In the last couple of years, the world economy has been rocked by uncontrollable increases in agricultural commodities worldwide, the rollercoaster ride of crude oil prices and the global credit crunch that has led to the global economic crisis, plunging into negative growth even the most robust economies.
The EU economy has not been shielded against the effects of such profound crises, now being dragged into its deepest and most widespread post-war recession. With unemployment expected to rise to 27 million in 2010, statements by right-wing politicians such as former Czech Prime Minister Mirek Topolanek, who recently warned against the dangers of ‘a paternalist state that will take care of everything at the cost of debts and higher taxes’, encapsulate the spirit of misleading free market ideology, refuting the responsibility of individual member states and the EU as a whole vis-à-vis the millions of unemployed Europeans.
Yet, since its inception just over half a century ago, the European integration project has been growing broader and deeper, creating a continent of peace, democracy, stability and prosperity. With its single market and currency, the EU has become a major player in the global economy. In today’s enlarged Union, citizens can afford goods and services that would have been reserved for the rich only a few decades ago. Higher relative wealth and easier access to credit have largely contributed towards this development. So, what has gone wrong with the EU economy in the last few months?
A first tentative answer lies in the EU’s growing role in the global economy and the close interdependence amongst world economies. What started in 2006 as a sub-prime mortgage crisis in the US, caused by the sharp rise in foreclosures, later resulted in a severe credit crunch and finally, in the present global financial and economic contagion.
A Burning Question
So, whose fault is it? Is it capitalism in itself or a series of short-term economic problems triggered by bad governance? Is the economic model to be blamed or the unethical behaviour of individual profiteers, driven by greed and collusion?
Before attempting to respond, this is what experiences going back nearly 250 years have taught us: capitalism is a profit-generating system, inherently regulated by profit. In a capitalist system, goods and services are not produced in order to satisfy desires of consumers or to give work to employees. It is the other way round.
In capitalism, the workforce is used, production is organised and consumers are shaped in order to make profit. In capitalism, there is no other goal than profit, and there can be no other goal because profit-making is the essence of capitalism, it is its strength and advantage over all other economic systems in history. So capitalism is a simple one-goal system stimulating self-interest and exploiting some elements of human nature, not necessarily the best.
Within this context, it is worth acknowledging two extremely powerful forces behind the world economy: the relentless pressure on organisations to continually maximise earnings and the fiercely competitive markets supercharged by the internet. As this combination puts to the test the management skills of market stakeholders, the true question is whether the existing economic model allows for the protection of people from crises such as the one we are currently experiencing. I am afraid that the answer to this is negative.
According to Amartya Sen, 1998 Nobel Prize winner for his contributions to welfare economics, the current economic crisis is generated by ‘a huge overestimation of the wisdom of market processes’. This highly questionable wisdom has allowed for the commoditisation of food, with speculation in agricultural commodity markets running in parallel with the rising costs of gold, oil and essential metals. Amartya Sen has pointed out that famines occur because of the collapse of purchasing power rather than the lack of food availability. Last year’s food riots triggered by food price increases were due to the greed of speculators, taking advantage of the lax regulatory system.
Indeed, people all over the world are paying the price for blind faith in market forces and unfettered speculation. It is also clear that the current crisis could only have been avoided if the existing economic system did not have such serious shortcomings. Which puts into question the very nature of capitalism in its current form and calls for its thorough overhaul.
I am not suggesting to throw out the baby with the bath water. Nor do I deny that there are some or even many ethically driven capitalists out there. But their individual stance is one thing and the relentless demands of the capitalist system is another.
In societies whose economies are organised according to the capitalist model, ethics emanate from different layers of society. However, regulation of capitalism beyond profit is introduced by the political process. The misery of the past 30 years is that the capitalist system has weakened the political system and its capacity of law-making, even in decent democracies. In fact, non-economic systems within society, with strong and distinctive values of their own, such as education, science, health care and even religions or political parties of the left, have capitulated in the face of the capitalist rationale and its ‘free market’ ideology. Now, amidst the crisis, our societies may lack the intellectual and moral resources necessary to bring about change.
By this, I do not insinuate that the answer to the malfunctions of the capitalist system is regression to state-controlled markets. We need to consider long-term changes in order to update the current economic system so that it should no longer hamper the realisation of social values. Establishing a true social market economy is a job that remains to be done. To date, it is mostly a shallow notion, void of any true content. The issue is both ethical and economic: although the crisis has destroyed substantial fortunes, it has primarily affected those who were already vulnerable and it is the state through its different levels of governance that is called to remedy the situation. Before coming to concrete suggestions, let me give you an overview of what current capitalism, dominated by an excessively oversized financial industry, has cost European local and regional authorities.