicable. The former can be codified and transmitted, the latter results from the individual experience and the environment in which one gains their knowledge. Hayek called it “the knowledge of time and space”. Numerous decisions are taken in this way, not only in the realm of science but also in the world of business – people know why to do something that way and not the other but they cannot explain why precisely that way.

What is more, the law of unintentional and often unexpected consequences operates. Sometimes the consequences are positive. For instance: the American financial regulation from 1963, which demanded the authorities assent for the transfer of the American companies’ funds abroad, led to the inception of a huge euro-dollar market. The range of its revenues was higher than the range of the credits granted in the biggest financial centre of the time – New York.

However, we should remember that the unintentional consequences are more often pejorative. That is why the liberal economists warn us against – as Hayek called it – “the sin of constructivism”. While trying to regulate anything we should keep in mind that the comparisons of the real systems with the intellectual constructions are methodologically wrong. The latter are known only from the intended perspective and we know nothing of their unintended effects.

L.J.: Is it worth continuing with the model of present consumption on credit? Or perhaps should we resign from it at all?

J.Ż.: I think that we are not able to foresee what to slow down and when. The whole appeal of capitalism lies in the fact that it rushes, but it should not stampede. The state is still perceived as the enemy of capitalism though it is not the enemy of human freedom. The greatest foe of capitalism today is the leviathan of corporations, impersonal creation which eats away the market. The professor mentioned the credit agencies and gigantic monopoles. When one looks at the market, the level of concentration there is dangerous. The model of capitalism functioning in Poland looks as follows: set up a company and sell it to a corporation. People are aware that the capability of development has its boundaries, especially when it comes to a collision with a hulk of some kind. One cannot beat it, so one should sell their company to other, who dominates the market. Uncontrolled growth of hulks of moderate efficiency is a very dangerous phenomenon, because if they fail, we have to help them. Today, those who pretend to defend capitalism from the state leave it in the lurch and sell it to the monopoles. The capitalists should believe that the state defends their freedom and return to reading Adam Smith – the greatest critic of all of these unfunctional economic constructions which are necessary in many ventures. However, if they are not controlled, they destroy all what is around them. We should stop dreading the state.

Coming back to Adam Smith who came up with a thesis: freedom and judicature are the source of wealth. There is no market that can properly function without the judicature and the state’s efficacy in pursuing and adjudging litigations. Also in the States the difficulties with the judicature are the reason for very serious economic issues. We should return to the belief that good state – not communist or fascist one, has to be guarantor of the market’s functioning and is not its greatest threat, just the opposite: the state can be the market’s ultimate defender. The lack of faith in the above statement can be the source of the crisis.

L.J.: Will the unprecedented scale of public support lead to negative consequences?

K.R.: In the report about Poland published by the OECD there is a diagram that compares the productivity of work in various trades over a span of the last 10 years. Also the productivity of public administration was measured and it fell by half. The administration’s productivity falls down in the time when TV-sets are produced more efficiently and they are several times cheaper. Not so long ago the share of public expenses in GDP amounted to 42%. In 2010 it is going to be 48%. There is no other country that has so inefficient administration which expands and costs more and more. From all of the OECD countries, Poland controls the economic circulation at the most. Poland is an unproductive country, it costs more and more and often intervenes into running one’s business. This should change. The means of disciplinasing the state that we have is the sheet of paper we cast at ballot box every four years. The governing, however, are afraid of this discipline. And as for now we do not see first symptoms of any transition. Despite the weakness of the state and the overregulation of economy, Poland is a green island indeed. But let us imagine how fast would we develop if some reforms would be introduced.

Marek Borowski: There are various types of capitalism: the European model, the Anglo-Saxon, the Swedish one. It is worth looking at the differences and which really works. How should capitalism and free economy function? They have to be transparent and truthful, the market has to work according to its own rules. Who should regulate them? The state, whose intervention is necessary. It is about the honesty, not taking in the citizens, about the powers that the commission of financial supervision has, which of them it used while raising the bar for the credits. Such authority is much valuable and has helped us a lot. What we need is the state’s measures taken to resolve the monopoles and make them transparent so the information about commodity and its advertisement were reliable and true. The crisis we are experiencing now is a result of not following those rules, mainly in the US but also in Europe. The issue of bankers’ salaries play a subsidiary role, although it keeps irritating me when and odd president of some not really big bank earns couple million zloty. That is an exaggeration.

L.S.: Here, in the church of capitalism, we believe that the state is necessary. The state should claim responsibility for introducing pro-developmental solutions and being a productive country. Crisis will be a permanent phenomenon. Lenin, if he were to rewrite his work today, he would have named it ‘Crisis as the highest stage of capitalism’.

J.Ż.: Capitalism is the issue of safety and hazard. If a bank wanted to lend money only those who would surely give it back, it would not make any money on that. The bank has to come to the edge just like every entrepreneur in capitalism. A good example here is ski slalom: if the competitor wants to reach the finishing line safely, he will arrive at the 35th position. But if he wants to reach the podium, he must risk a severe accident, sometimes even a fatal one. That is what capitalism is about and we will not change it. We can change only the relation between the risk and the safety. During crisis, more safety and less hazard is guaranteed.

A question from the room: How much time do we have to fix the crisis?

Krzysztof Rybiński: Approximately 10 years. In 2020 the numerous generation of the last baby boom will retire, an expensive climate policy will be introduced and we will lose the accelerator of the EU funds. We have only 10 years to catch up with the West in respect of the level of life.

J.Ż.: The world and the capitalism have changed a lot. If somebody had been analysing a similar issue three years ago, he would have invited Leszek Balcerowicz and that would have been enough. Today one has to invite 10 people and every one on them has their opinion – all unclear. This fundamental and radical change began in the States and came to Poland. There is nothing worse than the feeling of obviousness. If everyone is saying the same, everyone is wrong. This change has already led to the failure of the myth of the US – not as a superstate, because it will always be a superstate, but as a standard. Several years ago the American health system was set as an example for Poland. Today there is no longer such an issue. Some myths remained and they are extremely menacing, for instance the myth of turning a hospital into a limited company as such companies cannot fall into debt. However, numerous public limited companies are fatally indebted and they fall in full view. How much time? Either we do not have it at all, or we better switch to demography and regain the balance. We should not think that in 20 years there will come a generation that will pay all of our debts. Today, the emptiness pays our debts.

H.B.: The surveys show how much the criteria of company efficiency have changed. The importance of profit has diminished while the incorporeal values are raising in strength: the transparency, watching over the employees. In Europe there are countries which rush along, but the finishing line is somewhere else. The issue of demography is extremely substantial and here we have not enough examples for the state’s productivity. If somebody thinks that single allowance aid can solve the demographic trouble, they are spending all taxpayers’ money in vain. There are examples of countries that managed to solve the problem, of course they only postponed the issue. Talking about the state, it should listen to other participants of the market and try to communicate with them better. Capitalism – yes. But no warps.

L.S.: After the crisis a lot has changed in the field of debate, commenting and cogitations on what capitalism is. Socialism appealed to the main human features: altruism, social instinct, equality, group affiliation, equalitarianism, and on that ground it built something socially pejorative. In contrast, capitalism appeals to egoism, individual interest, the will to be recognised, and on this base it provides many useful things like the social responsibility of business – because of our will to make profit we do socially utile things. In capitalism nothing can function well unless it is based on the interest idea and we should accept that and try to tame it when needed. This is the sole essence of the system and it confirms its virtual functioning. Now is the time for the afterthoughts, but I am not sure whether it is going to last long.

Translated by A. Kumycz

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About Leszek Jażdżewski

Politologist, publicist, regular political commentator in Polish media. Editor in chief of “Liberté!”, Polish liberal socio-political journal. Studied international relations in University of Lodz, Institute of Political Studies on Polish Academy of Sciences, Glamorgan University in UK and Tbilisi University in Georgia. Vice-president of Liberal Forum, member of the council of Projekt: Polska Foundation, secretary of the board of Transport Integration Society, vice-president of Industrial Foundation. Coauthor of books: “Liberal reflections on life chances and social mobility in Europe” and “Democracy in Europe. Of the People, by the People, for the People?”

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