NEW YORK: Start with the obvious: we live in a global economy. Let us be clear about what that means. A global economy includes not only the free movement of goods and services but, more importantly, the free movement of ideas and capital (everything from direct investments to financial transactions). Though both gained in importance since WW II’s end, globalization of financial markets accelerated in recent years so that movements in exchange rates, interest rates, and stock prices in various countries are intimately interconnected. Indeed, the character of the financial markets changed out of all recognition during the 40 years that I have worked in them. So the global economy should really be thought of as the global capitalist system.
Global integration brought tremendous benefits: the international division of labor, which are so clearly proved by the theory of comparative advantage; dynamic benefits such as economies of scale and the rapid spread of innovations from one country to another, which are less easy to demonstrate by static equilibrium theory; and noneconomic benefits such as the freedom of choice associated with the international movement of goods, capital, and people, and the freedom of thought associated with the international movement of ideas.
But global capitalism is not without problems; we need to understand these better if we want the system to survive. By focusing on these problems I am not trying to belittle globalization’s benefits. These benefits, I believe, can be sustained only by deliberate and persistent efforts to correct and contain the system’s deficiencies. Here is where I am at loggerheads with laissez-faire ideology, which contends that free markets are self-sustaining and that market excesses correct themselves, provided governments or regulators don’t interfere with the self-correcting mechanism.
There are five types of deficiencies in the global capitalist system which I would now like to discuss: