Can Capitalism Co-exist With Democracy?

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26/10/2014 by Don Quijones

Here’s a thoughtful, thought-provoking little piece by Yves Smith of Naked Capitalism:

Real News Network is running an eight-part series on capitalism and democracy, with Chris Hedges and Sheldon Wolin as interlocutors. I thought the second segment in the series, which is historically focused, to be particularly strong. It seeks to trace the evolution of what they call corporate capitalism, or what we’ve sometimes called Mussolini-style corporatism.

At least in the segments I’ve seen, there’s a tendency for Hedges and Wolin to describe “capitalism” as if it were unitary, when in fact it comes in different flavors. For instance, Michael Hudson has depicted the German industrial capital model versus the English (and now American) finance driven capitalism. The Japanese variant of capitalism even now places creating and preserving employment as a much more important goal than profit.

Another issue I haven’t seen them address as crisply as they might is Dani Rodrik’s trilemma, which he first described in 2007:

Sometimes simple and bold ideas help us see more clearly a complex reality that requires nuanced approaches. I have an “impossibility theorem” for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.

Here is what the theorem looks like in a picture:

To see why this makes sense, note that deep economic integration requires that we eliminate all transaction costs traders and financiers face in their cross-border dealings. Nation-states are a fundamental source of such transaction costs. They generate sovereign risk, create regulatory discontinuities at the border, prevent global regulation and supervision of financial intermediaries, and render a global lender of last resort a hopeless dream. The malfunctioning of the global financial system is intimately linked with these specific transaction costs…..

So I maintain that any reform of the international economic system must face up to this trilemma. If we want more globalization, we must either give up some democracy or some national sovereignty. Pretending that we can have all three simultaneously leaves us in an unstable no-man’s land.

From what I can tell, the choice among policy-makers has been to continue to favor greater economic integration, even though going further in that direction is almost certain to produce less rather than more prosperity. Trade is already substantially liberalized; even if you believe more open trade creates net winners, as opposed to redistributes who gains and loses. Recall that the oft-neglected Lipsey-Lancaster theorem says that moving toward an unattainable idealized state (and that is what “free trade” is) doesn’t necessarily make things better and can readily make things worse. You actually have to evaluate the various specific end states to determine whether the result in net gains, which no on appears to do, preferring to rely on faith. Even worse, high levels of international capital flows are strongly correlated with more frequent and severe financial crises, so more financial integration is likely to be a bad thing.

Click here to view part 2 of Chris Hedges’ interview of Sheldon Wolin on the Real News Network (much recommended)

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