Even if 2012 proves to be the year in which the economic crisis that began in 2008 finally comes to an end, the foundation of capitalism has been shaken. Many observers, economists, and financial professionals are questioning underlying assumptions about the system, and camps previously in strong support of the current economic framework have begun to criticize it. Activists, politicians, and economists—a surprising mix of influential figures—are pointing to flaws in the structure.
Substantial structural changes and policy adjustments seem necessary.
Ongoing economic turbulences have necessitated a strong intervention from economic experts or downright chipped away at democracy, depending on one's point of view. This development could set a dangerous precedent for the future. In some countries, technocratic leaders have replaced elected politicians; in many countries, unelected economic experts are playing a more dominant role. In Greece, Lucas Papademos, a former vice president of the European Central Bank (Frankfurt am Main, Germany) and former visiting professor of public policy at Harvard University (Cambridge, Massachusetts), is the appointed prime minister. In Italy, Mario Monti—an economist, the president of Bocconi University (Milan, Italy), and a former European commissioner for competition—is the appointed prime minister. Although the economic and political situation might call for more direct control by economic pundits, some observers perceive the development as a suspension of normal politics and wonder what will happen to other countries that have unsustainable levels of sovereign debt and government-bond yields, such as Ireland, Portugal, and Spain. Economic difficulties in Japan and the United States mirror the financial situation in Europe.
In the past, disapproval of the capitalist approach was limited to specific segments of society; however, criticism is now coming from a more diverse array of players. For example, Sir Richard Lambert—former head of the Confederation of British Industry (London, England), which promotes the interests of British businesses—is questioning public support for free markets. He argues that the understanding that capitalism creates more prosperity for society as a whole than do other economic systems is in doubt and highlights substantial income inequality and the fall of middle-income earners' real earnings. "Capitalism has adapted to changing political and social pressures in the past, and now is time for it to do so again" ("Its camp is gone, but the Occupy movement will grow," Financial Times, 15 November 2011).
Lambert is not the only one concerned about the economic situation, and numerous experts have named relevant factors that might drive substantial structural adjustment. Structure of economic markets, organization of the financial system, technological developments, and global interconnectivity all play important roles in the situation and require consideration.
Harvard Business School (Boston, Massachusetts) professor Michael E. Porter and FSG (Boston, Massachusetts) cofounder and managing director Mark R. Kramer underscore social, ecological, and economic problems caused by current economic dynamics. And William H. Gross, managing director of the Pacific Investment Management Company (a subsidiary of Allianz; Munich, Germany), recently questioned proposals to address economic problems because the proposals favor capital over labor and thereby inadequately account for employment and equality considerations. Thomas L. Friedman, a columnist at the New York Times; Michael Mandelbaum, a professor and director of the American Foreign Policy program at the Johns Hopkins University School of International Studies (Washington, DC); and Joseph Stiglitz, a professor at Columbia University (New York, New York) and recipient of the Nobel Memorial Prize in Economic Sciences, all highlight various problems, ranging from education issues to institutional shortcomings to unbalanced wealth accumulation).
In a recent study, complex-systems theorists at the Swiss Federal Institute of Technology (Zurich, Switzerland) found that a tightly connected entity of 147 corporations controls 40% of wealth in the global network through ownership of other companies. Although the study is controversial and has been challenged, it might point to a structural issue that deserves consideration when addressing the economic situation in the long run.
Compensation structures in the financial industry also led to a number of overall economically counterproductive developments. In 2009, The Turner Review (www.fsa.gov.uk/pubs/other/turner_review.pdf), a report the UK government commissioned to make recommendations for regulatory reform, found that incentive structures encouraged bank employees to engage in excessive risk taking in pursuit of short-term profit. Recent research indicates that overall risk assessment in financial markets might be flawed. H. Eugene Stanley, a physicist at Boston University (Boston, Massachusetts), claims that catastrophic events in financial markets are not the exception but an inevitability. He argues that Wall Street is using a Gaussian function, the bell curve, for many economic models, which provides small likelihoods for occurrences at the edges of the curve. Stanley maintains, though, that a power-law distribution describes many phenomena more precisely. "With a Gaussian model, an event that's 100 standard deviations out—so far out it's considered impossible—has a probability of about 1 in 10350. With a power law distribution, that likelihood shoots up to 1 in 108" ("Beware the Long Tail," Science News, 5 November 2011).
Technological developments are also affecting employment structures. The Economist perceived a tipping point in automation threatening middle-income segments of the population, and the New York Times reported that the ongoing automation is now reaching service jobs. And Martin Ford, author of the book The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future, believes society has reached an inflection point at which technology is destroying jobs rather than creating them. And according to Arnold Kling, an economist and cofounder of the daily blog EconLog (http://econlog.econlib.org), jobs created might not sustain a middle class—potentially contributing to ongoing polarization in society).
Also, the belief that automation is mainly a problem of developed countries with high labor costs may be a misconception. The Pearl River Delta region in the south of China is a manufacturing center for companies, but the region has seen rising wages that are pushing manufacturers to look at increasing their use of automation and robotics to maintain the cost advantage China currently has over the rest of the world. In fall 2011, Foxconn (New Taipei City, Taiwan), a manufacturer of products for a wide range of electronics companies, prominently announced plans to increase the number of robots it uses to 1 million by 2014.
Reasons for the current economic malaise are manifold, and small adjustments might not provide relief. Substantial structural changes and policy adjustments seem necessary.