Draft May 2012 FOR COMMENTS – NOT TO BE CITED OR COPIED WITHOUT AUTHOR’S PERMISSION ULF DAHLSTEN THE SECOND RETURN OF UNCHECKED CAPITALISM How an International Rule of Law can reap the benefits of the global market economy and strengthen national and regional sovereignty. The second return of unchecked capitalism Draft version May 2012 SUMMARY Many in the Western world feel that something has gone terribly wrong. They see a systemic crisis, a crisis that stretches from the financial system to the political, from the ecological system to the social, from the availability of natural resources, food and water to their use. It has been easy, especially of late, to identify mistakes and put the blame for those on politicians who have spent more than they should have had, on individual countries that are worse sinners than others, on inventions such as the Euro currency union or on the development of a global market economy, or, perhaps more correctly, the lack of adequate management of this development. Others, especially outside the Western world, do not recognize the crisis, or see it as Western problem, often because they are benefiting from the forces which globalization has unleashed, more than they are hurt by the drawbacks. Hundreds of millions in Asian and other countries have after all been lifted out of poverty during the last decades. Clearly, these are valid points and legitimate views. However, they are in my mind missing an important underlying trend and that is the destructive Second Return of Unchecked Capitalism. The public order has lost its upper hand in relation to the market and as long as this situation remains we will see the return of the drawbacks of un-checked capitalism. It will not be enough to correct mistakes in individual countries, not even within a currency union to get the development back on track. I want to state from the outset that in my view the capitalistic system is the best system ever imagined to create wealth as it inspires one and all to develop their own life projects. The strengths of capitalism are numerous and the system continues to create technical progress, new products and services, accumulation of capital, growing markets, value for entrepreneurs and a global division of labour. Much is written about a capitalism in crisis, but the truth is that the system as such has never really been in crisis. It has, given the proper conditions, always delivered what it is best at. That un-checked capitalism on the other hand, comes with severe shortcomings was proven already at the initial phases of the industrial revolution a hundred and fifty years ago. The industrial revolution did bring unprecedented progress but also serious problems. It is a question of judgement what were the worst, but I would point to four drawbacks in particular. Many workers were taken advantage of, while others were left unemployed. Distribution of income and wealth became unreasonably skewed. Nature and natural resources were exploited in a short-sighted way. i Draft version May 2012 The second return of unchecked capitalism Tendencies to establish harmful monopolies and block competition hampered development. These negative side effects were felt by a majority of the populations in the early phases of industrialization. The popular unrest that followed gave rise to labour unions and the modern western democracies. People called upon nation-states, governed with the consent of their citizens, to address the problems and create checks and balances that could ensure the benefits of progress being shared by all. Thus, over time a marriage of convenience evolved between the market economy and the Western democracies – some call it ‘liberal democracy’, others ‘democratic capitalism’. The nation-states introduced different forms of control over the market economy, having the upper hand in the relation. The unchecked capitalism became a checked capitalism, bestowing on it a ‘softer’ name, market economy, but the underlying forces had not been changed, just slightly curbed. In truth, the benefits of the market economy have never been shared by all in an equal way, but then few have really demanded it, outside the circle of those that vainly are dreaming about a communist planned economy. The majority seems to tolerate that some are more successful on the markets than others, as long as their desires are being increasingly met and they feel that they are shown sufficient respect. The newly established marriage, however, between the nation-states and the market economy got into trouble after only a couple of decades. The drawbacks started to reappear in some Western countries, especially in the form of unemployment and inequality. Many view the First World War as part of this evolving systemic crisis. There was a Return of Unchecked Capitalism, not everywhere at the same time or in the same way, but where it cropped up, it eroded popular trust in the marriage and in both its partners, both the democratic system and the market economy. Industrialization had been followed by an accelerated globalization and relocation of industries. This was a one-sided globalization; characterized by colonialism and exploitation of weaker countries by military means. Western industries wanted and gained access to raw materials and new markets. The money involved increased rapidly as did the opportunities for fast rewards, which made the financial elite demand liberal financial markets. As a consequence, the globalized financial markets started to become flooded by speculative ‘hot money’ to use the language of the famous economist JM Keynes. A second consequence was that governments lost control of the flow of money. ii The second return of unchecked capitalism Draft version May 2012 There were early calls in many continental countries for protectionism and de-globalization in face of the rising unemployment; the responses by governments in the form of protectionism and other measures may even have deepened the crisis as it evolved into a Wall Street crash and the Great Depression. The loss of confidence in the system that unavoidably followed, paved the way for the take- over by fascists all over Europe, finally leading to another World War. The Second World War broke the neck of globalization, the relative role of trade in the economy declined and the financial markets were re-nationalized and regulated. The era of global “hot money” had ended and JM Keynes was the economist of the day. What then followed was a period of steady growth and a flourishing marriage between the market economy and the Western democracies. It is not until of late that we have achieved the same degree of globalization as before the Second World War. And now some drawbacks in the form of high unemployment and increased inequality within nations start to return. Some economic historians are observing the return of some disturbing imbalances and patterns. At the end of the first modern globalization period, the governments were, just like now, unable to control the global market economy, especially the forces of the financial markets. We have already had one severe global financial crisis and many see the early signs of a new such crisis. Some also warn of the risk for a prolonged recession in the Western hemisphere, similar to the one the Japanese experienced after their financial crisis fifteen years ago. Others are concerned about the increases in money supply, rising oil and food prices that can easily create expectations of inflation, almost inevitably leading to inflation, demanding monetary policy responses, creating stagflation or even a global recession. The parallels with history should not be drawn too far; the present globalization is much more balanced than the earlier one, driven as it is by an IT-revolution that has enabled a sophisticated and intricate global distribution of work. One important difference is that it is not only in the interest of the developed world, but also of the emerging countries that are benefiting most from globalization, that the global market economy functions in a reasonably stable and predictable way. However, what seems more and more obvious is that we are seeing a Second Return of Unchecked Capitalism. The market economy has once again outgrown the nation-states and become global. It can no longer be controlled by any individual country or even by regional bodies such as the European Union. The checks and balances that the nation-states have exercised on the market economy have withered away as the globalisation process and the iii Draft version May 2012 The second return of unchecked capitalism liberalization of the financial markets have shifted into a higher gear, without the much needed balancing institutional development. The power balance between the public order and the financial markets has once again been reversed. The public order has to act within the space offered by the financial markets, not the other way around. In hindsight one may argue that the Western democracies should have seen it coming. It has over the last decades become increasingly difficult for nation-states to meet the aspirations of their citizens for developed social services, education and other public goods. A main reason has been the lost ability to tax their global companies and their wealthiest citizens, who, in order to avoid taxes and by way of regulatory arbitrage, have been able to take advantage of an unregulated global market economy. Almost all Western nation-states responded to the new environment by running deficits of their public finances, heavily borrowing, initially mostly on the domestic markets, but increasingly on the global financial markets. As public debts began to reach unsustainable levels and doubts about the advisability of this route started to spread, a new opportunity was offered.