CAMBRIDGE: The global financial crisis that recently brought the world economy to its knees appears to have abated. Time to reflect on how we ensure that similar crises do not erupt again.
Practically all discussion on institutional reform in the world economy is predicated on the idea that our objective is a functioning global capitalist system. This approach takes it for granted that an integrated world market will deliver the goods as long as we contain its excesses and imbalances. The policy challenge within this frame of reference is: how do we make the world safe for free trade in goods, services, and capital?
No good answer to this question exists because the idea of global capitalism is inherently impracticable. Capitalism is a national phenomenon. The real policy challenge is: how do we make the world safe for different brands of national capitalism to prosper side by side? Until we address this question, we are not going to come to grips with the real issues and provide workable solutions to our global predicament.
Markets are not self-regulating, self-stabilizing, and self-legitimating. That is why every functioning society has regulatory bodies that set the rules of competition, monetary and fiscal institutions that perform stabilizing functions, and social insurance schemes, transfer policies, and other social arrangements that bring market outcomes into conformity with a society’s preferences regarding the distribution of risks and rewards.