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NEWSLETTER, World economy

BEYOND CAPITALISM: IS A THIRD WAY POSSIBLE?

Federico Giovanni Rega (SUNeconomist) and Stefano F. Fugazzi (ABC Economics) report.

Sourced from this month’s issue of The World Of ABC Economics.

The dichotomy between the two main approaches to economic organisation, the Anglo-Saxon model and Rhenish Capitalism, arose following the publication, in 1993, of Capitalism against Capitalism, a study by Michel Albert providing insight into the institutional and economic characteristics of capitalism in a number of English speaking countries.

In the Anglo-Saxon context there is an arm’s length relationship between shareholders and senior management. This distinction of roles and goals can give rise to a phenomenon known as the agency problem.

Shareholders tend to look at cash flows and the overall franchise viability of the firm whilst managers, who act on behalf of the owners, are responsible for running business operations and setting strategies, albeit their agenda may also include personal objectives such as career progression, status and bonuses.

By contrast, the Rhenish model is a social and economic system combining free market capitalism which supports private enterprise, alongside social policies which establish both fair competition within the market and a welfare state.

Present in Germany, France and in Northern Europe, with other peculiar variants in Japan, Rhine capitalism is an approach capable of striking a balance among stakeholders, overcoming the zero-sum game logic of the State versus Market tension in favour of a win-win approach.

The rise of the information age in the context of globalisation called into question the sustainability of the existing forms of capitalism.

As noted by the 2001 Nobel prize winner, Joseph Stiglitz, “we live in a process of globalisation, but we have no global institutions able to deal with its consequences. We have a system of global governance, but we do not have a global government.”

An alternative third way must be sought. Stiglitz is of the opinion that a middle-way solution retaining some aspects of both models is possible.

“Our economic system needs both the market and the state, going beyond the old conflict laissez faire – socialism. As a result, the solution is to find the right combination,” Stiglitz argues.

According to RM Phillips Professor in the Economics of Innovation at the University of Sussex, Mariana Mazzucato, this new approach would require the introduction of a novel form of capitalism where companies, State and employees work close together to support the creation of wealth and well-being.

The emblems of wealth in the age of the digital economy, from the iPhone to the Tesla S, have all relied on a strategic public sector that shoulders the burden of risks and uncertainties, working side by side with the private sector and willing to reinvest their profits in research and development (R&D) and in human resources development (HRD).

Regions and countries that have succeeded in achieving innovation-led growth have also benefited from long-term visions and forward-looking policies.

The involvement of public sector agencies was pivotal to their success, with investments being dispensed in public good areas, like basic research, but also across the entire innovation chain (basic research, applied research, early-stage funding of companies), giving rise to the creation of new technologies and, ultimately, achieving economic development through the creation of new sectors.

 

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