Monthly Archives: April 2009

By Edmund Phelps

Ingram Pinn illustration









In countries operating a largely capitalist system, there does not appear to be a wide understanding among its actors and overseers of either its advantages or its hazards. Ignorance of what it can contribute has in the past led some countries to throw out the system or clip its wings. Ignor­ance of the hazards has made imprudence in markets and policy neglect all the more likely. Regaining a well-functioning capitalism will require re-education and deep reform.

Capitalism is not the “free market” or laisser faire– a system of zero government “plus the constable”. Capitalist systems function less well without state protection of investors, lenders and companies against monopoly, deception and fraud. These systems may lack the requisite political support and cause social stresses without subsidies to stimulate inclusion of the less advantaged in society’s formal business economy. Last, a huge social insurance system, with resulting high taxes, low take-home pay and low wealth, may not hurt capitalism.

In essence, capitalist systems are a mechanism by which economies may generate growth in knowledge – with much uncertainty in the process, owing to the incompleteness of knowledge. Growth in knowledge leads to income growth and job satisfaction; uncertainty makes the economy prone to sudden swings – all phenomena noted by Marx in 1848. Understanding was slow to come, though.

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By Sir Martin Sorrell









Every era of financial or irrational exuberance ends with the shutters coming down. Tulip mania, the South Sea bubble, the panic of 1825 and the first internet bust were all part of the same ebb and flow. We should not expect it to be different now, but that does not make it any easier to accept the cyclical nature of economies.

In good times, collective human psychology and self-reinforcing experience convince us that we are living in a new era, where the old oscillations of boom and bust have been banished. Then comes catastrophe and bankruptcy, and a fresh consensus emerges from the debris of the last great party. That new orthodoxy says that Anglo-Saxon liberal market economics is dead and globalisation discredited. Even capitalism itself, it seems, is on life support under the watchful eye of the prison hospital staff. The former giants of finance are pariahs. Right now it would probably be more acceptable to confess at a dinner party to having stolen Christmas presents, than admit you dabble in investment banking.

This too shall pass and things will change. There will be a recovery of sorts, not this year but perhaps next – just by dint of the scale of fiscal stimulus in the US, UK and elsewhere and even by the atmosphere surrounding Gordon Brown’s seemingly triumphant Group of 20 nations summit.

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By Mario Monti

If the world economy is in crisis, the market economy is even more in crisis. It is seen as unfair, having generated unacceptable inequalities; and inefficient, having attracted massive resources into financial activities whose contribution to the economy is questioned. Yet the world needs an integrated market economy, a necessary, though not sufficient, condition for growth and welfare.

The Group of 20 countries has focused on recovery plans and financial regulation. But this is only a first step towards restoring the credibility of the market economy and taming economic nationalism, the seed of disintegration.

The key test for market economies, perhaps even for democracies, will be whether they master the growing in­equalities, including within countries, caused by ungoverned globalisation and aggravated by the crisis. This requires two developments: getting the best out of competing economic models; and firming up market integration by moderating tax competition. While the former has started, the latter is not even on the agenda.

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The Future of Capitalism

The free-market model that dominated thinking for 30 years has been discredited. Where to now? Join the debate here and follow the series in full at

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