Thursday, August 30, 2007

Keynes and Globalization

Adam Smith (1723-1790), the mastermind behind the so-called Invisible Hand, wrote:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual value of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.

Smith was wise in pointing to the inner needs of a human being and the vitality of creation of incentives. Unfortunately, as we know, the invisible hand did not do what Smith portrayed and greed in human society blocked the spillover effect of which he spoke about. The Great Depression in the beginning of the 20th century was largely a result of the failure of the Invisible Hand.

Therefore, the theories of John Maynard Keynes (1883-1946)(above) came as a revelation and a saviour. In contrast with Smith, Keynes propagated interventionist policies by government that would control and regulate the free markets. Franklin Delano Roosevelt was very much under the influence of Keynes when devised the plan to take the country out of the Depression. Of course, as usually crude capitalism is synonymous with free markets and state intervention is always attacked as socialism... Moreover, nationalization of industries as one of the measures of the state to regulate the capricious markets and big business is assailed as anti-democratic. Putin's economic policies in Russia have been coined precisely that, while he is very much like Roosevelt in economic affairs...

Today it is virtually unassailable that domestic markets must be regulated. But the problem is how in this globalized world we can also learn to regulate international markets, so that international accumulation of wealth can be distributed evenly among nations... Since no nation has the incentive to do that (just like the individual businessman, only seeking his self-gain), this is the task of international organizations. But just like governments purporting to regulate markets and lobbied by big business, international organizations cannot be perfect and are often lobbied by stronger nation-states...

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