Good morning, it's a pleasure to be here and to have this opportunity to talk to you about some really interesting problems
that I think are not getting enough attention in the press. And certainly not getting enough attention in the classroom.
Let me begin with a momentary annoyance.
This morning I saw that one of the newspapers, for the convenience of its readers I guess, labelled me a free market economist.
That is 180 degrees to the truth.
A free market economist is one who believes in virtually a zero level of government. Except possibly for national defence.
And who believes in the magic of the market.
In fact my whole career has been devoted to pointing out the fallacies of the left and the fallacies of the right.
So criticising the left in the 1960's I pointed out the theoretical difficulty
of arguing that higher inflation would be rewarded with lower unemployment.
Criticising the right I pointed out in the 1990's that the free market pays so little to marginal workers
that they cannot be integrated into society and have the dignity of self-support.
My book Rewarding Work is all about a program I devised of low wage subsidies paid to businesses
for their ongoing employment of low wage workers which would serve to pull up wages as well as employment at the low end.
And I pointed out in the 2010's, that the present decade, that the private financial market supplies
too little finance for business innovation, another market failure.
The banks are not performing one of their fundamental roles, to service businesses.
Around 1980 I articulated a critique of rational expectations.
I had something to do with the introduction of wage expectations and price expectations into the theory of inflation
and the theory of unemployment.
So I was horrified when all those little PE's and WE's that I wrote in my equations disappeared.
With rational expectations there are no independent things called expectations, everybody already knows what to expect,
it just solved out, the expectations.
You only see the E operator for the mathematical expectation of a variable, the expected value of variable.
Expectation formation is completely gone.
And I criticised the right wing idea that monitory policy can be conducted according to rules such as Friedman's 3% rule
and the Taylor rule. So now that I've got that off my chest.
In the last decade or 2 I have been thinking about corporatism and I've come to see better and better
I think the enormous harm that it does to a market economy, a market economy based on private ownership.
And that's my subject today. So obviously I'm going to have to begin by defining the term, what is corporatism.
There's probably no crisp answer to that question that would be any good.
It's inherently a somewhat fuzzy concept, but that doesn't, some necessary concepts are inherently somewhat fuzzy.
The corporatists conceived a private market economy as riven with conflicts, even violent conflicts between capital and labour.
So they made the argument that the government is needed to mediate these conflicts.
And their watch word, they had many watch words, many pet phrases and key ideas but one of them was clearly solidarity.
The role of the government is to achieve some sort of concertation between, among the various conflicting private interests.
I love the Italian word concertazione which became a very familiar term in Italy in the 1960's and 1970's,
it's the mission of government to go around and talk to capital and talk to labour.
Now how do you do that because there are, I don't know how many Italians there are but 10's of millions of Italians,
do you talk to each worker, about their grievances, their frustrations. Do you talk to every business in Italy?
There's a joke by Henry Kissinger, you're going to think now that Henry Kissinger is my favourite foreign minister,
that's not true (laugh), I'm still stung by that newspaper this morning.
But Kissinger said I would call Europe, if I just knew the phone number.
How is a government going to talk to capital and how is a government going to talk to labour.
Well the idea was that they would create something that came to be called a concertazione, sorry a corporazione.
A corporation, a body that would consist of an employer organisation and a labour organisation or labour union
and that would be the concertazione and then there would be 14 of those for every one of the 14 sectors of the economy.
Every one of these SIC codes.
So you had all these concertazione and the government would expect them, the government would look to capital
and labour in any particular concertazione to solve its problems, to mediate, to negotiate.
And if the negotiation broke down the government would come in, bang heads together and achieve some sort of a resolution
that calmed things down and achieved solidarity.
So that gives you an idea I think of the character of corporatism, it looks to the government to diffuse conflict
but there's much more to it.
The corporatists in the 1920's also criticised, 2 points, the corporatists made the criticism that capitalism is headless,
it doesn't have any direction, it doesn't know where it's going.
Of course it doesn't know where it's going, it's creating the future as it goes along.
And the consequences of what it's doing, the successes and the failures are not known until the attempts are carried out.
And we'll see what the market accepts and what the market rejects.
So these corporatists were saying that's no good, my god we've got to have direction, we've got to have order.
We've got to go back to the middle ages where we had order, don't want this modern capitalism with its headless,
heedless innovation. So that the public sector, the corporatist doctrine looked to the public sector,
to the government to set directions for the private sector dirigisme is the French word that you all know.
And finally the private, capitalism was criticised by Mussolini for example as not dynamic enough.
He was thinking of Italy. It would have been hard to say that the US economy was not dynamic between 1870 and 1913,
that would have been pretty tough to say.
But he felt that the small entrepreneurs in the Italian economy were lacking in innovativeness,
that there was something wrong, the economy just didn't have the dynamism that the corporatism could provide.
Corporatism would marshal the scientific resources of the economy and work out projects, public projects,
public and private partnerships and so forth, that would leave countries
such as the Italian economy of recent years in their dust.
Some of the Italian paintings in the Futurismo movement show these fast trains zipping forward, trains run by public authorities.
Well that's corporatism.
I was talking with Martin Wolfe a couple of days ago about this subject, we often chat about it for a minute or 2
and he was saying, "Well you know that's the natural order of things, that's right.
Left to its own devices, unconstrained there are going to be alliances between businesses and the government
and there are going to be alliances between labour unions and the government.
And they're going to regulate the economy sometimes for the advantage of incumbents.
They're going to regulate the economy to keep out competitors, keep out start ups, make things harder for start ups."
Of course sometimes the start ups get the idea and try to do their own lobbying.
So there are a lot of claims made by corporatism, in the end it seems to me that in Europe
we've had something of a test of corporatism in the last 4 or 5 decades.
We're able to compare the economic performance of the corporatist economies
with the performance of the economies of the United States, Canada and I'll leave it there.
And to be fair I think it's fair to say that the overwhelming balance of evidence suggests
that there is a lesser spirit of innovation, a lesser willingness to accept change,
a lesser willingness to take innovation, to take the initiative of new projects and so forth in Europe than there is
in the United States and Canada and maybe a couple other relatively well-functioning modern capitalist economies.
I've been writing a book about all this.
But then something happened in 2007, namely the beginning of the collapse of housing prices,
the slipping of the construction industry from boom into slump.
The discovery that half the assets of the banking system were bad loans that weren't going to be fully serviced
or might be in large part defaulted on.
And so that has raised a whole bunch of questions about what's happened with modern capitalism,
that a calamity of such a magnitude could happen. I'm not going to be able to discuss that today.
But the other thing that's happened in recent years is the Arab spring.
I couldn't believe it when I started reading the news dispatches and I saw that they were
all these young people in Tunisia who were saying they want careers, they want to have the self realisation
and the self discovery and the personal growth that comes with having a career, a career of challenges, of overcoming hurdles.
And I thought wow, they are expressing what I've been writing about every day, about the spirit of capitalism,
except I don't see it in my own country anymore very much. And here it is being articulated in Tunisia.
And I soon realised doing a little more reading that the reason there's a lack of opportunity
is not because of a lack of education on the part of these people,
on the contrary they've got relatively speaking quite a lot of education now, many of them have college,
university degrees and they are being closed out by the insiders.
And sadly then when they're asked to, according to a friend of mine who is from that region,
when he asks people on the street, what do they think about their system and they say ah capitalism, it's terrible,
they use the word capitalism to describe what for me is 100% stark corporatism.
In which the government and the government's cronies and the government's clients get together
and run the economy without any competition, without any possibilities of emergence of new firms with new ideas
and that's a perfect description of corporatism.
And it's a wildly inaccurate description of a well-functioning modern capitalism.
Well let me begin my talk now. My prepared text.
With the repressive regimes in Libya and Syria looking likely to fall soon
and elections coming up in post-revolutionary Tunisia and Egypt what are the chances that political change,
that the positive political change represented by the Arab spring will be followed by positive economic developments.
Many fear that these countries could slip into the category of so-called fragile states
in which social and religious tensions lead to continuing civil conflict and economic stagnation.
But the real threat is not a fragile state, it's an over mighty and excessively strong state.
Where the economy remains a closed system run by insiders for their own benefit.
Tunisia in particular, well let me stick to my text, otherwise I'll get in trouble.
The dictatorships of north Africa have been described as capitalist economies
but in reality they were corporatist economies where privileges and connections were the key to personal success
and where open competition and meritocracy were absent.
In Tunisia the insiders were those well-connected to the ruling family.
In Egypt they were members, the insiders were members of the military who owned shares in the company
or had high management posts in the privatised enterprises.
In these corporatist economies masses of ordinary citizens are denied the chance to achieve their potential.
While demands for social justice lay behind the uprisings in Tunisia and Egypt
those demands were less concerned with inequalities of income or wealth as they were with inequality of opportunity.
The young people protesting in Tunis and Cairo wanted to start businesses, enter industries,
compete for places in existing companies and see an end to excessive licensing.
But it's by no means clear that they can achieve these aims even under new governments.
The Egyptian army, it won't surprise you, is reluctant to give up its powerful role in the economy.
And in Tunisia foreign bankers are teaming up with local insiders to launch new infrastructure projects.
Including initiatives in the desert, cathedrals in the desert.
Such projects will not contribute to the advancement of young Tunisians who are looking for careers,
not temporary construction work.
Some of my closest friends were behind the recent proposal adopted by the G20 to give $20 billion to Tunisia and Egypt.
So far as I can tell, I still have those friends but I'm not 100% sure because I've been bitterly criticising that proposal,
it's precisely the wrong thing to do, it just, it's a tremendous set back,
it just returns them right back to a state directed system in which the outsiders are unable to get in.
The system that would be most appropriate for Tunisia and Egypt is some basic kind of capitalism
such as developed by Britain and America in the first half of the 19th century
on the way to building their highly successful economies.
The foundations of this system are civil liberties, property rights, secure contracts,
courts empowered to uphold the rule of law, local banks linked with local entrepreneurs,
financial firms that supply venture capital. And ease of market entry by new companies.
Today's western economies are some distance from providing such a text book model of capitalism.
Indeed continental Europe might still be accused of pursuing classic corporatism.
In which the state takes whatever measures it deems desirable in the name of solidarity and social protection.
Constrained only by the need to show efforts to restore growth whenever the economy flags.
Certainly Europe retains many examples of economic rigidity,
a deficiency of entrepreneurialism and conspicuously high unemployment, all of these are hall marks of corporatist economies.
And meanwhile in America there are disquieting signs of growing rigidities.
Grid lock in Washington, the political power of the financial sector in the face of a financial sector
that is expecting to circumvent the new regulations.
And huge expenditures on lobbying by all kinds of interest groups seeking a champion in the nation's capital.
When the American economy appeared to be dynamic and performing well, particularly during the glorious internet revolution,
these problems could be ignored.
But over the past decade America has undoubtedly passed into the land of corporatism.
The most obvious symptom of the present day corporatist economies on both sides of the Atlantic
is an excess of state borrowing and bank lending.
In America fiscal discipline was thrown to the winds after the presidencies of Ronald Regan, George H.W. Bush and Bill Clinton.
After them federal government outlay exploded, it's been exploding since 2002,
while federal revenue as a ratio to GDP has declined steadily.
With the result that there are now massive levels of public debt. In Europe a new sort of alliance as emerged.
The politicians want sovereign bonds rated risk free so the politicians can borrow at very low interest rates.
And the banks want sovereign debt to be rated risk free so that no capital is required against bank holdings of sovereign debt.
This was accomplished through an implicit commitment to bail out the government in the event
that it has serious difficulty in servicing its sovereign debt.
And of course the credit agencies came along, they said well if tax payers can be dependent on to avoid default
and if those tax payers fail to do so, some other tax payers in some larger governmental unit will,
maybe IMF or the European union, if they will then provide bail out money, then the debt must be risk free,
so we'll give it a triple A rating. So lots of people then wanted to hold sovereign debt.
This alliance may seem to benefit the insiders, both the politicians and the banks.
But the implicit bond guarantees impose costs on the public which have become very evident in the austerity measures,
tax rises and spending cuts that many governments are implementing in an effort to restore fiscal discipline.
What we're seeing now is perhaps the beginning of a decline of public support for unbridled corporatism.
The dissatisfied populations of north Africa eventually showed their feelings about over weaning state controls
with their mass demonstrations. But such movements have not been confined to Arab dictatorships.
On the other side of the Mediterranean Greece and Spain in particular have had a series of demonstrations,
not all peaceful in response to austerity measures and high unemployment.
This summer also saw violent riots in some British cities,
in part it seems as a result of the thwarted ambitions of disillusioned youth.
And perhaps ahead of their time in 2006 there was serious civil unrest
among disadvantaged young people of north African origin in the 'banlieues' of several French cities.
The Arab countries can hardly look to the economies and societies of the west right now as an example of true capitalism.
So what is the way forward? It is certainly not Tunisia's cathedrals in the desert,
the vast infrastructure projects promoted by the international monitory fund.
Nor necessarily is it education, huge unemployment among educated Tunisians was one of the drivers of the revolution.
The only solution is to do everything possible to promote enterprise and innovation.
That means establishing the right for people to start up their own businesses,
enabling new entry and entrepreneurship and encouraging a more meritocratic way of hiring people in existing business.
And it means ending support for sclerotic state-backed businesses and removing the blocks on people's initiative
in pursuing even the humblest enterprises through licensing and all the rest.
We understand at least intellectually what the way forward is or should be.
But in the shadow of severe economic challenges in the west and political and religious tensions in north Africa,
there are many obstacles in the way of helping the Arab countries move beyond corporatism to achieve a new more liberal capitalist economy. But it is too easy to be pessimistic. The countries of the Arab spring are undergoing dramatic political change.
We must hope that their populations, especially the excluded younger generation
can experience economic change on a similar scale, bringing the opportunities for careers and personal development
that they rightly demanded when they first took to the streets, thank you.