by Vadym Syrota*
The current period of socio-economic development across the globe is featured by the paradigm shift in dominant economic theory similar to the one that took place in 1970-80s. The appearance of Friedrich Hayek’s The Road to Serfdom (1944) sparked a variety of heated debates across the world exhausted by the Second World War, after which the new economic order was established based on extensive state involvement, the elements of centralized planning, and the creation of the welfare state. To oppose these tendencies the group of intellectuals led by Hayek met in the Swiss town of Mont Pelerin in 1947. Thus, the Mont Pelerin Society was set up to ensure both the transmission and diffusion of “free-market” ideology. Activity of such intellectual unit allowed a small circle of utopian thinkers to prepare the ideological, political and economic revenge of laissez-faire capitalism under the label of “neoliberal renaissance”.
Now the tide is back: over the last decade serious flaws of the unfettered capitalism have become obvious. Given the existing concerns about rising inequality, low productivity, technological disruption, and lack of space to apply the monetary toolkit, it would be quite reasonable to suppose that the paradigm shift in political economy is on the global economic agenda. According to OECD, which hosts under its umbrella New Approaches to Economic Challenges Initiative, if the world is to address the existing challenges successfully “business as usual is not an option”. The ways to implement economic policy must go beyond the traditional instruments to encompass reform of institutions, social policy and political narratives. IMF Managing Director Kristalina Georgieva speaks openly about “a new Bretton Woods moment”. Moreover, Jeffry Frieden, professor of government at Harvard University, at his article published in the IMF journal Finance & Development recently revealed positions that clearly oppose widely-spread neoliberal dogmas. He argues, for instance, that unilateral trade is practically unheard of, and no country today pursues it. There is also no universal economic cure: policy responses to the COVID-19 pandemic vary from country to country in line with different health, economic and political circumstances.
Deeply understanding the importance of political economy theoretical background to facilitate successful economic transformations, one should pay attention to the resonant statement by Neil Fligstein and Steven Vogel “Political Economy after Neoliberalism”, dubbed as Manifesto for New Thinking, in which they presented three core principles of alternative political economy.
The first principle: state/government is an important player in economic processes. Government serves as a designer of market infrastructure. For instance, financial centres are believed to exemplify the best practices of free-market and non-restricted competition: to succeed in their development free movement of capital and financial liberalization are necessary components. Government decisions to set up specific legal and regulatory environment were required prior to the establishing of global financial hubs. For example, the “Big Bang” that would become a milestone in the development of the City was triggered by Thatcher’s conservative government: abolishing minimum fixed commissions, ending the separation between those who trade stocks and shares and those who advised investors, allowing foreign firms to own UK brokers, and so on. So it is not surprising that the experts of a well-known British institute Chatham House defined that the post-coronavirus European political landscape could be marked by demands for a new social and economic contract: citizens will expect and demand more of the state. This crisis has the potential to fundamentally shift Europe’s political economy towards a new balance between the state and the market. It would likely emphasize a stronger and interventionist role for the state and reduce openness to market forces.
The second principle: politics matters. Political economy should investigate how political and market powers interact proposing the best way to build effective check-and-balances system. Analytical contribution of Artem Gergun on the welfare state development shows the nature of such interaction between politics and economy. This concept may be considered as social trade-off serving to limit and mitigate class conflict, to balance the asymmetrical power relation of labor and capital, and thus to overcome the disruptive struggle and contradictions that were the most prominent feature of pure laissez-faire capitalism. Moreover, such political and economic framework is the byproduct of the coexistence of the two different ways to modernize the society: Western-based free market approach and socialistic experiment led by the Soviet Union. According to Gergun, from the perspective of modernization theory, the industrial development would lead to a post-ideological democratization across the globe. Modernization process would eventually finish ideological and military rivalry between two opposing blocs of the Cold War: industrialized socialist societies would reduce their structural inefficiencies by invoking some of free market practices; and, vice versa, liberal democracies would overcome the drawbacks of laissez-fair capitalism by balancing market failures with enhancing welfare state and social security programs.
Following these arguments, each country designed a unique combination of check-and-balances between business, state and labour according to its own specifics. Unfortunately, the paradigm shift towards neoliberal economic ideology in 1970-1980s resulted in the trend of welfare state decline. So, the potentially “win-win” strategy of sustainable development was replaced by a formula of “advanced capitalism minus the welfare state”, having been generating a number of historic battles to forge the particular forms of governance in the economies worldwide.
The third principle: no “one-size-fits-all”. Acrimonious discussion, useful to illustrate this notion, have appeared on the pages of Financial Times. The heated debates, for instance, focused on the concerns about the existence of “zombie firms” — corporate businesses that fail to generate enough revenue to make their interest payments on borrowings and have low valuations that suggest moribund prospects. Supporters of free-market ideas appealed to the advantages of Shumpeter’s “creative disruption”: market economies are constantly adapting to new technologies and organizational models, supply discontinuities and other disruptions. Such adaptions and innovations are the primary engines of growth. A Shumpeterian policy avoids the distortions of politically chosen winners that tilt the level playing field against small competitors and disruptive technologies.
Another group of intellectuals backed Keynesian approach: economic shocks should be countered by government spending to recover full employment and general equilibrium, including corporate business bailouts. They argued, regarding their opponents’ position, that Shumpeterian approach requires a number of prerequisites to be implementable, including effective safety nets, means for new skills acquisition, etc. Moreover, financially weakest companies are not always the same as the least productive ones. Studies found that in France a surprisingly large share of companies with pandemic-related solvency problems are at the top of their sectors in terms of productivity. Thus, the choice whether to prefer Keynesian or Shumpeterian approach cannot be prescribed by common guidance: it depends on a variety of social factors, the level of institutions development and specific economic profile of each country.
To sum up, it is obvious that the period of neoliberal dominance in economic thinking worldwide is nearing the end. New political economy approach will be in line with what the OECD experts called “the sociality of human beings and their embeddedness in social institutions“. So, today’s economists and policy-makers have a unique opportunity to adjust the Mont Pelerin Society heritage to the needs of our time. There are a lot of cozy villages in the Swiss Alps that may host meetings of leading thinkers resulting in the foundation up-to-date intellectual incubators to promote the new political economy agenda.
* Vadym Syrota (PhD) is an independent banking expert and former official of the National Bank of Ukraine (central bank) at banking supervision and financial stability departments. He is a regular contributor to the Kennan Institute blog (Woodrow Wilson Center, USA) and numerous Ukrainian business and economic media outlets.