French Interior Minister Nicolas Sarkozy, the leading contender in the country's presidential election, recently lashed out against what he called "speculative capitalism," and said he wants to "moralize the financial zone" created by the euro.
What does Sarkozy mean by "speculative capitalism?" Apparently he means something immoral -- but what?
The term has rarely been used before, and seems to be redundant. After all, capitalism is practically a synonym for speculation.
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 twenty-first 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 a number of steps that would stand in the way of economic globalization. Although he does want to make the French labor market less rigid, he would block foreign takeover bids of French companies and protect Airbus workers from possible job losses. 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 putting this problem center stage should not mean protecting existing jobs come what may.
Capitalists put their money where they think it can get the highest return; that is what we call speculation. They buy companies, break them up, recombine them, fire some employees, and hire others. To do this profitably, they cannot afford to let patriotism or sentiment interfere. They do business in whatever country is most advantageous. Rewarding successful ventures is the basic idea of capitalism -- a dynamic process that Joseph Schumpeter called creative destruction.
Under capitalism, one is immoral if one reneges on a contract or breaks the law, but not if one speculates. Planned economies were never able to flourish because uncertainty about the future is just too high, something that is best left to the speculators, with the potential of reward if they are right and the disciplining whip of the market if they are wrong.
Concerns about free trade similar to Sarkozy's are gaining strength around the world. In an article last year in the US journal Foreign Affairs, Alan Blinder, a former adviser to US president Bill Clinton and vice chair of the US 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.
Blinder argues that governments should encourage education for jobs that are harder to outsource overseas. He wants the government to subsidize "personally delivered service" jobs that cannot be delivered over the Internet, to encourage the expansion of such jobs instead of "impersonally delivered services."
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.
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 -- a government institution that complements private insurance -- more incentive-compatible. It can make it 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 problem that his campaign has highlighted.
Robert Shiller is professor of economics at Yale University and chief economist at MacroMarkets LLC, which he co-founded.
Copyright: Project Syndicate
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