Policymakers in japan the worlds third-largest economy must

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 old gas guzzlers for newer, more fuel-efficient cars.

World leaders offered a variety of criticisms, perspectives, and proposals. Some denounced "American-style capitalism" at the annual General Assembly meeting at the United Nations. French president Nicolas Sarkozy called for greater oversight of the global financial system. "Let us rebuild together a regulated capitalism in which whole swatches of financial activity are not left to the sole judgment of market operators," he said. Brazilian president LuizIn√°cio Lula da Silva, a former labor leader, called for the global community to create a new foundation for the world economic system that would prevent abuses and shrink the gap between the rich and poor. Mahmoud Ahmadinejad, president of Iran, told the Assembly that the financial crisis was a sign that the American empire was "reaching the end of its road."

Some observers noted that the rhetoric was breathing new life into the long-standing debate between two competing schools of economic thought. On one side of the debate was John Maynard Keynes, a British economist and the author of The Economic Consequences of the Peace. Published in 1919, the book explained why the post-World War I economy in Europe suffered from inflation and stagnation. In 1936, Keynes published The General Theory of Employment, Interest and Money. Keynes advocated giving the state broad powers to make decisions about a nation's economy.

While campaigning as a candidate, U.S. Senator Obama promised that his economic policies would create between 2.5 million and 3.5 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 designed to boost aggregate demand. According to the White House, every $1 of government spending would yield about $1.50 in gross national product (GDP). In Keynesian economics, this was known as a spending multiplier. Yet, as U.S. President Barack Obama expanded the government's role in health care, some began to see his policies as moving the country towards a central planning economic model. Some labeled his policies as socialist.

On the other side of the debate was Austrian economist Friedrich Hayek, who was a proponent of free markets. In his 1943 book The Road to Serfdom, Hayek argued that political freedom and economic freedom go hand in hand. He warned that expanding the government's role in the economy could have unintended consequences, such as reducing the role of the individual in society. Moreover, Hayek believed that collectivism can lead to tyranny; he held up the Soviet Union as a case in point. As the U.S. employment needle has barely moved amid increased government spending and a burgeoning deficit, Hayek's name has been invoked. Not surprisingly, Hayek's theories have caught on with conservatives. For example, Glenn Beck, a conservative Fox News personality, featured The Road to Serfdom on his talk show.

The battle of ideas described here is also being debated by a new generation of economists and analysts. For example, political risk consultant Ian Bremmer has written The End of the Free Market: Who Wins the War Between the States and Corporations? The impetus for the book came from an encounter with a Chinese diplomat who asked, "Now that the free market has failed, what do you think is the proper role for the state in the economy?" In his book, Bremmer argues that China and Russia are using state capitalism to promote the interests of their companies. State capitalism is an economic system in which markets are used for political gain. Meanwhile, in emerging markets such as Brazil, socialist-leaning leaders are steering their countries away from free market principles.

Bremmer explains how the economic environment has changed since the economic crisis began in 2008. In his view, the G-7 world was characterized by widespread agreement that prosperity depended on the rule of law, independent courts, transparency, and a free media. In this world, free market capitalism is the dominant ideology and global corporations are the principle economic heavyweights.

These global players seek to maximize profit and thereby increase shareholder wealth. Bremmer notes that this consensus provided the engine driving 40 years of globalization. So, what has changed? China has emerged from the global economic crisis in relatively good shape, yet China's leaders do not fully embrace free market economics. The courts are not independent, and the media is not free. Moreover, China is not a democracy. Under state capitalism, politicians become key economic actors; rather than making profit the number one goal, they seek first to achieve political goals.

China's success has emboldened socialist-leaning ruling elites in other countries to pursue economic growth while solidifying their own bases of political power. This is creating friction between competing economic systems. As Bremmer explains, "There will be winners and losers, and the world's political and business leaders better begin to try to sort out who 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 they did get a boost when economist Russell Roberts created a rap video titled Fear the Boom and Bust with filmmaker John Papola.

The video is available on YouTube. After viewing it, you should be 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, must transition their nation away from a manufacturing-dependent model for growth. What industry sectors might emerge as the new 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?

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