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Tuesday, March 14, 2000

In praise of market heretics


During the 1980s and 1990s, waves of neoconservatism swept the world. The movement was sparked by two politicians: Margaret Thatcher, who became the prime minister of Britain in 1979, and Ronald Reagan, who became president of the United States in 1981. In Japan, a neoconservative administration headed by Yasuhiro Nakasone came into being in 1982.

These three politicians all demonstrated exceptionally strong leadership and vigorously pushed neoconservative reforms. Their common objective was to bring the market closer to "perfection" and make it more efficient. The functions of the market were threatened by thickets of government regulations that did more harm than good. That was particularly true of Japan. Those market reforms made good progress in a relatively short period: The markets did come closer to "perfection."

John Maynard Keynes expounded the theory that because the market is "imperfect," governments should step in by means of fiscal and monetary policy to resolve problems such as unemployment and to eliminate instabilities in the business cycle. Thatcher, Reagan and Nakasone all tried to minimize government intervention by making the "imperfect" market more "perfect."

In the 1990s, the former Soviet Union and East European nations steadily promoted liberal and democratic reforms. Developing nations in East Asia also pressed ahead with market reforms. The "collapse of socialism" was seen as the "triumph of capitalism." Market fundamentalists preached a transcendental philosophy: Market-driven economic globalization brings "unprecedented prosperity." That theory was accepted as an article of faith.

The government of every free nation has the authority to intervene in the market when necessary to correct macroeconomic instabilities and imbalances. Even hardline market fundamentalists should not negate the need for government. Yet the faithful say in effect that government is unnecessary for the global market economy.

The belief that the "market is almighty" went virtually unchallenged until 1997, when currency turmoil engulfed East Asia. The crisis was defused because the U.S., with its military and economic power, was able to govern the global market economy.

In all likelihood, the U.S. will maintain its military might. It is unlikely, however, that its present economic prosperity will continue forever. Given the tradition of the Monroe Doctrine, there is no small possibility that America will call it quits with global governance. If that happens, what will the world economy do?

Since the East Asian currency crisis, there has been increasing agreement that the global market should be regulated in one way or another. But there is as yet not even a semblance of consensus over what kind of regulation should be imposed on the international financial market and how. Right now, it is even unclear what should be regulated. In my view, an international body that governs the global market economy, such as a U.N. economic security council, should be created.

In the 1920s, during the heyday of classic liberalism, Keynes published "The End of Laissez Faire." Today's world is in a similar situation to that period. In the 1990s, the world has undergone various changes, such as economic globalization, the information-technology revolution, the postindustrialization of advanced countries, the industrialization of developing countries, the globalization of environmental problems and the diversification of values. These changes will accelerate in the first decade of the 21st century. As attempts are made to adapt to these changes, the limitations of market fundamentalism will be exposed. And step-by-step adaptations to change will force certain "revisions" on the market economy.

After the mid-1990s, social democratic or center-of-left governments debuted in member states of the European Union. Even though socialism supposedly collapsed a long time ago, the social democrats took power. Why? The answer is that from the 1980s to the early 1990s, globalization gained momentum as the market economy came closer to "perfection" and, as a result, something unexpected happened: Market forces became violent. The proof: East Asia's currency upheavals, natural monopolies or a single company dominating an entire industry as a result of market competition, the ever-widening gap between rich and poor and chaos in public medicine and education, to name but a few examples.

The challenge is gaining the wisdom to control market forces properly while making effective use of them so that they will not become violent.

Takamitsu Sawa, professor of economics at Kyoto University, is also the director of the university's Economic Research Institute.


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