Leading French presidential contender Nicolas Sarkozy has recently lashed out against “speculative capitalism.” But he should be asking how capitalism can be developed even further, with new institutions in finance and insurance to deal with the risks to jobs and livelihoods that he has highlighted.
Nicolas Sarkozy, the leading contender in the French presidential election, recently lashed out against what he called “speculative capitalism,” and says he wants to “moralize the financial zone” created by the euro. What does Sarkozy mean by “speculative capitalism?” Something immoral, apparently, but what? The term has rarely been used before, and seems to be redundant. After all, capitalism is practically a synonym for speculation, isn’t it?
Sarkozy is expressing a wave of sentiment that is neither unique to his party nor to France. At stake with his comments are emerging ideas and attitudes that will inform the twenty-first century economy. So we should think hard about what “speculative capitalism” means.
Sarkozy has called free trade “a policy of naiveté,” and wants to take a number of steps that would stand in the way of economic globalization. Although he does want to make the French labor market less rigid, he would block foreign takeover bids of French companies and protect Airbus workers from possible job losses. Protecting France from speculative capitalism seems to mean interfering with free trade to protect local jobs.
To be sure, Sarkozy is right to note the enormous risks that workers and their communities face in this rapidly globalizing world. But putting this problem center stage should not mean protecting existing jobs come what may.
Capitalists put their money where they think it can get the highest return; that is what we call speculation. They buy companies, break them up, recombine them, fire some employees, and hire others. To do this profitably, they cannot afford to let patriotism or sentiment interfere. They do business in whatever country is most advantageous. Rewarding successful ventures is the basic idea of capitalism – a dynamic process that Joseph Schumpeter called “creative destruction.”
Under capitalism, one is immoral if one reneges on a contract or breaks the law, but not if one speculates. Planned economies were never able to flourish because uncertainty about the future is just too high, something that is best left to the speculators, with the potential of reward if they are right and the disciplining whip of the market if they are wrong.
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now
Concerns about free trade similar to Sarkozy’s are gaining strength around the world. In an article last year in the US journal Foreign Affairs , Alan Blinder, a former advisor to President Bill Clinton and Vice-Chair of the US Federal Reserve Board, argued that the process of globalization has the potential to cause massive job loss in the future. Given that electronic communications technology has a powerful potential to replace employees with others who are thousands of miles away, we may now be seeing only the beginning of this process.
Blinder is absolutely right that the problem could get worse. Deniers of the problem – such as economist Jagdish Baghwati – cannot prove that the worst will not happen. We ought to prepare for the possibility of massive turmoil in our economies in coming years, even if we cannot prove that it will happen, just as we should take steps against global warming, even if some scientists doubt that it is a problem.
According to Blinder, governments should encourage education for jobs that are harder to outsource overseas. He wants the government to subsidize “personally-delivered service” jobs, which cannot be delivered over the Internet, to encourage the expansion of such jobs instead of “impersonally-delivered services.”
Subsidies, of course, interfere with free trade. But Blinder’s solution appears to be a creative new idea, and one may think of legitimate justifications for the government to interfere with free markets this way. His idea certainly is more focused and theoretically sound than Sarkozy’s plans to protect existing jobs. In fact, Blinder’s proposal is only one of many possible government policies aimed at dealing with the Internet-age turmoil in the market for jobs and livelihoods.
Capitalist institutions include risk-management schemes that provide insurance, hedging, and diversification. Government can promote the democratization of such institutions so that they protect people from the very risks that they are worrying most about. Such possibilities include livelihood insurance, home equity insurance, income-linked loans, and GDP-linked and home-price-linked securities.
Moreover, government can make our social insurance (a government institution that complements private insurance) more incentive-compatible and better at managing risks – and not just the risks of the extreme losers – by, say, launching inequality-indexation of the tax system. And governments should improve our information infrastructure, so that financial contracts can better capture the outcomes of economic risks.
So Sarkozy shouldn’t be lashing out against “speculative capitalism.” On the contrary, he should be asking how capitalism can be developed even further, with new institutions in finance and insurance to deal with the very important problem that his campaign has highlighted.
To have unlimited access to our content including in-depth commentaries, book reviews, exclusive interviews, PS OnPoint and PS The Big Picture, please subscribe
Iran’s mass ballistic missile and drone attack on Israel last week raised anew the specter of a widening Middle East war that draws in Iran and its proxies, as well as Western countries like the United States. The urgent need to defuse tensions – starting by ending Israel’s war in Gaza and pursuing a lasting political solution to the Israeli-Palestinian conflict – is obvious, but can it be done?
The most successful development stories almost always involve major shifts in the sources of economic growth, which in turn allow economies to reinvent themselves out of necessity or by design. In China, the interplay of mounting external pressures, lagging household consumption, and falling productivity will increasingly shape China’s policy choices in the years ahead.
explains why the Chinese authorities should switch to a consumption- and productivity-led growth model.
Designing a progressive anti-violence strategy that delivers the safety for which a huge share of Latin Americans crave is perhaps the most difficult challenge facing many of the region’s governments. But it is also the most important.
urge the region’s progressives to start treating security as an essential component of social protection.
Nicolas Sarkozy, the leading contender in the French presidential election, recently lashed out against what he called “speculative capitalism,” and says he wants to “moralize the financial zone” created by the euro. What does Sarkozy mean by “speculative capitalism?” Something immoral, apparently, but what? The term has rarely been used before, and seems to be redundant. After all, capitalism is practically a synonym for speculation, isn’t it?
Sarkozy is expressing a wave of sentiment that is neither unique to his party nor to France. At stake with his comments are emerging ideas and attitudes that will inform the twenty-first century economy. So we should think hard about what “speculative capitalism” means.
Sarkozy has called free trade “a policy of naiveté,” and wants to take a number of steps that would stand in the way of economic globalization. Although he does want to make the French labor market less rigid, he would block foreign takeover bids of French companies and protect Airbus workers from possible job losses. Protecting France from speculative capitalism seems to mean interfering with free trade to protect local jobs.
To be sure, Sarkozy is right to note the enormous risks that workers and their communities face in this rapidly globalizing world. But putting this problem center stage should not mean protecting existing jobs come what may.
Capitalists put their money where they think it can get the highest return; that is what we call speculation. They buy companies, break them up, recombine them, fire some employees, and hire others. To do this profitably, they cannot afford to let patriotism or sentiment interfere. They do business in whatever country is most advantageous. Rewarding successful ventures is the basic idea of capitalism – a dynamic process that Joseph Schumpeter called “creative destruction.”
Under capitalism, one is immoral if one reneges on a contract or breaks the law, but not if one speculates. Planned economies were never able to flourish because uncertainty about the future is just too high, something that is best left to the speculators, with the potential of reward if they are right and the disciplining whip of the market if they are wrong.
Subscribe to PS Digital
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now
Concerns about free trade similar to Sarkozy’s are gaining strength around the world. In an article last year in the US journal Foreign Affairs , Alan Blinder, a former advisor to President Bill Clinton and Vice-Chair of the US Federal Reserve Board, argued that the process of globalization has the potential to cause massive job loss in the future. Given that electronic communications technology has a powerful potential to replace employees with others who are thousands of miles away, we may now be seeing only the beginning of this process.
Blinder is absolutely right that the problem could get worse. Deniers of the problem – such as economist Jagdish Baghwati – cannot prove that the worst will not happen. We ought to prepare for the possibility of massive turmoil in our economies in coming years, even if we cannot prove that it will happen, just as we should take steps against global warming, even if some scientists doubt that it is a problem.
According to Blinder, governments should encourage education for jobs that are harder to outsource overseas. He wants the government to subsidize “personally-delivered service” jobs, which cannot be delivered over the Internet, to encourage the expansion of such jobs instead of “impersonally-delivered services.”
Subsidies, of course, interfere with free trade. But Blinder’s solution appears to be a creative new idea, and one may think of legitimate justifications for the government to interfere with free markets this way. His idea certainly is more focused and theoretically sound than Sarkozy’s plans to protect existing jobs. In fact, Blinder’s proposal is only one of many possible government policies aimed at dealing with the Internet-age turmoil in the market for jobs and livelihoods.
Capitalist institutions include risk-management schemes that provide insurance, hedging, and diversification. Government can promote the democratization of such institutions so that they protect people from the very risks that they are worrying most about. Such possibilities include livelihood insurance, home equity insurance, income-linked loans, and GDP-linked and home-price-linked securities.
Moreover, government can make our social insurance (a government institution that complements private insurance) more incentive-compatible and better at managing risks – and not just the risks of the extreme losers – by, say, launching inequality-indexation of the tax system. And governments should improve our information infrastructure, so that financial contracts can better capture the outcomes of economic risks.
So Sarkozy shouldn’t be lashing out against “speculative capitalism.” On the contrary, he should be asking how capitalism can be developed even further, with new institutions in finance and insurance to deal with the very important problem that his campaign has highlighted.