Cedric Wilson

Joseph Schumpeter, the celebrated Austrian economist, over 60 years ago, asked the question "Can capitalism survive?" to which he responded "No: I don't think it can." In recent times, the American economy, the central pillar of modern capitalism, has been grappling with what may well be its biggest economic challenge since Schumpeter penned those words.

Reckless lending in the United States mortgage market spawned a crisis of delinquencies which cascaded into a catastrophe on the balance sheet of banks in major financial centres. Later, it sent shock waves through stock markets worldwide. It is estimated that more than US$5 trillion vanished from the value of publicly traded company stocks in three brief weeks in January. For the last quarter of 2007, initial estimates suggest that the US economy slowed to a growth rate of 0.6 per cent, unemployment jumped to five per cent and consumer confidence dipped precipitously. Added to that, the US dollar, which for half a century has dominated global trade and has been the foreign-exchange reserve currency of choice for central banks the world over, has weakened considerably.

lowest level

Earlier this month, it sank to its lowest level ever against the euro. Increasingly, central banks are seeing the euro as a secure instrument for foreign-exchange reserve. Then, of course, oil prices skyrocketed to unprecedented levels, deepening the crisis. Indeed, the word 'recession' is on everybody's lip wherever the US economy is mentioned.

The Americans are never in the habit of giving in easily. In the last week of January, Federal Reserve slashed interest rates by three quarters of a percentage point, the most dramatic cut in more than two decades. President Bush has also put together a stimulus package worth nearly US$150 billion to energise the slumping economy. Yet, even with this intervention, the US economy does not seem as invincible as it did when the Berlin Wall collapsed. Symbolically, when the wall fell, it marked the end of the Cold War era; it announced the triumph of capitalism over the lacklustre socialist approach to production.

Certainly, the US economy has been through recessions before. The capitalist world has had to grapple with the inevitability of the up-and-down swings of the business cycle - but this time, things are different for three reasons.

First, emerging economies which do not exactly share the political ideals of western democracies have accumulated enormous wealth from the booming oil market and expanding export trade. As such, the economies are increasingly becoming forces that cannot be ignored on the global stage. In the latest crisis, US financial institutions have benefited from the surplus savings (or sovereign funds) in the developing world. Citi-group and Merrill Lynch, two US banks that suffered heavy losses in the financial crisis, were rescued by US$21 billion provided mainly by the governments of Singapore, South Korea and Kuwait. Last year, it was estimated that China had between US$1.5 trillion - US$2.5 trillion worth of sovereign funds and was seen to be propping up the Americans' incorrigible consumption habit. Therefore, if the notion that power follows wealth is true, then the equation of global power is being rebalanced before our very eyes.

Second, the idea that capital must always flow from developed countries to their less developed counterparts is no longer valid. There are now multinational companies from emerging economies that are making bold inroads into developed territories. For instance, Suzlon, an Indian company, recently acquired a United Kingdom wind turbine gear box manufacturer, Hansen Transmission International, and REpower, a German wind energy company, for over US$2 billion. Last year, another Indian company, Tata Steel, bought the British Chorus group and is at present in discussions with Ford Motor Company to purchase the British car company, Jaguar. Not to be left behind Jamaica's GraceKennedy got into the action last year with its £23 million acquisition of the UK firm WT Foods.

Third, the World Bank and the IMF, which for the last couple decades have played pivotal roles in shaping the economic policies of developing economies, have had to settle for a smaller role. Both institutions have seen a number of emerging economies paying off their loans. Consequently, they have a less significant role in influencing policy direction among emerging economies.

likely outcome of capitalism

Admittedly, the dynamics of the world economy have changed dramatically in the last half a century, but are we on the verge of witnessing what Schumpeter considered to be the likely outcome of capitalism? No, at least not yet.

Capitalism has survived because of its flexibility. Historically, when the conditions of workers got wretched, trade unions emerged; when monopolies got too large, regulations were introduced; when the swings in the economy got deep and unsettling, the instruments of economic management were fashioned. Once again, capitalism faces a new set of challenges, born out of a world that is more tightly interwoven, created by the excesses of institutions driven by greed and pushed by emerging players that are demanding a larger stake in the global economy. The US might wane, but capitalism will survive. And it will survive for the simple reason that human beings are seldom motivated to produce beyond their immediate need by the idea of equity. Self-interest that throbs unceasingly in the souls of mortals is the life blood of capitalism.

Cedric Wilson is an economist who specialises in market regulations. He may be contacted at conoswil@hotmail.com.