ALTERNATIVES TO NEO-LIBERAL FREE- MARKET PHILOSOPHIES

Social Market Theories

Margaret Thatcher once famously declared that "There is no alternative" (TINA) to her policy on something or the other. In this, she was representative of zealots of every age and hue, who are so full of conviction that theirs is the only true faith that they are one-eyed. At this time, the dominant economic religion is that of the free market and the economic Vatican, so to speak, is located in Washington DC. From the U.S pours a positive torrent of assertions and axioms about the rectitude of the One True Faith - that of laissez-faire free markets. These dogmas has been enthusiastically adopted by many governments in Europe, but nowhere more so than in Britain, where the alliance of Margaret Thatcher and Ronald Regan set the tone for her successors.
To read and observe the words of media and government in Britain, one would imagine that there is no alternative to neo-liberal free-market economics. Well, we have had some thirty years of neo-liberal policies - sufficient time to evaluate their efficacy. The way things are panning out in the land of free-market fundamentalism, maybe its time for our policy-makers to consider that there could be some alternatives - or at least some modifications to the prevailing dogmas. It might seem to those with eyes to see that the behaviours of unregulated free markets, whilst generating economic growth, have also created very serious problems, such as frequent bouts of instability, gross inequalities and a financial system that is moving beyond the influence of representative democracy and increasingly serving only its own purposes and those of the rich and powerful. This leaves much of society out-with the halls of the wealthy and thus increasingly disadvantaged. These are not political statements, but based on empirical observation and evidence. Nor are they a full-frontal attack on the value of the market or a swipe at democratic capitalism.
But it seems to us that any system should be open to intelligent critique and one that cannot bear the light of objective enquiry is probably flawed. So, we are willing to risk the scorn of believers in the unalloyed free market and to ask:

Are there alternatives to neo-liberalism?

And the answer is ......Indeed there are! The philosophies of the Social Market are in one form or the other, prevalent in many countries in Northern Europe and South East Asia.
It seems to us that a viable socio-economic philosophy should meet two main criteria:

• Is it conceptually sound?
• Is it empirically robust?

The rest of this essay is concerned with testing Social Market theory from these two angles.

First, Social Market Theory.

Social market advocates start from the standpoint that the market and market economies are a social good, in other words, the workings of the market will create greater freedom for people to express themselves and seek economic fulfilment than statist or collectivist approaches.
Social Market theorist Robert Skidelsky wrote a seminal paper for the Social Market Foundation in 1989 entitled "The Social Market Economy".
He was quite clear about his view on the efficacy of markets:
"The use of the phrase 'social market economy' signifies a choice in favour of the market economy. It means that we turn to the market as a first resort and government as a last resort, not the other way round. It means that our first instinct is to use the market, not to override it; and we are not afraid to apply the logic of this to matters of thought, expression and behaviour, which most governments, not least Mrs Thatcher's (written 1989) have an incurable urge to control.
Having said this, there remains a substantial role for government. Adding the word "social" to "market economy" is not just a political flourish. Its object is to draw attention to the elements of statesmanship and design necessary to sustain a market order. ....Those who value the market as an institution must be concerned to keep its support system in good repair.
The state's role is essentially threefold:

1. To create and maintain an appropriate legal framework for market exchange,
2. To limit and supplement the market where necessary, and
3. To ensure that the market is politically acceptable.

A social market economy is, above all, one which is embedded in social arrangements regarded as 'fair' ".

Skidelski saw several key roles for the state:
"Employment, health and the environment are prime candidates for intervention. The state must also maintain a substantial role in education because of the link between education and both the job market and the public good of knowledge.
Third, the state - or more broadly, statesmanship - must not only maintain appropriate legal foundations for a market order, but must at all times concern itself with securing the social acceptability of the market system. This involves working towards 'fair equality of opportunity', a wider dispersal of property, and a basic income guarantee". He also strongly believed that the state had a crucial role to intervene should markets suffer gross failures.

Economist John Kay makes an important contribution to our understanding of social market thinking. His basic assertion is that all markets are basically social institutions - that the idea of 'pure' markets, disembodied entities separate from the communities that they are embedded in, is a fantasy. In this regard, the neo-liberal, free-market fundamentalists are peddling a dangerous myth. Kay reckons that markets are a product of societies, not of economic theorists, and in this regard they will each be different. The current idea of the 'model' free-market economy is, in Kay's opinion, the American Business Model' (ABM). This model is being pushed through the IMF and World Bank as a template for the global economy. In Kay's terms, pushing a model derived from one culture on to all is courting disaster, which predictably occurred when Western bankers prescribed neo-liberal free-market practises for ex-Soviet Russia.
In an interview with Strategy+Business magazine, Kay describes four 'Myths about markets':

• "The first is that greed is overwhelmingly the most important motivation in economic affairs. Of course, it is a motivation, but it is not overwhelming for most people. Most people work because they want to do a good job, because they enjoy the respect of their friends and so on. If you ignore these other motivations, you actually undermine the relationships that make corporations effective".
• False premise two is market fundamentalism. It says that you should impose as few restrictions and limitations as possible in the operation of the markets. But this doesn't recognise that markets actually operate - and can only operate - through an elaborate social, political and cultural context. ... To suggest that unregulated markets are more efficient is wrong. Markets rely on rules and signals. Without these you get chaos" (As in Russia).
• "The third premise, which is obviously mistaken, is that a successful business needs a minimal state. This argues that the only legitimate role for the state is in the protection of property rights and the enforcement of contracts. But when you look at them closely, you find that the most successful market economies have the largest and most powerful governments the world has ever seen".
• "The fourth (myth) is that there's an overriding need for low taxation, which is also untrue".

Kay concludes, "I have no doubt at all that the market economy is the only successful form of economic organisation, and that both rich and poor countries benefit from an open international trading system. But I see the market economy to-day described - not just by its opponents, but by its defenders - in terms of a lightly regulated society in which individual greed is the dominant motive. This is ethically unattractive, which is why protesters win sympathy from a much wider audience. But, more importantly, it is not a correct description of how real market economies work. The societies that are closest to that model - Nigeria, Haiti and Russia - are not successful".

What have we learned so far?

1. It seems valid to accept that there is no universally applicable definition of a 'good' market economy - different societies have different histories, traditions, problems, challenges and therefore cultures, and their markets are embedded in and a product of their cultures. Thus by implication, the neo-liberal version of a market economy, substantially derived from the American Business Model, is a form of economic colonialism. Even more significant, the idealised version of a pure market propounded by neo-liberal market fundamentalists is a long way away from the actuality of the American social and economic culture - in relation to the roles of representative political institutions - in particular federal and state legislatures and executives, which are hugely enmeshed in the workings of the market and intervene heavily to moderate and guide what markets do.
Thus, to propose Market Fundamentalism as a universal blueprint for the world is arrogant, dysfunctional and inappropriate for most societies, which have to tailor the design of their economies to their cultures and circumstances.

2. Kay also makes the powerful observation that no market is distinct from the society in which it is embedded, therefore markets are a product and a part of society. So in reality, all markets are social markets.
But behind this observation is a more fundamental point - people are also a product of the societies to which they belong - their values and behaviour are deeply influenced by the cultures they grew up in. Therefore the idea that all or most people are simply driven by their own interests is a dangerous myth. People and societies are much more diverse and complex than that. Indeed many people are driven by self-interest, but others will be motivated more by altruism or a desire to do well for its own sake and to be of service to others. To contend (as market fundamentalists do) that these behaviours are simply smoke screens to fool others and gain advantage is an inaccurate and very nasty fallacy.
Therefore, different societies will spawn quite different social behaviours. Anthropologists tell us that some societies incline towards individualism, where the individual is the nuclear element, but others, perhaps many more, are much more communitarian, regarding the individual as a part of the collective whole - the community being the most important element.

3. Social market theory recognises the market as the best mechanism for conducting economic affairs. But an essential difference between social market theory and market fundamentalism is the role assigned to the state, or more broadly, those institutions that express the will of society. Social marketeers believe that the market is the most efficient mechanism for economic activity but that the functioning of the market and the allocation of the wealth created must be regulated on behalf of society. If this is ignored severe dysfunctions, such as unstable employment, insecurity, poverty and inequality will occur, thus distorting the functions of the market and undermining its morality and acceptability. They also believe that the state has important roles in ensuring equitable access to health and education, plus a 'fire brigade' role to intervene when the market suffers serious failures.

So, we can sum up one key similarity and three key differences between free and social market philosophies

The key similarity

Both free and social marketeers believe that markets are the most effective means of creating wealth and enabling people to express their economic creativity. So both strongly oppose the view that centralised state control of economic activity is anything other than inefficient and destructive of essential freedoms.

The differences

1. Free-marketeers believe that a concept of society is something of a fantasy and that the key motive force is individuals trying to serve their interests. The sum total of all individuals' actions make up the market, and the market is all there is. Margaret Thatcher put their view very clearly when she famously said: "There is no such thing as society: there are individual men and women, and there are families."
   Social marketeers on the other hand believe that markets are an integral part of societies, deeply affected by the history, values and cultures of the societies in which they are embedded. The market is therefore a servant of society, a mechanism for ensuring that wealth is efficiently created for the good of society as a whole. The effectiveness of markets can be judged by the health of the society in which they are embedded. These judgments will not just be about the gross quantum of wealth created, but also based on more qualitative factors like public health, environmental impact, inequality, educational attainment and social cohesion.
2. Free-marketeers have a particular view of people. Drawing from gene theory, they believe that people are essentially self-serving, seeking advantage for themselves and their immediate dependents. This view of people is elaborated in Game Theory, which provides mathematical models to show that people (or states) will rationally calculate what they need to do to attain their goals, modifying their behaviour to allow for the actions of others. Thus, the sum total of all the self-serving strategies of individuals will add up to results that will benefit everybody.
   The social market belief about people seems to be quite different. People have many facets to their natures - they are a complex of many drivers. These will include individualism, altruism, selfishness and generosity. If encouraged to do so, most people can easily carry a concern for their own interests whilst also being willing to sacrifice some personal advantage for the sake of the common good.
   More fundamentally, peoples' beliefs and values are a product of the environments in which they live. These environments are determinants of cultures. For example, it is very likely that the collaborative tendencies of the Dutch are a product of the challenges faced by all from the sea.
3. Free-market theory seems to lead inexorably to a series of axioms -statements of absolute truth. Anthropologists describe this tendency as universalism - the belief that there is a set of principles or rules that will be universally true and not contingent on such factors as cultures or circumstances. As an example, the free-market rules of the International Monetary Fund seem to represent a universalist view of what is right for all.
   Social market thinking is rather looser and more contingent. It is almost certainly more empirical - in other words capable of modification and development according to evidence. In the eyes of some this weakens its appeal - they like to know exactly where they stand. There also seems to be a tendency on the part of the more ardent free-marketeers to resist evidence or data unfavourable to their cause. The same tendency applies of course to any zealots whether they be ardent socialists or religious devotees.

Do Social Market ideas work?

1. State involvement in market economies

A major tenet of free-market theory is that the involvement of governments in the working of the free market will lead to inefficiency and probably corruption.
Social marketers are far less dogmatic, seeing needs and opportunities for the state to have a role in industrial development as well as regulation and public service provision.
Empirically, the assertion that government cannot work in partnership with industry and free markets is inaccurate. Japan is now a major technological powerhouse, with a commanding global position in many major technologies, including automotive engineering, home electronics, telecommunications, computing and many others. It is a fact that this would absolutely not have happened without a strong partnership between the Japanese government and its support agencies in the post-war period. This partnership continues, as can be seen from a speech by Hiroshi Okuda, chairman of energy agency Nippon Keidaren:
"In pursuit of the goal of becoming a technology-based nation, the Japanese government has identified four priority areas for research and development. These are: life sciences, information and communication technologies, nanotechnologies, and the environment. To gain a global leadership role, the government has assigned budgetary and policy preference to these fields. Four other keys fields have also been identified: energy, production technologies, social infrastructure, and frontier technologies. This total of eight fields has been approved by the Cabinet for priority initiatives in Japan's Science and Technology Basic Plan".
The story is exactly the same in South Korea:

Strong Government Support Driving Growth of South Korean Biotech Markets

Business Wire, Nov 19, 2003

Sustained government support is boosting the South Korean biotechnology industry. Having identified biotechnology as a high-potential industry of the future, the South Korean Government has prioritized it and dedicated substantial resources to its development.

New analysis from Frost & Sullivan (http://www.biotech.frost.com), Competitive Positioning Strategies for South Korean Biotech Markets, reveals that revenues in this industry totaled $1.37 billion in 2002 and are projected to reach $6.59 billion by 2010.

The growth of the Korean semiconductor industry has been stunning. Within a 10-year period, Korean "chaebols" (industrial conglomerates) went from being virtual non-players to capturing one-quarter of the world semiconductor market in 1994. Samsung is now the world's largest DRAM manufacturer. Korean players in semiconductor markets are regarded by U.S. and Japanese counterparts as formidable competitors.

Government support of electronics includes substantial tax benefits for R&D and product testing, plant improvement or facility construction, and manpower development. Support has also included considerable direct funding of projects in line with national priorities. Government support is now turning to new priorities such as information technologies and startup of a domestic semiconductor equipment industry.

The government and chaebols have worked both independently and in concert to obtain foreign technology from industrialized nations through direct and indirect methods. However, their ultimate goal is for the country to transition from "investment-driven" development to "innovation-driven" development in which the country's major competitive advantage will be innovation capability. This drive permeates the industry. In striving to emulate the electronics expertise of Japan and the United States, Koreans are zealously improving their educational infrastructure and domestic R&D facilities.

Government involvement is an empirical fact

1. It is an indisputable fact that developing economies and industries need government support at the vital stages of early development or explosive growth.

Most successful developed nations got to be that way because of a partnership between government and industry - and this emphatically includes the UK and United States in their development as world powers. To-day, US defense industries heavily support the development of advanced technologies and the US government is quick to leap to support US interests by subsidies and other means.

So, it is arrant nonsense to assert that government ought not to interfere in market economies - they do all the time and their support can work very well.

2. Social Market economies - do they work?

We do not have to look far to find successful examples of nations where social market principles prevail. The Nordic countries, Sweden, Denmark, Finland and Norway are all good examples.

But there are many other countries where the free market does not hold unimpeded sway, to the extent that the state plays an active and important role in economic life. Such roles include the provision of education, health, employment and social security services - but also, as we have shown, in economic and industrial development as well. Examples? Korea, Japan and other South East Asian countries - Canada, the Netherlands and the Nordic countries - all of which also have strong democratic traditions.

The 'Nordic Model'

The Nordic Model applies to Sweden, Finland, Denmark and Norway, although other countries share some of their characteristics. It should be emphasized that the characteristics of each Nordic country are somewhat different to each other, so there is a degree of flexibility within the model. But each of them accords closely to Skidelsky and Kay's definitions of a social market society.

Eindhorn and Logue* characterise the so-called 'Nordic' model as that in which:

• An active and interventionist state,
• Provides universal transfer payments to support the elderly, disabled, unemployed and families with numerous children and low market incomes,
• Provides universal social services for health, education, childcare, services for the elderly and the like,
• Uses national policy to achieve high rates of labour force participation and full employment on the national level, via both macro-economic and sectoral policies,
• Integrates major interest groups in making and implementing national policies (rather than the capture of the state structure by a single group of interests, or state capture of the interest organisations),
• Possesses a strong civil society with encompassing and democratic organisation of interests, but particularly the strong organisation of those otherwise weakest in capitalist society - family farmers and urban workers,
• Is underpinned by a set of values around empiricism and social trust; in particular solidarity and reciprocal responsibility are crucial concepts in the development of public policy

We would add one other characteristic that other researchers have highlighted - the Nordic countries have active market economies and great openness to the external world that enables companies to compete and adapt in the global economy, in collaboration with supportive unions and governments which (unlike the UK/US) provide extensive social welfare and support for labour market flexibility, together with high levels of skills training and retraining.

A key observation is that Nordic governments formulate and implement policy in partnership with representative bodies of business, employees and local government. This feature challenges the neo-liberal assertion that governments are self-interested and corrupt.

* Economic and social security in Scandinavia. Einhorn and Logue, University of Massachusetts. March 2006.

The researchers observe that the Nordic economies suffered as a result of the economic downturns of the late 1990's but were sufficient flexible and resilient to adapt their practices to meet new circumstances. This empiricism (a willingness to act and adapt as a result of experience and evidence) is a particularly impressive facet of the Nordic Model countries.

Einhorn and Logue state, "Our proposition is that through their significant reforms the Scandinavian states have once again demonstrated their pragmatic but active policy process and added new options to other states seeking to make their social welfare systems compatible with 21^st century economy and society.......The emphasis on education, (labour market) activation and job placement has reduced the number of able-bodied welfare recipients. Pension reforms have improved the prospects for future generations to enjoy their retirements through compulsory savings and wise investments. Moreover, these reforms have increased rather than eroded the competitive positions of the Nordic countries in the world economy".

Contrary to the views of some neo-liberals, the roles of government and of the national representative organisations of owners, managers, labour and industries are extremely positive. Also contrary to other free-marketeers' beliefs, the support and security experienced by employees actually increases the flexibility of the labour market, skills and levels of enterprise, and high levels of taxation do not discourage new business formation.

Synthesis - Policy Implications

It must seem clear to all except the ignorant or one-eyed zealots that the current in-vogue system of fundamentalist free-market economics is in need of significant reform. The instability, greed and speculative tendencies of the big players in global financial markets, together with the lack of transparency and evasion of the basics of good citizenship - acceptance of the need for regulation and payment of tax - make change imperative.

Furthermore the system doesn't work for society and the majority of people. The global system has been hi-jacked by rich and powerful institutions and nations which manipulate it for their own benefit. The widening of the gap in wealth and opportunity between the growing mass of relatively disadvantaged and poor people and the minority of the super-rich is reaching chronic proportions in 'free-market' countries like the UK and US.

The key questions are what and how?

And as economist John Kay spelled out earlier, the fundamental issue is cultural. The obstacles to change in the UK lie in the schisms that have always existed between the haves and the have-nots. These problems will take a huge force to overcome. The glimmer of hope lies in the fact that post-war Britain has been through a series of radical changes - from a period of socialist statism, through a period of muddled conditions known as the 'Mixed Economy' to the Thatcher era of free-market fundamentalism, only slightly moderated by New Labour. So change is possible, provided those initiating it are very clear about what they want to change and recruit the majority of the population as supporters. This is crucial because the powerful interests that benefit from the current arrangements are unlikely to give up without a mighty struggle and will certainly threaten doom.

Some people felt that the now-defunct 'Third Way' was an intellectual platform for change, but it was muddled and woolly, being clearer about what it wasn't than what it was. Equally important, its early advocates had neither the commitment nor stamina to make it stick. Tony Blair soon drifted off into a fascination with wealth that precluded him from offending the rich and powerful.

It is hard to escape the conclusion that reform will need to espouse some facets of social market thinking - in particular finding ways of enabling central and local representative labour and industrial institutions in a change process.

There are of course established and successful models of the Social Market at work in the Nordic countries. But before rushing off to copy Sweden, we had better remember that the Nordic Model is a product of cultures that are markedly different from that of Britain. The Nordic cultures are based on long histories of social cohesion, low social power distance and collaboration that class-ridden Britain doesn't share. Maybe the best strategy is to start to tackle the overweening power of the finance industries, whilst increasing our attempts to reduce inequality and deprivation by a huge quantum.

PS. Reform will be even more difficult in the US, because a prevailing of materialistic individualism is very strongly embedded in that country's culture.

SOME FACTS

The empirical test - how do Nordic Model social market societies perform by comparison with free-market comparators?

Real GDP per head - % of OECD average

Source: OECD

Growth rates - GDP.

Source: OECD

Income distribution

GINI Index : 0= perfect equality, 100 = perfect inequality (1 person owns all the wealth)

In Europe, only Greece has more unequal income distribution than Britain. The US stands out as having the highest levels of inequality in the developed world
OECD

UN Human Development Index

(Index measures standard of living, educational attainment, literacy and life expectancy)
Rankings:
1. Iceland
2. Norway
4. Canada
6. Sweden
8. Japan
9. Netherlands
11. Finland
12. U.S
14. Denmark
16. UK
United Nations

Life Expectancy

OECD

Infant Mortality (deaths/1000 live births)

US census bureau

Upper/post secondary education attainment aged 25 to 64: %

Crime and imprisonment

Number of prisoners per 100,000 population

Voting in last Parliamentary election, %

UK had the lowest voter turnout in Europe
Eurostat

Trade Union Membership % working population

Eurostat