CAPITALISM AND RESPONSEBILITY

By Vladimir Gligorov

Hey, it's your money, I mean, I'm just holding it for you, you know. Like a bank. Except that, you know, better than a bank because, you know, banks are always knocked off. And no one knocks off old Tony. (Leon)

What caused the financial crisis, too many regulations or insufficient control? Is the market or the state to blame? Capitalism or socialism? We shall firstly discuss the inconsequence of those blaming too many regulations for the crisis and then the problems facing those that advocate for stronger state control. Finally, we shall discuss intellectual responsibility of liberals and neo-liberals.

Many who take that specific regulation of economic activities in, say, America, caused the financial crisis often assert, at the same time, that banks - and next in the line, companies - should not be saved. Why? Because everyone should be responsible for his decisions and actions. This stand is evidently inconsequent. For, it too many regulations caused a problem - the financial crisis in this specific case - the responsibility for the consequences of those regulations rests on those who have passed them in the first place and are, generally, authorized to pass them. So, those taking that - to put it plainly - the state is responsible for the financial crisis should take the state accountable for its consequences.

I shall give you an example. Practically everywhere central banks are responsible for the stability of banking and, generally, financial systems. Central banks do not bear responsibility alone but let's take a look just at them. Why is it that central banks are made responsible is another story. But since they are, a central bank is indisputably responsible for the financial crisis. Claiming that financial institutions behave as if the central bank takes care of the stability of the system and then demanding that banks should be left to go bankrupt when the system crisis breaks out doesn't make much sense. Such perception of responsibility is inconsequent.

Opposite to the critics of economic regulations are those who take that the financial crisis is a result of insufficient control, supervision and regulation of this sector. Regardless of whether or not this precisely describes the state of affairs, one should state the reasons for the belief that control, supervision and regulation would be efficient. To be efficient in principle, we would need to know at least what is supposed to be their content. This is not that simple for many reasons, one of which is especially important.

Some people say there would be no crisis at all had we have this regulation or other, this control institution or other, or had some financial activities been forbidden. Regardless of whether or not such a stance is well-grounded - since this a counterfactual judgment - it is obvious all this is about learning from experience or mistakes. The problem challenging the regulators is the problem of how to prevent a future crisis. The one that has already broken out can be prevented no longer by regulations or in any other way. We need to adopt regulations that will prevent any future crisis. And this implies that we know what we are doing. For, any future crisis - no matter how much it resembles earlier ones - will be caused by certain innovations, by something that is quite unknown at the moment regulations are passed, control established or bans introduced.

For instance, second rate credits or loans play an important part in today's crisis. This is about a financial innovation that is not illogical, on the contrary, but negatively affects the financial system and "creatively destructs" the existing regulatory system. As usual the author of this best, though for some readers too abstract definition was Kenneth Arrow in the Guardian, who pinpointed the discrepancy between new instruments of risk takeover and the existing financial system. From the angle of regulators, the problem is that each regulation derives from experience, from the past, whereas innovations are guided by expected profits in the future (we regulate backwards and innovate forwards). Besides, every system of regulations opens the door to those innovations that tend to profit from whatever was left unregulated. Therefore, a better, stronger and more efficient regulation is possible but not the one that will show its shortcomings only when a new crisis breaks out.

Does it mean that banks or private owners in general should transfer responsibility to the state? The situation of the stock market evidently testifies that private owners pay dear for their decisions. Likewise, owners practically lose all their property in the banks taken over by the state.

And this is how things should stand in the market-oriented, capitalist economy. At this point the public is concerned, with good reason, with the salaries paid to the managers of bankrupt or high-risk banks - but that that will not last long. Those managers are still protected by contracts but their market value is considerably lowered and many of them have already lost their jobs or soon will. There is a difference between saving banks - and only with the purpose of avoiding a system risk - and saving of bankers, either owners or managers. That difference is crucial for division of responsibility between the state and the private sector, i.e. for the assessment of everyone's responsibility in the market economy or in capitalism.

A financial crisis is followed by adjustments in the so-called real sector, which implies lower production and unemployment in the first place. How things stand with responsibility at the labor market? That's a more complex question than the one about responsibility in the financial sector - and primarily because both entrepreneurs and employees make decisions in (macroeconomic) circumstances they cannot influence. They must clearly rely on the market that provides a considerable dose of stability. That's what Adam Smith had in mind when referring to the "invisible hand." This is about the stability of human needs and interests that make division of labor, specialization and establishment of enterprises predictable and useful activities. Of course, the market is not in itself responsible for people's doings - therefore, not responsible to maintenance of stability. Responsible are individuals and their institutions and organizations, and the state as an institutionalized political responsibility.

Of course, some sectors might have been overproportionate such as the sectors of finances and real estate. But that's not the case with most other sectors. There might be no jobs for the people who have invested years of hard labor to receive business school diplomas and they might have to get retrained. But that's the risk they have taken themselves and should be responsible for it. Generally speaking, people should bear responsibility for the decision they have made vis-a-vis their education, profession or, simply, the jobs that earns them daily bread.

Likewise, entrepreneurs should bear the risk of investment and managers the risk of decision-making. The system in which those risks are needlessly mixed - in which entrepreneurs bear the risk of wrong professional decisions of their employees, or the risk of wrong decisions of managers - is a bad one. The same applies to the opposite direction. Employees do not make decisions on investment or the type of production program. On other hand, regulations applied to the labor market, products and enterprises considerable influence distribution of those risks. Actually, the system of responsibility is more or less discrepant with the principle that everyone bears responsibility for his decisions.

In democracies, besides, it's not that simple to avoid political responsibility for a general level of employment or for the so-called unwanted or forceful unemployment. For, there is political responsibility in developed democracies. In America, say, the prospects for a party or a president to be reelected mostly depend on the situation in the labor market. And this is particularly so because the whole system greatly relies on the flexibility of the labor market. The situation in Europe is different because of different forms of social protection of the unemployed - therefore politics less influence the situation in the labor market. In America, to put it plainly, economic policy is concerned with employment and, generally, with the situation in the labor market, while in Europe it is concerned with earnings and social relations. The whys of that difference make an interesting topic for some other story.

And how things stand with intellectual responsibility? To discuss the matter seriously one should ignore those tending to change the subject and divert the attention from real responsibility to ideological one. Those are the people who bear real political or business responsibility but blame, say, liberals or neo-liberals for their wrong moves or for their irresponsibility. And then, how things stand with the market-state theory? Is it wrong to expand the area of economic freedoms or is it better to lean on some form of state coercion or paternalism, to put it mildly? And can we draw some lessons about it from the latest financial crisis?

Let's take one example from America and one from Serbia to concretely discuss the issue of intellectual responsibility. In America, the Democrats on the one hand criticize those taking that deregulation is the best policy for regulation of economic life, and indicate on the other that they have no valid answer whatsoever to what is to be done about the financial crisis - except, probably, that the state should undergo depression so as to "learn a lesson." Bearing in mind that they are the opposition to the present government actually largely intervening in the economy, their criticism is justified as it simply calls for political responsibility of the ruling party.

Do they, by any chance, advocate anything contrary to liberal or neo-liberal teaching? Judging by the writings of the people that mostly influence economic policy of the Democratic Party one could hardly say so. Laurence Sammers, Bob Rubin, Paul Krugmann, George Soros, John Stiglitz and, especially Barak Obama's economic adviser, Austin Goolsby, are certainly not libertarians but can also not be taken advocates of state economy - in brief, they cannot be considered the opponents of the liberal and market-oriented economic and political system. Their fierce and even intolerant criticism of "market fundamentalism" - whatever that means - is actually the best way to secure intellectual responsibility in a free society or at least in the society guaranteeing freedom of thought, which is certainly among basic values of liberalism. As far as I know, no one takes that nationalization of thought would be a good solution even when our cognitive powers are in crisis.

Serbia's approach to intellectual responsibility is somewhat different. This is probably best illustrated by President Tadic's recent speech and the "Declaration" signed by the Democratic Party and the Socialist Party. Tadic takes that the crisis has testified that freedom was the problem calling for a new ideological answer since liberalism and neo-liberalism are bygone. By saying this, Tadic reiterates Vladimir Putin's and his ideologists' stands. So far, one can hardly tell what it is Tadic has in mind as an alternative, though we know what it is Putin's ideologists advocate. However, if you go through the "Declaration" you shall see no appreciation for individual freedoms. The rest is worrisomely empty-worded or, to put it mildly, obsolete.

Let's now take an example that is theoretically significant. Stiglitz has been criticizing for decades now those taking that the asymmetry in people's uniformity in every domain of life affects not the understanding of the efficiency of market allocation of resources and fairness of distribution of income. And that it has no significance whatsoever for the economic policy in a market or any other economy. His criticism is justified. Stiglitz has surely proved that those taking that theoretical conditions for the efficiency of a perfect market have been met in everyday life are wrong. This still does not mean that a model of a perfect market is useless for explanation of economic and even political developments.

Stiglitz has also exerted himself to prove that in the conditions of global market a regular monetary policy is wrong - since, for instance, a raise of interest rates against the backdrop of a threatened exchange rate often produces opposite effects, i.e. leads to the crisis of exchange rate. Finally, his criticism of privatization unconcerned with free competition is also important, particularly when one takes into account international financial institutions' stance that the price at which something is privatized matters not, the same as whether or not private monopolies emerge from privatization - having privatization is all that matters. All those criticisms call for a responsible intellectual debate.

None of the above criticism counteracts market economy or liberalism. Despite the exceptional times, exceptional measures were not proposed over the debates in the American election campaign. Everyone bears or shall bear the responsibility for his economic, business, political and intellectual decisions, which is actually how things should stand in a liberal society.