Free markets will deliver the goods if left alone
December 20, 1998
by Irwin Stelzer
IN Tom Wolfe's best-selling novel, A Man in Full, a debt-laden property developer finds himself in a new world, one in which he faces ruin because his cash flow is insufficient to meet the interest payments on the money he has borrowed to expand his empire. Aloft in his beloved G-5 private jet with his MBA-endowed chief financial officer, Wolfe's bewildered developer seeks an explanation for his fall from grace.
"The whole paradigm has shifted," says the bean counter. This advice "absolutely drove him [the developer] up the wall. The damned word meant nothing at all . . . and yet it was always 'shifting', whatever it was. In fact, that was the only thing the 'paradigm' ever seemed to do. It only shifted."
And it seems to be doing the same in the real world. The extraordinary volatility of recent months has left pundits wondering whether they are witnessing a paradigm shift in the world economy. Not for them acceptance of the fact that markets go up and down, that the circumstances of the world's various economies change from time to time, and that some of these changes, if truth be told, are beyond human understanding, or at least beyond the understanding of economists and business analysts.
Instead, they hunt for a new paradigm. The last search turned up the theory that, in a globalised economy, policymakers need no longer worry about that annoying trade-off between inflation and unemployment. With the capacity of the world to draw on for its T-shirts, trainers and cars, a fully employed American economy could continue to grow rapidly and indefinitely without putting upward pressure on wages and prices - and tow the rest of the world behind.
But the permanent worldwide prosperity foreseen by the new paradigmists was not to be. So we now have on offer several newer paradigms, or ways of viewing the world. From Germany comes the view that the road to prosperity lies on the demand side of the economy. "Red" Oskar Lafontaine says that raising wages and increasing government spending will take Germany and the rest of Europe to permanent prosperity. Never mind that Franklin D Roosevelt tried that during the Great Depression and never succeeded in eliminating massive unemployment until the American economy went on a war footing.
A competing paradigm starts from the assumption that the volatility in the world economy has been caused by 30-year-old currency traders moving massive amounts of money at the touch of a button. Curb the ability of these speculators to withdraw funds from an economy in trouble, and meltdowns such as we have seen in Asia will be prevented.
The appeal of this paradigm to politicians and finance ministers is obvious: it places them, rather than callow currency traders, at the controls of the international economy. Or so they think. Alas, they are doomed to disappointment. Capital that cannot flow out of a country is unlikely to flow into it in the first place. Capital flows are not the result of traders' whimsy. Rather, when capital flees it is a signal that something is very wrong - the banking system over-extended, or the exchange rate unrealistic. Attacking the symptom will not cure the disease.
Nevertheless, this latest paradigm is attracting some support from distinguished academics and is the leading topic in most meetings of American and British Treasury officials.
These new "new paradigms" are offered as replacements for some of the older ones. Japan's model of government direction of the private sector is in justifiable disrepute. South Korea's model - prosperity based on corporate conglomerates, grown large through the use of low-interest debt made available to government-favoured borrowers - no longer seems attractive, with that country mired in recession.
So, too, the Russian model. Both the old, communist system, which brought the country to penury, and the newer mafia entrepreneurship that has seen the country's GDP dip below that of Denmark, are hardly worth copying.
Which leaves the entrepreneurial-capitalist paradigm, as practised in the United States and aspired to by Tony Blair for Britain. Not new, not complicated. Minimum state involvement in the economy, with the government claiming less than 40% of the nation's output of goods and services. Taxes kept low enough not to discourage work and risk-taking. Capital and labour free to flow to their best uses. Monetary policy set by someone as wise as Alan Greenspan, or at least as independent. Free trade so that consumers can benefit from the best the world has to offer, and producers are forced to compete with the world's most efficient firms.
That is the essence of the paradigm that the French derisively call "the Anglo-Saxon" model. The derision stems from the component they find most offensive: labour-market flexibility. In America, real wages are allowed to fluctuate and firms are permitted to lay off unneeded workers. But the combination of flexible real wages, geographic mobility of workers, a culture of entrepreneurship that encourages new business start-ups, and the conditions mentioned above result in the rapid re-employment of these workers. That is why the business press is reporting lay-offs at Boeing, Citicorp, Exxon Mobil and, at the same time, record-high employment. Not a new paradigm, this Anglo-Saxon system, but still the best known route to prosperity.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.