New Front in the Battle of Ideas
As pain from the economic crisis spread around the globe, policymakers set about devising strategies to prevent a global economic
meltdown. Various economic stimulus packages were passed, including"cash for clunkers" deals that encouraged consumers to trade in oldgas guzzlers for newer, more fuel-efficient cars.World leaders offered a variety of criticisms, perspectives, andproposals. Somedenounced "American-style capitalism" at the annualGeneral Assembly meeting at the United Nations. French presidentNicolas Sarkozy called for greater oversight of the global financialsystem. "Let us rebuild together a regulated capitalism in which whole
swatches of financial activity are not left to the sole judgment of marketoperators," he said. Brazilian president Luiz Inácio Lula da Silva, a formerlabor leader, called for the global community to create a new foundationfor the world economic system that would prevent abuses and shrinkthe gap between the rich and poor. Mahmoud Ahmadinejad, presidentof Iran, told the Assembly that the financial crisis was a sign that theAmerican empire was "reaching the end of its road."Some observers noted that the rhetoric was breathing new lifeinto the long-standing debate between two competing schools ofeconomic thought. On one side of the debate was John MaynardKeynes, a British economist and the author of The EconomicConsequences of the Peace. Published in 1919, the book explainedwhy the post-World War I economy in Europe suffered from inflationand stagnation. In 1936, Keynes published The General Theory ofEmployment, Interest and Money. Keynes advocated giving the statebroad powers to make decisions about a nation's economy.While campaigning as a candidate, U.S. Senator Obama promisedthat his economic policies would create between 2.5 million and3.5 million new jobs. The Emergency Economic Stabilization Act of
2008, the $787 billion economic stimulus package passed by the U.S.Congress, was a textbook example of Keynesian principles designedto boost aggregate demand. According to the White House, every$1 of government spending would yield about $1.50 in gross nationalproduct (GDP). In Keynesian economics, this was known as a spendingmultiplier. Yet, as U.S. President Barack Obama expanded the government'srole in health care, some began to see his policies as movingthe country towards a central planning economic model. Somelabeled his policies as socialist.On the other side of the debate was Austrian economist FriedrichHayek, who was a proponent of free markets. In his 1943 book TheRoad to Serfdom, Hayek argued that political freedom and economic
freedom go hand in hand. He warned that expanding the government'srole in the economy could have unintended consequences, such asreducing the role of the individual in society. Moreover, Hayek believedthat collectivism can lead to tyranny; he held up the Soviet Union as acase in point. As the U.S. employment needle has barely moved amidincreased government spending and a burgeoning deficit, Hayek's namehas been invoked. Not surprisingly, Hayek's theories have caught onwith conservatives. For example, Glenn Beck, a conservative Fox Newspersonality, featured The Road to Serfdom on his talk show.The battle of ideas described here is also being debated by a newgeneration of economists and analysts. For example, political riskconsultant Ian Bremmer has written The End of the Free Market: WhoWins the War Between the States and Corporations? The impetus forthe book came from an encounter with aChinese diplomat whoasked, "Now that the free market has failed, what do you think is theproper role for the state in the economy?" In his book, Bremmerargues that China and Russia are using state capitalism to promotethe interests of their companies. State capitalism is an economicsystem in which markets are used for political gain. Meanwhile, inemerging markets such as Brazil, socialist-leaning leaders are steeringtheir countries away from free market principles.Bremmer explains how the economic environment has changedsince the economic crisis began in 2008. In his view, the G-7 worldwas characterized by widespread agreement that prosperitydepended on the rule of law, independent courts, transparency, anda free media. In this world, free market capitalism is the dominantideology and global corporations are the principle economic heavyweights.These global players seek to maximize profit and therebyincrease shareholder wealth. Bremmer notes that this consensusprovided the engine driving 40 years of globalization.So, what has changed? China has emerged from the globaleconomic crisis in relatively good shape, yet China's leaders do not fully
embrace free market economics. The courts are not independent, andthe media is not free. Moreover, China is not a democracy. Under statecapitalism, politicians become key economic actors; rather than makingprofit the number one goal, they seek first to achieve political goals.China's success has emboldened socialist-leaning ruling elites in othercountries to pursue economic growth while solidifying their own basesof political power. This is creating friction between competing economicsystems. As Bremmer explains, "There will be winners and losers, andthe world's political and business leaders better begin to try to sort outwho those winners and losers will be."
Discussion Questions
1. Does the global economic crisis signal that the American model of free market capitalism is fundamentally flawed?
2. Keynes and Hayek aren't necessarily household names, but theydid get a boost when economist Russell Roberts created a rapvideo titled Fear the Boom and Bust with filmmaker John Papola.The video is available on YouTube. After viewing it, you shouldbe able to answer the following question: Are you a Keynesian?Or do you side with Hayek?
3. Policymakers in Japan, the world's third-largest economy, musttransition their nation away from a manufacturing-dependent
model for growth. What industry sectors might emerge as thenew drivers of economic growth?
4. Do you think that the economic stimulus programs in the United States, Asia, and elsewhere are the right approach to pulling the
world out of recession?
5. The case mentions China, Russia, and Latin America as countries and regions where state capitalism is present. Are there state
capitalist powers in other parts of the world as well?