Saturday, November 22, 2008

The Flexibility of Capitalism

While capitalism is the most dominant mode of economic organization in the global economy today, there isn't one country which is completely based on liberalism, its theoretical foundation. This is because liberalism, followed unflinchingly, creates a state so ruthless in its pursuit of efficiency that no society will abide the instability it causes. Instead countries pursue a diversity of strategies that take many ideas from liberalism but also temper these with different forms of government intervention. What's more, economies develop alongside societies with each influencing the other. Not only do these different societies have different views on the amount of instability they're willing to accept in exchange for growth, they are also at different stages in their development today. Each one has been affected by crisis in different ways and has developed different forms of capitalism in response. In a sense, each capitalist country is like its own business with no two being completely alike. All the while capitalism has been able to adapt; keeping the free market and invisible hand while adjusting them to suit the specific country and its society.

While economists that favor liberalism portray it as an ideal form of market organization, the history of human societies that have tried to implement it have shown a strong backlash against it. This was most notably described by Karl Polanyi when he argued that, “The outstanding discovery of recent historical and anthropological research is that man's economy, as a rule, is submerged in his social relationships.”i This research shows that people are not purely devoted to obtaining material goods through rational economic decisions of supply and demand as liberalism describes. Instead the social aspects of an economy must be examined rather than the economy in isolation. Polanyi goes on to show how history has demonstrated that liberalism rather than the natural state of affairs for people was a directed effort by those that supported the rationality of its theories. The self-regulating market that it favored though caused problems not just for the working class that found their labor so easily commodified, but also by land owners and merchants that were adversely affected by the price swings and instability that it brought. This led societies to once again embed the economy in the greater social structure of politics and culture in order to curtail its most unsocial aspects.

This embedded liberalism takes on different forms in different economic regimes as they are complimentary to the underlying social norms. As Ruggie notes, “international economic regimes provide a permissive environment for the emergence of specific kinds of international transaction flows that actors take to be complementary to the particular fusion of power and purpose that is embodied within those regimes.”ii By coming to a compromise between the growth and efficiency available from a free market and the stability of, for example low unemployment, from government control these economic regimes create an acceptable normative framework for society. This normative framework allows these economic regimes to last long past the initial situations which formed them such as the existence of the IMF long after the dissolution of Bretton Woods system. Since cultural and societal norms differ from region to region, these normative frameworks and the economic regimes that are built on them will differ. Even as we look across the world today we see that different regions are in different stages of development and have had more or less experience with a free market economy. Some economic regions may stay in a constant flux as different segments of society search for a policy compromise that is amenable to all and that will build the necessary normative framework of acceptance. Sachs points out that, “for a developing country rejoining the world system, the fact that the advanced economies all share certain key features...offers a relatively straightforward set of guideposts for the most fundamental reforms.”iii Though these guideposts are well known and their successes in developed countries can be clearly seen, each country must work to see how they fit in with their existing culture and society. Much of the consternation of globalization has come about by local communities and market segments fighting to ensure that their voices are heard as their countries embrace more of a free market. They want the growth, but on their terms. Each country and economic region comes to those terms on their own time line.

Often, those time lines must be greatly altered as a country faces a crisis and is forced to deal with the current situation. Each country will face crisis differently and develop different forms of economy in response. As Gourevitch writes, “Economic crisis leads to policy debate and political controversy; out of conflict, policies emerge.”
iv When the economy is sailing along and people are relatively happy there is little motivation to alter public policy. With crisis comes the need to examine what has gone wrong and how to avoid similar problems in the future. It is also an opportunity for market segments that feel ill-represented by the current norm to angle for a better compromise and a normative framework that better represents their interests. For any crisis there are a variety of options available to governments for dealing with it. For one to be implemented above another requires political backing and the power that comes with it. As each country has its own array of political segments, each with varying amount of power, they will come to different resolutions for how to handle a crisis. In addition, the policy choices that a country makes in the past has ramifications for the options available to it in the future. If demand management or protectionism worked well for the country in the past there will be a strong urge to use those procedures in future crises.

As capitalism has developed and matured around the world its participants have begun to appear more and more like the companies which help drive their economies. Some are willing to take more risks, be less stable, and experience greater volatility in the hopes of creating more growth and efficiency. Others prefer less volatility even at the cost of increased growth. This becomes clearer with the increased mobility of financial capital. Freidan argues that, “international capital mobility tends to remake political coalitions by way of its impact on the effects of national policies.”v That is, if governments want the benefits of capital mobility they need to insure that the policies they make will not cause investors to leave. This is similar to companies that list shares of the company on market exchanges and are thus influenced in management decisions by investor responses. Just as companies seek to find new and different ways of attracting investors, countries that rely on capital mobility will seek government policies that attract more capital.

Though capitalism has spread as the dominant mode of economic organization we've seen a large variety of the forms of capitalism throughout the world. While no country embraces unbridled liberalism many take liberalism and temper it in some way by government. This embedding of liberalism is different for each country as it develops and faces crises. As each country determines through power and politics what levels of growth and stability are the acceptable norm they mimic companies balancing the needs of their different stakeholders. All of these options for how a country can manage liberalism show the incredible flexibility of capitalism.

i  Polanyi, Karl, The Great Transformation, p. 46

ii  Ruggie, John Gerard, International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, p. 6

iii  Sachs, Jeffrey, Consolidating Capitalism, p. 2

iv  Gourevitch, Peter, Politics in Hard Times, p. 19

v  Frieden, Jeffry A., The Politics of National Economic Policies in a World of Global Finance, p. 426
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