John Maynard Keynes

Sovereign Wealth = Sovereign Power? (2/2)

Second and final part of a short essay I wrote in 2009 (but still relevant in many aspects). Here you can find the first part and all the details.

A new world order (continued)

The rise of emerging economies (China, India and Russia on all) emphasizes the fact that in a growing proportion of the world economy, the state governance plays a fundamental role in allocating resources for international investment. In the last twenty years, the political leaders of Western countries have followed the dictates of Ronald Reagan and Margaret Thatcher, trying to subtract as much as possible the influence of the government from economic life. Markets should be working (only) on three key principles: Privatisation, Liberalisation and Deregulation. However, the problems faced by the financial markets since the end of 2006 following the outbreak of the subprime mortgage bubble, have brought black clouds on the “market-only approach” to modern capitalism. After the near collapse of the U.S. and EZ banking system and the serious problems posed by the world credit crunch, on the horizon is looming the return to state governance crucially more involved in international economic and financial affairs.

In other words, we are finally beginning to understand that the dichotomy that opposes the “more government, less market” to “more market, less government” is false, and that the historic changes set in motion by globalization and technological revolution require much more complex response of the old-fashioned statism or of a liberism preaching the “laissez-faire capitalism”. Probably, the answer can be found in the scheme “more government, more market”, meaning for “more government” not necessarily a stronger presence of public money, but certainly a stronger ability to determine policies, indicating the strategic guidelines to move the productive forces, and for “more market” a set of simple rules that should ensure the greatest possible transparency to the dynamics of profit.

Somebody may wonder if that could mean a return to a Keynesian economic system. In my humble opinion, the theory of John Maynard Keynes cannot be proposed “as is”. Instead, if returning to Keynesianism means the rediscovery of the need to definitively overcome the dichotomy liberalism – statism, and recovering the role of public policies in the market, then it is useful and appropriate to return to speak of the man who is rightly considered the father of modern macroeconomics. With his theories, Keynes argued the need for regulatory intervention by the state, primarily by using the instruments of monetary policy and credit. His thinking is certainly useful when reasoning about the future of globalization: there is no doubt, in fact, that we have entered a sort of “phase two” of the process of integration of global economies and markets, and this season should not be characterized from a return to protectionism, but from the definition of common rules and new world organizations that go beyond technical ones, such as IMF and World Bank, and political ones, such as various G7-G20 .

Here is a very convincing statement of Dani Rodrik of Harvard University [click for reference]

The first three decades after 1945 were governed by the Bretton Woods consensus — a shallow multilateralism that permitted policymakers to focus on domestic social and employment needs while enabling global trade to recover and flourish. This regime was superseded in the 1980s and 1990s by an agenda of deeper liberalisation and economic integration. That model, we have learned, is unsustainable. If globalisation is to survive, it will need a new intellectual consensus to underpin it. The world economy desperately awaits its new Keynes.