Global economic woes prompt soul-searching on capitalism


Hope springs eternal: China's manufacturing sector has perked up a bit; there are encouraging noises coming out of Washington about avoiding the fiscal cliff; the euro is still in one piece – could it be that recovery is coming at last? After all the false dawns, this could be the point at which capitalism shows its resilience and regenerative powers. Since the birth of the modern industrial age more than 250 years ago, there have been only brief deviations in the upward trend of production. The Great Depression looks like a mere blip on the upward sloping graph of UK or US GDP.
Even so, the depth and length of the crisis has led to a degree of soul searching. While policymakers insist publicly that vigorous recovery will eventually arrive, there is private concern that deep structural problems are blunting the effectiveness of a stimulus unprecedented in its scale, scope and duration. These concerns are well founded. To understand why, it is necessary to look at the basic ingredients that historically have made capitalism tick in all its many guises, be it America's free-market approach, Sweden's welfarist model, or China's state-run variant.
The first requirement is stability, without which entrepreneurs will not take risks. In the early stages of development, this means adherence to the rule of law and a system of property rights that guard against expropriation. As economies grow more sophisticated, it comes to mean additionally a degree of economic and financial stability. Those taking long-term investment decisions need to feel confident that there will be a steady stream of returns and that the banking system is robust and well-managed.
The second prerequisite is legitimacy, which is not the same as fairness or equality. Capitalism is neither fair nor equal, and never will be, but large quantities of fairness have been injected to ensure it has retained political legitimacy.
Quite early on, in the first half of the 19th century, it became clear to the more far-sighted capitalists that a method had to be found of ensuring that a rising tide lifted all boats. The observations of Karl Marx and Friedrich Engels on the immiseration of working people in Britain's industrial revolution were accurate but, even then, steps were being taken to improve living standards.
Some of these were self-help measures by workers (trade unions, friendly societies); others were the result of pressure from social reformers and politicians (better sanitation, expansion of education). Later, starting with Bismarck in Germany, there was the development of a system of old-age pensions, stage one in the creation of welfare states. By the middle of the 20th century, an array of checks and balances were in place to ensure the fruits of growth were shared – from progressive taxation to the US's 1944 GI bill, paying extra benefits to more than 2 million returning soldiers.
Sustainability is the third ingredient needed for capitalism to work.. Read more:
http://www.guardian.co.uk/business/economics-blog/2012/nov/25/global-economic-woes-capitalism

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