Beyond Capitalism: is a third way possible?

This article (Italian version) was originally published here: http://www.smartweek.it/la-pluralita-del-capitalismo-e-la-ricerca-di-una-terza-via/ Capitalism is not unique and absolute. This article aims to investigate its two different main versions and to take a look at a possible third way, notably with reference to risk-taking in boosting innovation-led growth. The literature traditionally focuses on two models of capitalism: on the one hand, the Anglo-Saxon model; on the other hand, the Rhenish Capitalism (also called social capitalism or social market economy). This dichotomy came out of a study by Michel Albert, Capitalism against Capitalism (1993), concerning the institutional and economic characteristics of capitalism in the United States and in anglo-saxon countries in general. This model nearly evokes an image of "a Bank that bows to the Stock Exchange" and “a manager who bows to the shareholder". In these countries, an in-depth division between owners (shareholders) and managers characterizes the structure of the enterprise. This can trigger that phenomenon known as the “agency problem. On the one hand, the role of shareholders is anonymous and they are only interested in cash flow that the company is able to generate (only interested in the renowned Net Present Value). On the other hand, managers deal with the actual management of enterprises; however, their goals can truly differ from the principal’s interests: professional success, prestige, maximizing their salaries, etc…. In a nutshell, the Rhenish Model is instead based on that media res between public and private that is the social market economy, as it is practiced in Germany and other northern European countries, with other peculiar variants, in Japan. As its core, banks, insurance firms, investment and pension funds, known as “institutional investors”, play a relevant role. Furthermore, there is a constant relationship between the company and public institutions, which helps to stabilize the complex balance among the different forces that are part of the company. The precious network of relations between the different social actors (stakeholder approach), affirms and simultaneously reinforces the idea that the company is not an ordinary good, and cannot therefore be negotiated like any other commodity. In this form of managerial-organizational capitalism there is a crucial leader: the "visible hand" that Chandler opposed to the market (1977). A recent book by Mazzei and Volpi (2010) compares the Asian economic model with the West. The authors focus on two key points. On the one hand, an epistemological point that implies the overcoming of a zero-sum game "State or/against Market" in favor of a win - win approach (positive-sum) which should lead to a radical change in our development model, from an essentially quantitative dimension to a more qualitative dimension. The authors refer to the two principles of oriental culture: ying and yang. These forces are not mutually exclusive. They are complementary. "So, there is the night, as there is a day, ... and - to paraphrase Adam Smith - the market exists because there is the state." On the other, the book aims to highlight (once again) that this crisis is not economic, but a systemic crisis. Maybe we are in a phase of epochal transformation of the international system: the end of the West's dominance, that urges us to go beyond, to rethink. Also Pope Francis has warmly criticized the “Market Priesthood” in his encyclical letter, Laudato Si. Global financial reforms are needed “to develop a new economy, more attentive to ethical principles, and new ways of regulating speculative practices and virtual wealth” (Laudato Si, page 49). As J. Stiglitz, Nobel laureate in Economics in 200, affirms, "we live in a process of globalization, 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". The process of economic integration around the world brings about continuous questions and the ability of states to respond is faltering.. Scholars and economists are looking for a "third way" that emerges in medias res between statism and market automatism (“American style”). For years Stiglitz has been working through an approach – within the information economy and its relative information imperfections - which urges its intermediate solutions and tries to rewrite the rules of the market and finance (speculative). Finance ended in the dock over the past decade of financial crises. Crisis has provided us with some common lessons and traits: 1) capital markets are subject to repeated failures (solely in exceptional circumstances market is efficient), 2) also government intervention should be subject to failures. Our economic system needs both the market and the state, going beyond the old conflict laissez faire – socialism. As a result, the solution (but simultaneously a huge challenge) is to find the right combination (Stiglitz 2001). To this purpose, it is necessary to debunk old myths, to rethink economics, to go beyond the mainstream. In accordance with this instance of a rethinking process, there is a focus on the Entrepreneurial State by Mariana Mazzucato. She invokes a capitalism in which companies, State and employees work together to create wealth and wellbeing. They are all potential creators of wealth. The emblems of wealth in the modern knowledge economy, from the iPhone to the Tesla S, have all relied on a strategic public sector (risk-taker) that shoulders the burden of risks and uncertainties, working side by side with a private sector and willing to reinvest its profits in the "downstream" areas, such as research and development (R&D) or human capital training. If we surf the web, among data and researches, we will find that those regions and countries that have succeeded in achieving smart innovation-led growth have benefited from long-term visionary mission-oriented policies – from putting a man on the moon to tackling societal challenges such as climate change. In addressing these missions, public sector agencies have led the way, investing not only in the classic ‘public good’ areas, like basic research, but also along the entire innovation chain (basic research, applied research, early-stage funding of companies) and courageously defining new high-risk directions (e.g. the Internet, the “green revolution”, biotech, cleantech, fintech). Tomorrow’s growth – or long-term economic growth – is determined by today’s investments in R&D, infrastructure projects, human capital, technical change and innovation. Accordingly, innovation requires decisions on directionality and capabilities to understand and engage dynamically with future technological and market opportunities. Those decisions cannot be taken by only ingenious entrepreneurs, nor are they an exclusive public task. Mazzucato (2013) wants to stress the importance of a "Slow Finance" (she speaks also about a Finance mission-oriented) to boost the technological innovation, the pharmaceutical industry, the academic research. We ought to abandon a lot of myths, beliefs and conventions on the State and to rethink its role in creating new and dynamic engine of the economy. It is recommended a hug between a risk taker State and the private sector, in order to assume the risks together and enjoy together the benefits. References - Albert M. (2001) Capitalism against Capitalism. Ten years later, Il Mulino, n. 3/01 - Gowdy J. (2015) Why the Pope is Right to Criticize Free-market Ideology; available online at: http://evonomics.com/pope-understands-new-economic-paradigm-economists-dont/ - Mazzucato M. (2013) The Entrepreneurial State: debunking public vs. private sector myths (Anthem 2013) , Italian Edition - Laterza, pp. 46-52 - Mazzucato M., Penna C. (2015) MISSION-ORIENTED FINANCE FOR INNOVATION: New Ideas fot Investment-Led Growth, Policy Network, London; pp. 2-26 - Stiglitz J. (2001), “In an imperfect world”, Donzelli Editore, pp. 4-21 - Volpi, Mazzei (2010) Revenge of the visible hand. The Asian economic model and the West, Bocconi University Editor-Egea, Milan, 2010 Note: if you find some english mistakes, let me know in the comments