Edward Hadas

The social market economy

January 26, 2012

lesspeople-moremoneyCapitalism is the name people give to the way the modern economy is arranged. Now that Communism has been discredited as an economic system, there seems to be no real alternative. But the word is misleading.

A capitalist analysis of any economic issue starts with capital, both physical capital – factories and land – and financial – shares and bonds. It is associated with free and competitive markets for goods and labour. And capitalism has come to designate a system where private property is the norm, with any exception needing some sort of justification. Capitalist analysis usually treats governments and unions as economic interlopers, and ignores the broader society.

That perspective is too narrow. Capital and markets are only two parts of the complex modern economic system. People don’t only matter because they bring their labour to the owners of capital – as in the original, 19th century definition of capitalism. And governments over the years have become regulators and keepers of the monetary order. Moreover, the economy is so closely integrated with modern society that no clear border separates the two. Social forces – such as the thirst for technological innovation, the work ethic and other moral values – play a fundamental part and influence the workings of the purely “capitalist” system.

A limited analysis often leads to unnecessarily grim prognoses. Think back to the 1960s, when environmental pollution was first identified as a serious problem. Many observers, enthusiastic capitalists among them, thought that the capitalist system couldn’t deal simultaneously with environmental goals and the search for profits. Economic disruptions were predicted. But changes in the law, technology, corporate priorities and cultural values combined to bring about a remarkable success in reducing noxious emissions, without noticeable harm to prosperity or profits. The system found a way to price externalities without endangering itself.

Half a century later, people, including enthusiastic capitalists, are again wondering whether the system can survive. Now they cite the long financial crisis, or issues such as the exorbitant privileges of the very rich. They are not wrong to be concerned. If the economy were simply or primarily capitalist, either of these problems could well be lethal. After all, neither factory nor financial capital can be expected to allocate income and wealth justly. And the financial system could be too wounded to heal itself.

But the separation of the rich from the rest in some countries isn’t basically a failure of either capitalism or free markets. At bottom, it is a sign of inadequate social solidarity. The more direct causes, from politicians and regulators’ complacency to society’s general indifference regarding corporate pay, are more social than economic problems. The solutions – new rules, taxes, and behavior – will have little to do with the functioning of the core capitalist system.

Similarly, the financial disorder may look like a crisis of capitalism, but its causes and cures are political and moral. Financial markets have failed because politicians tried to give citizens more wealth than they have earned, bankers forgot the common good, governments refused to live within their means and investors’ greed was celebrated rather than restrained. No solution limited to the technical operations of the financial system can work for long, unless it is a reflection of changed political and moral attitudes.

Words are not everything, but the unquestioned identification of the modern economy as “capitalist” tends to constrain economic arguments. The debate is almost completely stifled when hyper-capitalists assume that any impediments to free markets are regrettable signs of “market failure”. That dismisses most of the economy – from the government’s 40 per cent share of GDP to the 90 percent of the workforce employed in meritocratic bureaucracies. But the capitalist obsession also limits the insight of economists friendlier to government intervention and more skeptical about free markets. They tend to downplay social values and ethical analysis.

A new name for the modern economy might encourage a broader approach. Something bland might work – the business, or the industrial economy. I prefer a title that has a bit of spin on it. Acronyms are fashionable; perhaps it is time to introduce the BCRINCF economy — bureaucratic, competitive, regulated, innovative, collaborative and financial. But that’s a mouthful.

I suggest the “social market economy”. The term was coined in Germany after the Second World War to show that capitalism could be combined with a strong government presence, workers participation in company boards and an extended social safety net. The combination is still apt, as each of the two words captures something essential. “Market” takes in capital, competition and the eager striving for improvement. “Social” pays tribute to the human element and the need for economic activity to serve the common, social good. It is appropriate that social comes first in the title, because the modern economy is a largely a construction by and for the whole community. If it had been merely capitalist, it would not have lasted this long.

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Edward Hadas is a Reuters columnist.

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3 Responses to “ The social market economy ”

  1. rifat munim on January 29, 2012 at 8:39 pm

    Very interesting analysis of capitalist economy and the suggestions are also substantial. However, I have one disagreement with the concluding part where he says, ‘It is appropriate that social comes first in the title, because the modern economy is largely a construction by and for the whole community.’ I firmly believe that modern economy is largely a construction by whole community but I don’t buy that it is ‘for the whole community.’ In fact, the writer’s own analysis is my first reference to support my point.

  2. Shegufta on January 27, 2012 at 7:46 pm

    811 pointless words.

  3. Golam Arshad on January 26, 2012 at 7:27 pm

    Ed: Whatever name given “Capitalism” will prevail. Globalization trudges in… as competition rings round for adding new consumer. If there is Demand! Supply will take its formidable stand! Who will tight the spending belt? That is the question we need to ask??? Good Job!!

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