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Time for True Market Reform
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The mantra of economists, central bankers, the World Bank, the IMF and others advising developing countries calls for , above all, market reform. Un-packing the jargon, they mean de-regulation, free trade, privatization, convertible currencies, export and debt-led growth and flexible labor markets – summarized as the "Washington Consensus." Today, the call for market reform is morphing into demands for reforming markets and capitalism itself.

Today, this one-size-fits-all conventional recipe for economic growth is being challenged not only on social and environmental grounds --- because it is widely seen as failing. Corporate CEOs at Davos worried about global climate chaos and their US-CAP group urged mandatory caps on their own carbon emissions. Soul-searching continues on the failure of WTO trade talks, the growing gap between rich and poor, the effects globalization and offshoring of blue and increasingly, white-collar jobs. There is little to reassure American that any serious policy re-think is afoot.

China has long rejected the Washington Consensus model and modified it to create its path of a social market economy where markets are seen as "good servants but bad masters." Europeans favor the mixed social market economy and now most Latin American countries are rejecting the US formulas in favor of the Chinese and European models. In earlier years, the economies of Taiwan, South Korea and Singapore grew on the Asian model of markets steered and regulated by governments.

Socially–responsible pension fund trustees and mutual fund managers launched the United Nations Principles of Responsible Investing representing over $6 trillion in assets. The Carbon Disclosure Project, representing $31 trillion held by global asset managers demands disclosure of carbon emissions. These financiers are giving new meaning to market reform. (see www.ethicalmarkets.com). They demand that companies in their portfolios also focus on making markets more ethical. They employ the new accounting protocols of the "Triple Bottom Line" that go beyond the traditional single bottom line of profit and also improve their governance, social and environmental performance. This is not surprising since today, bad behavior entails new kinds of risk to companies' stock prices: social, environmental and reputational risk, measured by financial services firms such as Innovest Strategic Value Advisors, Truecost and others.

The Information Age has also morphed in to a new Age of Truth, where a company's reputation, precious brands and stock can be broken in real time by negative postings by global watchdog groups such as Corpwatch.org and Global Exchange. Individual investors, making common cause with labor unions, environmentalists and social justice groups have fueled this new definition of market reform, representing $2.3 trillion in assets in the USA alone. Even the Nobel Committee gave its Peace Prize to Mohammad Yunus, banker to the poor.

Such market reforms include more ethical, transparent and accountable corporate management, full disclosure, responsible marketing and advertising, environmentally-friendly products, cutting exorbitant executive pay and stock options, curbing lobbying and political influence of elections, unfair labor practices, environmental pollution and resource depletion.

Ethics is the big story in governments as well as markets and the often unholy alliance between them. The recent corporate crime wave helped elect Governor Eliot Spitzer of New York. The US Senate's passage of a stricter ethics package January 18th limits lobbying, perks and earmarks in response to the public outcry against corruption. Political candidates might do better if they simply pledge to never become lobbyists.

Even foundations are no longer immune, as socially-responsible investors demand that they examine their portfolios of stocks underwriting their charitable giving. The schizophrenic rules which still advise a "Chinese wall" between investing and grant-making decisions are ethically blind. The Bill and Melinda Gates Foundation is only the latest to be challenged. It is ethically-confused, even incoherent for a foundation, say in healthcare, to hold a portfolio loaded up with stocks of tobacco, alcohol, junk foods and over-sweetened soft drinks companies. The pioneer in mission-related, clean portfolio management complementing its social mission is the Jessie Smith Noyes Foundation. Other foundations scramble to follow suit.

The ethics debate is growing in global markets and policy–making, as the USA reassesses the morality of preventive war in Iraq and its tragic human costs. Nuclear proliferation beyond the "club" of the USA, Russia, China, France, Britain, as well as Israel, to India, Pakistan, and probably other countries is forcing the deeply moral issues of their Nuclear Proliferation Treaty, which pledges them to relinquish these weapons. A new doctrine is proposed in Ethical Realism (2006) by Anatol Lieven and John Hulsman which crosses old political divides. They call for a new "Capitalist Peace" with more globalization and trade. But significantly, they no longer espouse the old mantras, but call for regulated "law-governed free markets….working civil societies, democratization…wider distribution of income, social justice and environmental stewardship."

Market reform is coming to mean reforming markets and capitalism itself. Would Adam Smith be surprised? Probably not, since he lauded the dynamism of capitalism. Schumpeter later saw the evolution of markets as "creative destruction," as seen today in the new "disruptive" technologies of cleaner, greener energy and resource-use now challenging coal, oil, and nuclear power. The new values and ethical concerns driving the further evolution of capitalism reflect the new imperatives of the 21st century on our small, endangered planet. Smith's famous "invisible hand" turned out to be our own…not some metaphysical force. Guided by our growing human awareness of what we have wrought on this planet and our potential for further development, all our long-term self-interests are now indivisible . Ethics and morality are becoming the new pragmatism.

HAZEL HENDERSON, futurist,syndicated columnist,author of many books including Ethical Markets: Growing The Green Economy (2007), also co-created the Calvert-Henderson Quality of Life Indicators, updated.

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Comments

Few points.

The American economy is and has been steered in large part by the government for years. It's just done less obviously, through military spending, farm subsidies, and infrastructure choices, not to mention banking and labor management. Point being simply that maybe the truth of the matter is more relevant, that free markets are and have always been a myth, a gloss thrown over shattered colonial economies and rule by gangsters in three-piece suits. It was a lie when the British claimed it internal to their Commonwealth after spending a century shattering the economies of Bengal, British Africa etc. It's a lie now when we create giant pools of desperate labor across the world through insane farm policy and sinister military intervention.

And honestly, I'm not sure that we should embrace the idea of improving capitalism through government regulation. For the simple reason that this has not worked very well in America, ever as far as I can tell. Liberals crow about the post-WWII prosperity, but that had more to do with the demolition of the main industrial competitors for the US around the world, and even that wave left out huge sections of the population (African-Americans, women, etc.) Regulation is necessary but not sufficient.

I'd suggest being a little more radical about it. What is really needed is a revitalized and reconceptualized labor movement across America, focused on contemporary social issues (like environmentalism and oil independence and Third World development) and on the development of worker-ownership in all its forms, combined with networks of intelligent and ethical consumers. That level of grassroots organization would allow real and lasting challenges to corruption in business.

The foundation of corruption in the business world is always that the folks who do the work have little to no direct power over how that work is organized and traded, so you have an inherent division between action and responsibility- a division we see expressed more ad more in the corporate world, even and especially in the current "corporate" Administration of the George Bush. Unless that division between power and action is organically removed through the vehicle of worker ownership (in whatever form that may take as long as it is concrete), any action against corruption and market excess will be transient in its effects.


Posted by: donald on 3 Apr 07

This is indeed an exciting time in economics. We should be careful to note, however, that just because the Washington Consensus was branded as being the economists' solution does not mean that there was a true consensus among economists on how best to develop. In reality, there was not a consensus on growth among economists, there is not a consensus on growth, and there probably never will be. We should not forever shun U.S. economists because of the political adoption of the Washington Consensus. Economists too have rejected the Washington Consensus.

I encourage you to check out Harvard economist Dani Rodrik's accessible review, "Goodbye Washington Consensus, Hello Washington Confusion" on the current state of development thinking and the positions of the World Bank and IMF.

http://ksghome.harvard.edu/~drodrik/Lessons%20of%20the%201990s%20review%20_JEL_.pdf


Posted by: Ryan K on 4 Apr 07

Interesting post and reply, but I would reiterate something I've been saying for a long time. Individual home ownership has to be the most important buffer against economic swings, and should be the upshot of any economic regime. While stand-alone houses may become too expensive (in terms of individual AND social cost) in the future, a nation of rent-payers is a nation with potential political instability.

People decry the US savings rate being so low, but that's basically because all our savings is in our homes.

The system isn't optimal, the old "externalities" of sprawl and municipal expense are coming home to roost, but the system needs adjustment, not reforming. And the adjustment mechanism is already in place. It's price elasticity, which rewards the forward-thinking and financially prudent.


Posted by: rob on 5 Apr 07



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