Can capitalism, the democratic nation-state and globalism hold together?

Market capitalism, the nation state, and democracy are conjoined in a Goldilocks’ balance. Capitalism has at its core human motivations based in competitive accumulation and individual freedom; its internal logic drives inevitably toward its ultimate manifestation in a global market. Market capitalism also finds its most socially rewarding expression in competitive tool making. Accordingly, capitalism is also about change, indeed turmoil, as Joseph Schumpeter clearly articulated. Our tools are constantly changing and they, in turn, are constantly making and remaking our society. We are our tools.

The Western version of market capitalism has worked well; fundamental individual economic freedoms and private property are protected from the predations and prejudices of dictators or of the democratic masses. The protections are embedded in difficult-to-change political constitutions. Nation states, at least in good times, have also promoted expanded international trade and the modern corporation.

This model continued to develop and to work plausibly well for roughly a hundred years. Then the experience of two World Wars and the Depression of the 1930s, all in a 30-year span, demonstrated that peaceful and steady progress was not inevitable. Nonetheless, the nation state again responded by maintaining an appropriate level of aggregate domestic spending and introducing many social insurance programs. International trade was restored. The global corporation continued to evolve. The reformed version of capitalism performed spectacularly for the first 35 years after the Second World War. The presumption, and the experience, was that a rising tide lifts all boats. It was a Goldilocks’ world in which everything was not too much or too little, but “just right.” Then energy prices spiked in the 1970s and early 1980s, and spiked again after the millennium.

Now the globalization of economic growth to Asia and other parts of the world has presented us with a new complexity. Can Western market capitalism, the nation state, democracy, and the globalization of economic growth go forward in happy concert? Can we sustain a growing divide between the circumstances of those living in rich neighbourhoods and those in poor or near-poor neighbourhoods in the same city? This divide is not just about a different level of material comfort, but also about relative social status. These two factors together affect the stability of families, the status of men in society, everyone’s health, and the chances for success of a very large number of children. And perhaps equally important, these differences affect how people think and how they view the future and therefore the community’s collective prospects for dealing with future problems. Poverty is not just about a lack of income; it is about a state of mind and about the poor decisions made within that state.

At the core of our current economic malaise are constraints on the supply and nature of our energy resources. All we need is a vast expansion of low-cost, low-carbon-emitting energy and greater conversion efficiency in our technologies, particularly transport. As we have seen, this may not be so much a problem of technology, but of institutional design. It would be technically possible to vastly expand the supply of renewable or benign energy as well as produce far more energy-efficient tools. And it is certainly possible to have a quantum jump in energy-related research and development. But who is to undertake these tasks, and what is their incentive?

Both our governments and our private corporations have their obvious frailties in this regard. Private markets will address the energy supply problem — but at their own pace and only in response to the incentive of higher prices. And they will do so without consideration for short-run macro-economic implications and low carbon emissions.

Nor can we turn to our governments. They are beset with inertia. Government is no longer trusted by many people on either side of the ideological divide. The growing number of swing voters or Independents is a further reflection of mistrust. So far, there is not even a political consensus on the nature of the problems and the central role of energy, let alone the appropriate solutions. Moreover, very few believe that such consensus will arrive soon. In this situation, governments can only respond to “a clear and present danger,” unmistakably recognizable to the vast majority. Government cannot be much of an instrument of forward-looking public policy if no one trusts the instrument.

Of the many great modern economists, J. M. Keynes and F. A. Hayek have become the icons of the two opposing perspectives on the proper role of government in relation to the economy, at least in response to the type of economic crisis represented by a depression. Nonetheless, both men agreed absolutely on the fundamental power of ideas or beliefs.

Keynes in the midst of the Great Depression concluded his masterpiece, The General Theory of Employment, Interest and Money, by noting that ”the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly understood. Indeed the world is ruled by little else” (383). Hayek, writing near the end of the Second World War in his most celebrated work, The Road to Serfdom, warned, “We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different than those which we expected” (65-66).

We want a lightly regulated society, but also a highly insured one. These objectives are not compatible, but we have chosen both.

These two formidable thinkers have come to personify two philosophical camps that, while each possesses fundamental insights into the human condition, leave us profoundly divided. Our society has a deeply embedded institutional design flaw, along with a highly complicating and compounding consequence. The design flaw is the high degree of moral hazard that we have deliberately designed into our private and public institutions and programs. We want a lightly regulated society, but also a highly insured one. These objectives are not compatible, but we have chosen both.

The complicating factor is the increasing income inequality in society. It has been indirectly responsible for a vast increase in household and now government debt in order to maintain aggregate spending. Such a society is highly vulnerable to future spikes in energy prices, or indeed any unhappy contingency.

And that is not all. Inequality, in all its manifestations, makes it extremely difficult in a democracy to deal with problems that demand thought about the distant future and then prudent action with respect to those possible futures. In a sense, because the poor are trapped by their circumstances, so is everyone else. We not only hope for the best possible outcome. We need the best possible outcome. This is not prudent behaviour by anyone’s definition. The global energy mega-risks will continue to hound us until we resolve these complexities.

Is there an integrating and liberating idea? Could we redesign our political institutions in an effort to remove or diminish their architectural defects? In principle, the answer is yes. But it would mean fundamental reform to the most cherished institutions and programs of those on both the left and the right of the political spectrum. Needless to say, it would meet with howls of protest and disbelief from both.

My own forecast is that the moment for redesign will have to await some future calamity. We will have to hit an iceberg, probably a very big one. In the meantime, we are most likely to be governed by inertia. Institutions are resistant to change from within. Even when they fail to perform as predicted, they are not abandoned but are patched up and often pushed to more extremes of risk. We typically double-up on our bets.

Society is a science experiment in real time. And we are part. We cannot simply think or debate our way to a better model. Our deep ideological divide is more likely to produce stalemate. We are trapped by our beliefs (institutions) just as surely as if we were in the Malthusian trap and just as surely as the Wall Street bankers were trapped, even as they believed themselves to be “Masters of the Universe.” Knowing the risk does not alter the trajectory. And so our experiment proceeds within its own compelling logic, with no real control by any single entity, and yet perhaps drawing ever closer to catastrophe.

In the end, our most cherished ideas succumb only to calamity. Only out of the ashes of the old will the new emerge. Our youngest and brightest minds might well busy themselves with developing that new model of reality which could shape a future society. Being ready — armed with a new design when the old one clearly fails — is still the best advice to give would-be future policy advisors.

What will be the shape of the new model? I have no crystal ball. But in my mind it will almost certainly be one that seeks to restore the role of individual responsibility throughout our institutions. It will attempt to diminish the role of “branding” and “money” and increase the role of fact and reason in politics. It will seek accountability for long-term results as well as short in all our institutions, including politics. No politician should be considered by history as successful just because he or she was reelected for a few terms.

But the new model will also take account of randomness in the universe; it will make ensuring equality of opportunity, in all of its most relevant social dimensions, a priority social responsibility. The new architecture will vastly expand research and development on new environmentally benign energy-related technologies, whether on the supply or demand side. And it will be a society with far less debt, and of course with far less inequality of income and wealth as well.

These are some broad possibilities. But whatever direction the future redesign might ultimately take, we could usefully heed the advice of that other giant twentieth-century intellect, Albert Einstein, who is reported to have said that “the significant problems we face cannot be solved at the same level of thinking we were at when we created them.”

This excerpt is taken from Navigating on the Titanic: Economic Growth, Energy, and the Failure of Governance. Queen’s Policy Studies Series, no. 177 (Montreal, QC, and Kingston, ON: McGill-Queen’s University Press, 2013)