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Tuesday, April 24, 2007

Robert Shiller: The Taming of 'Speculative Capitalism'

Robert Shiller says Nicolas Sarkozy has wrong-headed ideas about how to insulate workers from the consequences of globalization:

The taming of 'speculative capitalism', by Robert Shiller, Project Syndicate: Nicolas Sarkozy, ...[a] 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 21st century economy. So we should think hard about what "speculative capitalism" means.

Sarkozy has called free trade "a policy of naivete," and wants to take ... steps that would stand in the way of economic globalization. ... 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 ... this ... should not mean protecting existing jobs come what may. ...

Concerns about free trade similar to Sarkozy's are gaining strength around the world. In an article last year in ... Foreign Affairs, Alan Blinder, a former adviser to President Bill Clinton and vice chair of the U.S. 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 ... jobs ... which cannot be delivered over the Internet...

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 ... 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.

    Posted by on Tuesday, April 24, 2007 at 12:24 AM in Economics, International Trade, Social Insurance, Technology | Permalink  TrackBack (1)  Comments (27)


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    [Source: Economist's View] quoted: Foreign Affairs, Alan Blinder, a former adviser to President Bill Clinton and vice chair of the U.S. Federal Reserve Board, argued that the process of globalization has the potential to cause massive job loss in the f... [Read More]

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