Capitalism and Adam Smith

Despite all [Adam] Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.
The economic difficulties of today do not, I would argue, call for some “new capitalism”, but they do demand an open-minded understanding of older ideas about the reach and limits of the market economy. What is needed above all is a clear-headed appreciation of how different institutions work, along with an understanding of how a variety of organisations – from the market to the institutions of state – can together contribute to producing a more decent economic world.
Adam Smith’s market never stood alone, by Amartya Sen, 1998 Nobel Laureate in economics (see also New York Review of Books Capitalism Beyond the Crisis)

7 December 2006
Capitalism: One size does not fit all
Pranab Bardhan, Professor of economics, University of California, Berkeley, and co-chair of the Network on the Effects of Inequality on Economic Performance. He is chief editor of the Journal of Development Economics.
(YaleGlobal) Shaped by many cultures, some forms of capitalism are more palatable to anti-globalization activists than others
For developing countries, the East Asian model has not lost its influence. The model is characterized by relative equality at first, followed by land reform and mass expansion of education, which helps smooth the wrenching conflicts and readjustments of early industrialization.
In addition, state coordination of private enterprise strengthens rather than stifles the market processes. The phenomenal growth of capitalism in China under pervasive government control has only added to the attraction of the basic East Asian model.
India, another high-growth country, has also not quite followed the economic orthodoxy in a systematic manner, particularly in matters of privatization, deregulation and fiscal deficit management.
… it is important to stress that single-minded pursuits of efficiency are bound to be counterproductive. In particular, a standardized policy prescription that ignores social and institutional diversities or the context-dependent complexities of a particular society is a recipe for failure. The accumulated resentment of the large numbers of losers worldwide in the process of globalization – despite its theoretical potential of benefiting everyone – is already in danger of triggering a substantial backlash in many countries. The advocates of capitalism should try to protect it from the enthusiasts for any one particular variety of capitalism.
1 November 2006
The allure of the Chinese model
By Wei-Wei Zhang
(IHT) Many of the African leaders coming here for the Chinese-African summit meeting are attracted not only by opportunities for aid and trade, but also by the Chinese model of development.
They know that only three decades ago, China was as poor as Malawi. But while the latter remains among the world’s poorest, China’s economy has expanded nine-fold. Indeed, the Chinese model has in many ways challenged the conventional wisdom in the West on how to fight poverty and ensure good governance. Its key features are:
–People matter. Since 1978, China has pursued a down-to-earth strategy for modernization, and has focused on meeting the most pressing needs of the people. The architect of China’s reform, Deng Xiaoping, argued that China could only “seek truth from facts,” not from dogmas, and all reforms must take account of local conditions and deliver tangible benefits.
–Constant experimentation. All changes in China first go through a process of trial and error on a small scale, and only when they are shown to work are they are applied elsewhere.
–Gradual reform, not big bang. China rejected “shock therapy” and worked through the existing, imperfect institutions while gradually reforming them and reorienting them to serve modernization.
–A developmental state. China’s change has been led by a strong and pro-development state that is capable of shaping national consensus on modernization and ensuring overall political and macroeconomic stability in which to pursue wide-ranging domestic reforms.
–Selective learning. China has retained its long tradition of “selective cultural borrowing” – including from the neoliberal American model, and especially its emphasis on the role of the market, entrepreneurship, globalization and international trade. It is inaccurate to describe the Chinese model as the “Beijing consensus” versus the “Washington consensus.” What makes the Chinese experience unique is that Beijing has safeguarded its own policy space as to when, where and how to adopt foreign ideas.
–Correct sequencing and priorities. China’s post- 1978 change has had a clear pattern: easy reforms first, difficult ones second; rural reforms first, urban ones second; changes in coastal areas first, inland second; economic reforms first, political ones second. The advantage is that the experiences gained in the first stage create conditions for the next stage.
30 March 2006
Joseph Stiglitz

Joseph Stigiltz: in praise of Scandinavian countries in an article titled “A Progressive Response to Globalization“:
Globalization is often viewed as posing a major threat to “capitalism with a human face.” Trade liberalization puts downward pressure on unskilled wages (and increasingly even skilled wages), increasing inequality in more developed countries.
… Yet Sweden and the other Scandinavian countries have shown that there is an alternative way to cope with globalization. These countries are highly integrated into the global economy; but they are highly successful economies that still provide strong social protections and make high levels of investments in people. They have been successful in part because of these policies, not in spite of them. Full employment and strong safety nets enable individuals to undertake more risk (with the commensurate high rewards) without unduly worrying about the downside of failure. These countries have not abandoned the welfare state but have fine-tuned it to meet globalization’s new demands. We should do the same.

13 September 2005
Martin Wolf on good and bad forms of European capitalism: Europeans can look to each other
(FT – available only to subscribers) The “Nordic model” (Denmark, Finland, Sweden, plus the Netherlands) has the highest public spending on social protection and universal welfare provision. Labour markets are relatively unregulated but there are “active” labour market policies, while strong unions deliver a high degree of wage equality.
The “Anglo-Saxon” model (Ireland and the UK) provides quite generous social assistance of last resort, with cash transfers going mainly to people of working age. Unions are weak and the labour market relatively unregulated.
The “Rhineland model” (Austria, Belgium, France, Germany and Luxembourg) relies on social insurance for those out of work, as well as for provision of pensions. Employment protection is stronger than in the Nordic countries. Unions are also powerful or enjoy legal support for extension of the results of collective bargaining.
Finally, the “Mediterranean” model (Greece, Italy, Portugal and Spain) concentrates public spending on old-age pensions. Heavy regulation protects (and lowers) employment, while generous support for early retirement seeks to reduce the number of job-seekers.
…How well then do these different approaches work in terms of two fundamental European objectives: high levels of employment and elimination of relative poverty?
On the former goal, both the Nordic and Anglo-Saxon models perform well and the Rhineland and Mediterranean models relatively poorly. On the latter objective, the Rhineland and Nordic models do well and the Mediterranean and Anglo-Saxon models poorly (see chart). Prof Sapir argues, intriguingly, that the main reason for the underperformance of the Anglo-Saxon model on poverty alleviation is not the lack of fiscal redistribution but poor educational standards at the bottom.
The Nordic model is good for both employment and poverty alleviation and the Mediterranean model bad. Meanwhile, the Anglo-Saxon model is good on employment and bad on poverty alleviation, while the Rhineland model is the reverse. As Prof Sapir puts it, the Anglo-Saxon and Nordic models are efficient (at least for the labour market), while the Rhineland and Nordic models are equitable. He adds that the inefficient models may also be unsustainable. One indication of this is that the Rhineland and Mediterranean countries have higher ratios of public debt to GDP gross domestic product, at 73 per cent and 81 per cent, respectively, against 36 per cent in the Anglo-Saxon group and 49 per cent among the Nordics.