Cardinals of Capitalism Open to a Debate
STANFORD, Calif. — Some of the scholars laboring in this intellectual cathedral of capitalism known to the world as the Hoover Institution crack this joke: There are only two places on Earth that still bow down reverentially at the altar of unfettered capitalism. One is the People’s Republic of China. The other is the Hoover Institution.
In truth the jibe is not so accurate about China, but it is almost devilishly on target about Hoover. The honorary vicar of this college of capitalist cardinals is undoubtedly George Shultz, the former secretary of State, now a Hoover fellow. When he openly scoffs at efforts to counter the negative effects of the Asian financial crisis through the intervention of current or would-be international organizations, financial reformers cringe. Shultz would, among other things, simply vaporize the controversial International Monetary Fund as punishment for incompetence, irrelevance and immateriality. Only completely free international markets, operating without the interference of well-meaning but inherently flawed man-made multinational financial institutions, can address global economic problems effectively, he advises.
But such an across-the-board defense of the pure pro-markets line clashes, it seems to me, with the daily reality that something is amiss with the world economic system. Even the Hoover Institution, if not Shultz, appears to implicitly admit this possibility in a new publication. The Hoover Institution Press’ “The International Monetary Fund: Financial Medic to the World?”--a compilation of essays on the IMF--lays out the pros and cons of world-markets regulation as if the issue were far from settled. For Hoover, this is a welcome departure from form, when, in much of its past, the aim of its scholarship seemed mostly evangelical. The current volume includes not only strong defenses of the much-criticized IMF but the free-market revisionism of Harvard’s Jeffrey Sachs and MIT’s Paul Krugman. To be sure, Hoover is nowhere close to throwing in the free-market towel; indeed, its even-handedness on this controversial issue more reflects the frank intellectual honesty of the institution’s current leaders than deep-seated institutional doubt. As Associate Director Tom Henrikson explained: “In the issues of our time, and especially for this vital issue, a full consideration of all the views can’t and shouldn’t be avoided.”
The Clinton administration needs to be more like the new, nuanced Hoover and less like the ideological old one. America, on the opium high of its best economic performance in memory, has got to get off its sick kick that free markets can solve virtually every problem. If America wraps its eyes in ideological blinders and ignores the unfolding crisis and the pain and misery in Asia and elsewhere, it will lose the policy leadership of the emerging worldwide debate and become intellectually irrelevant and morally suspect. Free capital flows across borders can create wealth, no doubt about it. But they can also create unintended problems, especially in economies ill-equipped to regulate massive and almost instantaneous cash flows. This is little more than common sense. But common sense is not always the economists’ forte, or Washington’s. Berkeley economist Barry Eichengreen explains this neatly in the Milken Institute Review, a recently launched policy journal published in Los Angeles: “Economists presume that markets know better than governments and that, left to their own devices, markets allocate resources reasonably well. Yet the suspicion remains that there is something different about international financial markets.”
However, many economists do recognize, as they did not before, that developing nations often do not possess the institutional muscle required to monitor and control capital flows. They understand that governments long accustomed to operating in a culture of secrecy do not readily make public negative financial data until it is too late for them or anyone else to act. Some economists have even stopped criticizing China for violating free-market ideology and not opening its currency to convertibility, on the grounds that its economy is not yet up to handling it. As Eichengreen put it, “Developing countries are simply not ready for prime time.”
Market systems incontestably produce more wealth than any other system yet devised, but they also produce serious inequalities and periodic crises. The challenge is to mitigate the inequalities and forestall the crises without eviscerating the very worldwide market forces that tend to produce wealth. This is now the great long-term question facing the community of nations.
