Will the Global Crisis Lead to Capitalism With a Human Face?

1. Will the Global Crisis Lead to Capitalism With a Human Face? Ivars Brīvers The Chairman of the Latvian Economic Association, Professor of BA School of Business and Finance, Riga, Latvia

2. SPEECH BY M. NICOLAS SARKOZYPRESIDENT OF THE FRENCH REPUBLIC40th World Economic ForumDavos – Wednesday, January 27, 2010 This crisis is not just a global crisis. It is not a crisis in globalisation. This crisis is a crisis of globalisation. By discarding all our responsibilities in the marketplace, we have created an economy which has ended up running counter to the values on which it was nominally based, and to its own objectives.

3. Is the present crisis economical? The three dimensions of sustainable development: • Environment – the basis • Economy – the tool • Social – the target (From Our Common Future; The Brundtland Commission, 1987) Thus the present global crisis should be considered as: • environmental crisis (in narrow sense ecological) • economical crisis • human crisis in general – historical crisis

4. Ecological crisis If the present growth trends in world population, industrialization, pollution, food production and resource depletion continue unchanged, the limits to growth on this planet will be reached sometime within the next 100 years. The most probable result will be sudden and uncontrollable decline in both population and industrial capacity. (From Limits to Growth; Donella H. Meadows, Dennis L. Meadows, Jorgen Randers and William W. Behrens, 1972) • resource depletion • environmental pollution and degradation of ecosystems • global warming

5. Human crisis Moral crisis • people are confused about the values of life – “added value” has superseded real values Institutional crisis • the contradiction between individual preferences and social goals, which cannot be solved without irrational elements, such as Th.Veblen’s institutions Educational crisis • are the people in the XXI century better educated than in XIX century? • considering the higher education as non-elitist has lead to the loss of real higher education • the education has been subjugated to the market, it has lost its moral aspects

6. Where we can see the end of the crisis? Still a lot of economists give more attention to the financial markets, considering that the signal about recovery will come from there. This is curiously as even during the Great Depression J.M.Keynes considered labour market, not the stock market as the main indicator of the recovery. Searching the way out of the present crisis only as a financial crisis may lead to “recovery, not welfare”. (Jose Antonio Cordero) Finding the way out of the crisis only in one dimension – economical, may lead to very harmful consequences – one should remember the consequences of the Great Depression.

7. We need to guard against destructive creation,Jagdish Bhagwati,university professor at Columbia University,The Financial Times, October 16, 2008 “In each case, the assumption was that financial innovation was like non-financial innovation. When the personal computer was invented, the economy profited without upheaval. The typewriter became obsolete – an example of what Joseph Schumpeter famously called “creative destruction”. But with financial innovation, the downside can be lethal – it is “destructive creation”. We have to work hard at defining the downside scenarios.”

8. SPEECH BY M. NICOLAS SARKOZYPRESIDENT OF THE FRENCH REPUBLIC40th World Economic ForumDavos – Wednesday, January 27, 2010 The question of innovative financing is central. We cannot avoid the debate on a tax on speculation. Taxing the exorbitant profits of finance to combat poverty: who cannot see how such a decision – even if I am well aware of the complexity of implementing it – would contribute to putting us on the path of a moralisation of financial capitalism? If financial capitalism went so wrong, it was, first and foremost, because many banks were no longer doing their job. Why take the risk of lending to entrepreneurs when it is so easy to earn money by speculating on the markets?

9. SPEECH BY M. NICOLAS SARKOZYPRESIDENT OF THE FRENCH REPUBLIC40th World Economic ForumDavos – Wednesday, January 27, 2010 …finance, free trade and competition are only means, not ends. From the moment we accepted the idea that the market was always right and that no other opposing factors need be taken into account, globalisation skidded out of control. Globalisation first took the form of globalisation of savings. It gave rise to a world in which everything was given to financial capital and almost nothing to labour, in which the entrepreneur gave way to the speculator, in which those who lived on unearned income left the workers far behind…

10. Latvia – Ponzi from the start(D.Bezemer, M.Hudson, J.Sommers) In Latvia the state power has grown together with the speculative business, taking a full control over the mass media, thus manipulating with people’s consciousness. Thus the democracy there is fictitious. Political and economical power is in the hands of cleptocracy, which make decisions, according their narrow interests, ignoring the survival of Latvian nation.

11. IMF as a charitable adviser „Don’t rely on profuse inflow of foreign capital, which will inflate your finance system or real estate sector. This is a warning to many Central and East European countries, that rely too much on those two sectors.” (Marek Belka, Director of European department of IMF, March 30, 2009, reverse translation from Latvian)

12. Economic crisis The goal of economy in the XXth century – economic growth has turned out to be false. Economic growth in the developed countries does not contribute the increase of real welfare. “While the rich got richer, middle-class incomes in Western countries were stagnant in real terms long before the recession.” (Jackson, 2009) Economic growth is unsustainable, as environmental resources at an exponential rate are turned into rubbish, and both of them are close to the limits. Though economic growth is necessary, as the increasing productivity and labour substitution by capital allows producing the same amount of product with less labour. Perhaps, this is the main contradiction of economics in the XXI century, and solution of it will be the main problem of economics. Is it possible to achieve prosperity without growth?

13. Growth has been (until now) the default mechanism for preventing collapse. In particular, market economies have placed a high emphasis on labour productivity. Continuous improvements in technology mean that more output can be produced for any given input of labour. But crucially this also means that fewer people are needed to produce the same goods from one year to the next. As long as the economy expands fast enough to offset labour productivity there isn’t a problem. But if the economy doesn’t grow, there is a downward pressure on employment. People lose their jobs. With less money in the economy, output falls, public spending is curtailed and the ability to service public debt is diminished. A spiral of recession looms. Growth is necessary within this system just to prevent collapse. This evidence leads to an uncomfortable and deep-seated dilemma: growth may be unsustainable, but ‘de-growth’ appears to be unstable. At first this looks like an impossibility theorem for a lasting prosperity. But ignoring the implications won’t make them go away. The failure to take the dilemma of growth seriously may be the single biggest threat to sustainability that we face. Tim Jackson, “Prosperity Without Growth?”, 2009

14. Oscar Wilde(fromThe Young King, 1891) “Sir, knowest thou not that out of the luxury of the rich cometh the life of the poor? By your pomp we are nurtured, and your vices give us bread. To toil for a hard master is bitter, but to have no master to toil for is more bitter still.”

15. I confess I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other's heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress. The best state for human nature is that in which, while no one is poor, no one desires to be richer, nor has any reason to fear being thrust back, by the efforts of others to push themselves forward. It is only in the backward countries of the world that increased production is still an important object: in those most advanced, what is economically needed is a better distribution. It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the Art of Living, and much more likelihood of its being improved, when minds ceased to be engrossed by the art of getting on. Even the industrial arts might be as earnestly and as successfully cultivated, with this sole difference, that instead of serving no purpose but the increase of wealth, industrial improvements would produce their legitimate effect, that of abridging labour. John Stuart Mill (from Principles of Political Economy, 1848)

16. Herman E. Daly (from A Steady-State Economy, 2008) Growth is more of the same stuff; development is the same amount of better stuff (or at least different stuff). The economy must conform to the rules of a steady state - seek qualitative development, but stop aggregate quantitative growth. GDP increase conflates these two very different things. We have lived for 200 years in a growth economy. That makes it hard to imagine what a steady-state economy (SSE) would be like, even though for most of our history mankind has lived in an economy in which annual growth was negligible. The growth economy is failing. The quantitative expansion of the economic subsystem increases environmental and social costs faster than production benefits, making us poorer not richer, at least in high consumption countries. And even new technology sometimes makes it worse. We do not bother to separate costs from benefits in our national accounts. Instead we lump them together as “activity” in the calculation of GDP. How do we deal with poverty in the SSE? The simple answer is by redistribution - by limits to the range of permissible inequality, by a minimum income and a maximum income.

17. The institutional roots of criticism of the steady-state economy“Institutions are habitual methods of carrying on the life process of the community.” (Th.Veblen) The ideas of steady-state economy, prosperity without growth, and sustainable development in general usually meet a negative attitude from most of politicians, bankers, and even from common people. How to explain that these rather obvious conclusions about limits to growth are treated with resistance? May be the explanation is in the fact, that the notion of increase of personal wealth through competition has institutional roots – people cannot give a rational explanation to their belief, thus are defending it with the same strength, as a zealot is defending his confession. If he feels that he is losing in the discussion, the only let-out is to give an ironic and none-serious spirit to the discussion.

18. SPEECH BY M. NICOLAS SARKOZYPRESIDENT OF THE FRENCH REPUBLIC40th World Economic ForumDavos – Wednesday, January 27, 2010 We will not be able to change our set ways if we do not change the way we measure and represent things, our criteria. That is not an issue only for the experts. It concerns us all. Purely financial capitalism is a distortion, and we have seen the risks it involves for the world economy. But anti-capitalism is a dead end that is even worse. Either we change of our own accord, or change will be imposed on us by economic, social and political crises.

19. Is there a solution for the dilemma of growth? • Can one find the solution under capitalism (i.e. private property of capital)? • Can the financial markets exist in economy without growth? • Can the economy exist without financial markets? • How can we return the economy to the service of mankind? How can we act to ensure that the economy no longer appears as an end itself, but as a means to an end? (N.Sarkozy) • Is it possible to create a capitalism with “human face”? I guess, that the answer is “no”.