Free market economy

1. Do you think our free market economy, especially against the backdrop of unfettered transnational financial operations and the financial crisis, is the right way to live in a globalized world?

Jana Hybášková:

Globalization is not the result of the free market economy, in as much as the free market economy is not a function of globalization.

The free market economy is one of the key values by which we have agreed to live, to support it in our external relations. By free market economy we mean the economic freedom of every individual and equal economic rights for each individual. We Europeans are of the opinion that economic freedom is a necessary condition for the creation and sustainability of civil and political freedoms. The other values are democracy, rule of law and protection of human rights. You would be facing difficult times if we argued that the free market economy, as used in the Copenhagen criteria, or the Treaty on the EU, is not meant to represent equal economic rights.

The free market is a political idea based on the economic freedom of every individual. Freedom does not mean lawlessness. Freedom means a set of rules stipulated to provide equal opportunities. In western democratic thinking, freedom is not based on the limitation of the rights of others. The free market is based on transparency and accountability rules, equal competition, anti-monopoly policy, protection of ownership, and protection of intellectual property. The free market in the European understanding does not exclude the social state; the free market economy is not synonymous with wild capitalism - quite the contrary.

The history of totalitarianism provides evidence that attempts to limit economic freedoms are necessarily tied to attempts to limit civic freedom and individual human rights. To use globalization as an apolitical threat leading to the necessary limitation of economic freedom would mean a return to totalitarian and autocratic forms of social order.

It is not only Friedman and Hayek, but also our post-communist experience, that any attempt to limit economic freedom leads to the limitation of freedom in general. So, more important than limiting the free market economy is how to develop better rules and regulations to support it, to strengthen it, to make it more sustainable; an open opportunity for everyone, an open economic opportunity for everyone. Globalization can be a problem for sustainable development in its forms which are not based on the free market economy, be it exploitation of others' ownership, lack of competition rules, exploitation of children or forced labor, lack of respect of human rights of workers, occupation of others' national wealth.

Three examples of what could be done better are as follows: the world price of coffee in London Starbucks should be competitive with the price of still water. The price of coffee beans in Nigeria is not derived from the “real” cost – exploitation of soil, the price of water, the price of a working hour, the social and health insurance of the plantation worker, transportation cost to port, to the distant port of Southampton, to package, market, and finally make a retail sale in London. It is derived from the price of the same quantity of water.

Is there any free oil market? Where is it? You might say: in London today’s price of one barrel of Brent crude, or Dubai, or WTI is… have any of you thought about which part of an entire day's consumption of oil is sold on aifree market basis? The price of oil is not really free and never was. It is a negotiated price between the consumer and the producer, between the US, China and EU countries and OAPEC and OPEC and Russia. There is no transparent information. The same holds true in an even more precarious way for gas, since it is more difficult to store, or even electrical energy, which we can not store at all. The price of energy follows theilogic of world economic development, and certainly not in a clear, predictable and transparent way.

Coming to the financial crisis: the issue was the “real price” of CDO, CDS, and SBS financial derivates. Funds came under ever growing pressure to increase their profit. Banks, financial institutions where not able to increase the profit by any existing means, so they searched for new ones. In the case of CDO, CDS, and SBS, experienced bankers themselves did not understand how the price was set up. The price was not transparent even to them. How could they be accountable to their shareholders? How did they obey the law? Which kind of legal instruments - information, accountancy, income sheets, expenditure sheets - were at their disposal?

The rules which can help us Europeans advocating for more free market economic benefits from globalization are competition rules, anti-monopoly rules, protection of ownership, better control of financial markets, control of illicit drug and arms traffic, of human traffic, anti-money laundering rules, transparency rules, protection of shareholders, open public competition, reduction of unfair protectionism.

The direct threat to the free-market economy in the world is corruption, protectionism and exploitation.

Stefan Marx

Hello everybody, Hello Jana,

thanks for the accurate and comprehensive answers.

Concerning your answer on question one: I think you reduce the global financial crisis to financial derivates like CDS or CDO. But in my opinion it’s not only a problem of subprime. The origin of the crisis is how capital markets and our whole economy are construed. The shareholder-value approach (as you mentioned Friedman) and the resulting pursuit of profit forces banks to develop new products for receiving more profit. Without rising profit a takeover ensues. This is the determination of listed companies. So it's not just the companies that operate in the system of free market economy, it's the sytem itself in which they operate.

Later you mention several rules which are needed in a globalised free market economy. Your points are really great but I don’t know how these goals can be achieved. The implementation of these rules should take place in a normative way (laws). But who will establish laws for controlling markets and enforce its validity? There is a dissent between national laws and global validity. In Europe we have EU Directives that national states have to convert into national laws. I don't think there is any regulation for global right...

Friday, 11 December 2009

Jana Hybášková

Dear Stefan,

After living through post68 normalization in the communist Czechoslovakia, than living in the Middle East and witnessing capitalism growing and facing crisis in my own country, I can only say, I am very far from disqualifying big systems and ideologies. Still, from the three systems I have witnessed in my life, capitalism allows comparatively for larger number of freedoms, individual creativity and responsibility. Yet, recalling all Leninism, Islamic fundamentalism, I am very far from saying that capitalism is wrong per se. What is wrong with capitalism is if it is spoiled, if it does not function. Corruptions, preferential treatment, lack of information, inside trading, are problematic issues. With fundamentalism and communism the problem is, if they function…So, I am not going to propose any change of the system. On the contrary, if rules of individual responsibility, transparency and accountability, no preferential treatments, no corruption, are applied, the system will be the most open to individual initiatives.

Control and new financial regulations is what you ask in the second half of your question. Definitely there is a tool: FATF is the key instrument. Please, learn about it. Second instrument is US legal system – so called Federal Treasury matters. US are the hub for vast majority of financial operations. If the customers brake rules, if the transfers are not accountable, if there is substantial amount of suspicion – money laundering, human trafficking, drug trafficking, arms proliferation, duel use problems, US usually are very effective safeguard . So far Switzerland was opposite. This has changed. The same is going to happen to off shores and to Luxemburg. So comprehensive compromise reached between US and EU in G – 8, G-15 is reflected in US and EU legislation. And this is how it works. This is why we need these summits and we must not protest against them, otherwise we close the last effective action agreement. Good tool for cooperation is as well TEC – Transatlantic Economic committee. Thanks God, in EU US relations we have a lot of meeting points, which can translate the ideas into work, into common legislation, so it is not only EU directive. Vast majority of EU directives, especially those, which deal with financial instruments, are as well communicated and negotiated informally and formally with respected US bodies. EU US cooperation happens every day in real time. So EU does not function solemnly as well as US. Good communication and cooperation as well happnes with Japan. The rest is still the rest of the world. Problems are Russia and China. This is where transatlantic society has to square its head.

Sunday, 13 December 2009

Stefan Marx

Dear Jana,

I never wanted to demonize capitalism respectively the free market economy! If you compare it with different systems you’ve undergone by yourself I understand your preference. But I think we should consider different alternatives of what went wrong (and actually goes wrong) within this system. It’s not about comparing given systems in my opinion. Particular elements should be reconsidered (For instance financial markets, the divide between rich and pore, the policy of economy over environment, etc.).

You mention the FTFA. This organization only regulates money laundering and the financing of terrorism and has little more than 30 members. In my eyes this is no appropriate instrument to control a global issue like capital market. It can only contribute.

I think you didn’t get the point I’m driving at. I’m aware of the threats to the system you mention. Beside the problems of bribery, protectionism or money laundering this system per se is not stable and unfair. People are greedy and the free market economy increases this fact. The same applies to environmental problems.

This is a very personal opinion, perhaps a little pessimistic. Never the less I respect your opinion basing on personal experiences I never made. To finish with a proverb of Thomas Hobbes: “Homo homini lupus”. :-)

Tuesday, 15 December 2009