Ｃａｐｉｔａｌｉｓｍ ａｎｄ Ｇｌｏｂａｌｉｚａｔｉｏｎ

Capitalism and Globalization

Toshiaki Hirai

(Sophia University, Tokyo)

1. Introduction

This chapter aims at addressing the following themes fairly broadly and theoretically, showing a general perspective of the whole book: What is the present globalization? How should we evaluate it in relation to capitalism?

 If we would search for a single word which can characterize the development of the world economy from the latter half of the 1980s to the present day, there would be no suitable word other than “globalization”. Generally defined, it should be done as the “phenomenon moving toward market economy (or capitalism) on a global scale”.

  So far as it is defined so, however, we can point out the Age of Exploration in the 16^th century, the Industrial Revolution in the 19^th century as well as, in the modern times, the Age of Rapid Economic Growth after the Second World War. Therefore, only by means of globalization we cannot characterize in specific terms the development of the world economy during these three decades.

 We would mention the following three points which can characterize the present globalization: (i) As a principle of operating economy, socialism has been abandoned, and capitalism has come to be adopted globally; (ii) financial globalization has come to proceed to an extreme degree; (iii) Several countries, which had been regarded as developing countries, have attained remarkable economic growth to such a degree that the gap between the developed countries has been narrow, and have come to occupy an important role in the world economy.

　(i) is an epoch-making phenomenon in the postwar world economy, not ever seen in the world history. Albeit seen in the Pax Britannica, (ii) is outstanding in terms of scale and the multiplicity of financial products. (iii) is a new phenomenon such as would demolish what the world economy had so far been settled in terms of North-South Issue.

  This chapter runs as follows. Firstly, we would and need to show what capitalism is, for the present globalization is the development of capitalism on a global scale. Here the essential characteristics of a capitalistic system are pointed out and then its problematic points are examined.

 Secondly, globalization is examined, clarifying what characterizes the present globalization. It might be grasped from two aspects – five factors which caused it, and four types of globalization which occurred as a result.

Five factors run as follows: (i) Neo-Liberalism; (ii) financial liberalization; (iii) liberalization of capital transaction; (iv) New Industrial Revolution; the collapse of a socialistic system.

Four types of globalization run as follows: (i) Financial globalization; (ii) Globalization of market system I (capitalism in the ex-communist bloc); (iii) Globalization of market system II (Emerging Countries); (iv) Globalization of market system integration (EU). An important point should be that globalization can be classified under the broad headings of (i) financial globalization and market system globalization which includes (ii), (iii) and (iv). The salient tendency has been for the former to promote the latter, while bringing about a huge glut of financial capital the former has left the world economy more fragile.

2. The Capitalistic System

2.1 Essential Characteristics

We can mention six points worth noting as essentials of capitalism: (i) dynamics, (ii) markets, (iii) capital, (iv) firms, (v) uncertainty, (vi) ambiguities. The first three are connected with strong points in a capitalistic system, the last two with fragile points.

(i) Dynamics - The essential nature of a capitalistic system is embodiment of an impulse to growth. A capitalistic system generates increase in production and growth through the development of division of labor, competition and technology while it destructs existing systems involving traditional industries. Thus the capitalistic system is a dynamic economic and social system which incorporates instability as well.

Its “dynamics” operates through “markets” and “capital”.

(ii) Markets - They have two salient characteristics: that of “turning everything into commodities” and “the monetary economy”.

The phenomenon of “turning everything into commodities” – capitalistic society might even be summed up as a society in which the most important elements of the economy come to be transacted, being turned into commodities. These include not only labor, which began to become a commodity in the mid-19th century UK, but also, in recent years, securitized products, the emission trading system (that is, turning title of emission into commodity) and so forth.  

“Monetary economy” ― In the markets, almost all the transactions are made by means of money. That is, in capitalistic society barter is not so much an essential form of transaction as a monetary transaction in which commodities are bought/sold in exchange for money.

(iii) Capital - Capital, which is divided broadly into “real capital” such as factories and production equipment and “finance capital” such as money, debt and securities, is an important tractive wheel which sets markets in motion.

Finance capital, among other things, keeping a lookout over all the markets on the globe, enters those deemed most profitable. This is another strongly characterizing feature of capitalism. Firms and industries which cannot procure finance capital can only perish. Finance capital runs through the market system, searching for profit, making some markets active, others inactive. As a result, the industrial structure undergoes sweeping transformation and the capitalistic system can attain growth.¹  

(iv) Firms - The fourth factor which characterizes a capitalistic system is ‘firms’. It is the firms that play an absolutely vital role in “dynamics” as an essential feature of capitalism. They must develop, looking to the uncertain future, new goods and new markets, injecting huge amounts of capital and human resources.

The above-mentioned four features are strong points. Through a gigantic network of markets economic activities are developed, and economic agents (such as consumers and firms) are allowed to behave on a self-driven basis. Through the mechanism of numerous markets a great many economic agents produce and exchange vast quantities of goods and services. Moreover, through the activities of firms the economy as a whole can attain dynamic development.

In capitalism, efficiency is a necessary promoter while freedom is an accompaniment, for the development of an economy is achieved through the autonomy of market system rather than by particular persons.

The capitalistic system operates through the activities of economic agents who are free to choose rational behaviors which bring about desirable results from the point of view of economic efficiency. It is superior to socialistic or feudal systems in terms of freedom, for it is through the markets – to a great extent “autonomous”, not depending on decrees or direction by some particular persons – that the production and exchange of goods and services are carried out.

Unlike the above (i) - (iv), the following show the capitalistic system to be subject to various uncertainties and ambiguities, associated with the hazards and fragility which the capitalistic system is subject to.

(v) Uncertainties – Economic activities in the capitalistic system face various kinds of uncertainties which await them. Firms need to go on producing goods anticipating sales in the markets. They need to make great efforts to develop new goods. Once they succeed in doing so, they need to build capital equipment and make efforts to increase profits. And yet forecasting is, in essence, very difficult to achieve because the sales of the goods thus produced greatly depend on the tastes and incomes of the demanders.

  Moreover, in present-day capitalism an ever larger share of economic activities has tended to be occupied by “self-augmentation of finance capital”, so that firms which belong to the real economy are forced to produce and sell goods, forecasting the sales subject to the behavior of finance capital, which makes forecasting more difficult.   

(vi) Ambiguities – Economics has assumed “rationality” in regard to markets, economic agents and maintained that the unfettered market system can bring about the Pareto optimum. To some extent, this system has superior points in that independent individuals can make their own decisions in the market, and many goods and services are determined without any intentional interference from outside.

However, this assumption entails big problems. It depends on excessive reliance on “rationality”, and that rationality defined in economics is too rigid in regard to the rationality of individuals, the rationality of markets.

 Here let us consider that if the capitalistic system were conceived exclusively in terms of rationality, whatever that may mean, the inevitable result is greater error in cognition, and great bias. One example is the “ambiguities” with which capitalism is endowed, which is distinguished from uncertainty. We will illustrate this point by taking the case of “market price”, “accounting”, and “debt contracts”.²

Market Price – Economics teaches us that the relative price is determined at the intersection between demand and supply in each market, maintaining that money works as a sort of veil. However, it should be an absolute price which is actually determined at the intersection between demand and supply. Money always works in this transaction as a counter party.

This has important consequences, quite different from barter transaction.

Suppose that a certain good has enjoyed extremely high sales due to, say, word of mouth, false claims, or advertising. The absolute price goes up and the firms concerned can make a huge profit. In this situation financial institutions can enter this market, creating money (money can be created by financial institutions ad lib). As this phenomenon encroaches ever more on the goods concerned, the possibility looms ever larger that the price as determined by demand and supply is not the result of optimal behaviors of economic agents participating in the market. What price will be “fair”, and can the market mechanism which is greatly influenced by credit creation on the part of the financial institutions really determine a fair price? This is a question that needs asking. Which is why we need to keep an eye on the market, with some sort of “fairness” in mind.

  

Accounting – What amount of profit a firm has been able to make depends entirely on the accounting system, for complicated everyday business activities alone do not provide a firm with concrete information. Thus every transaction is kept on a balance sheet. And once or twice a year a firm makes performance public in the form of the balance sheet and earnings statement.

  However, this system has a shortcoming. Among other things, depreciation allowance and inflation/ deflation are serious matters. Depreciation allowance is, by its very nature, not exempt from some degree of arbitrariness. Inflation/deflation is more serious, for if it reaches an extreme degree accounting loses its significance. The figure thus kept for, say, half a year, shows a bias and does not carry correct information, and yet firms have no other choice.³ In this case, nominal GDP, which is a sum of these firms’ activities, does not constitute correct information. In order to avoid the problem, social accounting calculates real GDP by dividing the nominal GDP by the GDP deflator, and yet this method cannot elude the essential ambiguity.⁴

Debt Contract – In a capitalistic system various kinds of debt contracts are made. They use money as a unit of account. In this case, debts cannot avoid the influence of inflation/deflation, and yet people have no alternative but to enter upon debt contracts based on the use of money as unit of account. That is, people do so under a “conscious” money illusion. In spite of the fact that in a capitalistic system contracts in terms of money are absolutely fundamental, “ambiguities” always crop up there.

2.2 Issues involved

In Section 2.1 we explained what kinds of characteristics a capitalistic system has from, so to speak, the point of view of principles. In this section we will see three issues involved which constitute headaches for the system: (i) the Bubble Phenomenon; (ii) Corruption and Injustice; and (iii) the Disparity Problem

(i) The Bubble Phenomenon － Firms and People as Trapped

By the bubble phenomenon we mean the situation in which the economy overheats due to some factor to such a degree that the government tries in vain to control it, and which finally leads up to an eruption. These phenomena have occurred since olden days. Well-known examples are the Tulip Bubble in the 17^th-century Netherlands, and the Stock Bubble associated with John Law in 18^th-century Europe.

In economics, however, the bubble phenomenon has been dealt with as an exceptional case, not considered among the essential problems of capitalism. The principal task of economics has resided, rather, in analyzing normal processes according to mainstream economics. Moreover, even economic fluctuations and phenomena of unemployment had been considered exceptional in economics up until the early 20th century. Most economists had placed profound trust in the “classical dichotomy” and “Say’s law”, thereby failing to address an issue like unemployment in capitalistic society until Keynes appeared on the scene. 

  The trend in these two decades has been to revert to the situation prior to Keynes. The New Classicals have defended the “classical dichotomy”, Say’s law. Nevertheless they argued economic fluctuations (without regard to involuntary unemployment). Worse still, this approach has become the mainstream of macroeconomics.

  Strangely enough, these two decades have been a period during which the capitalistic system has raised the degree of instability, while bubble phenomena have constantly occurred. As representative examples, we may mention the Japanese bubble and its burst from the end of the 1980s to the early 1990s, the US Dot.com bubble and its burst from the mid-1990s to early 2000, and the housing and subprime bubble with its burst in the early 2000s – all due to speculative activities making use of an abnormal bloat of money. Moreover, our modern-day governments could not prevent these bubbles from coming to bursting point. If economists who are supposed to work to safeguard good economic performance regarded these bubbles as exceptional phenomenon, they could surely be criticized for incompetence and irresponsibility.

The reason why the bubble is a serious issue for the economic system is that it could drive people excessively into money-making activities. When rival firms are making huge profits on a bubble, a CEO of a certain company will not be allowed to sit and wait, stating that the bubble will burst soon, for the shareholders and the management personnel will put heavy pressure on him. 

  The same is true of employees. When people belonging to the same section are getting huge amounts of orders in relation to the bubble, and the department director is listing up the sales performance of the junior staff, he/she cannot wait and see, saying that the bubble will burst soon. If he/she were to adopt that attitude, he/she would immediately be shoved aside, or get a sharp cut in income.

  This sort of climate comes from the human nature underlying society – people cannot sit and wait while rivals are making profits. They cannot help dancing around in the bubbled economy, unknowingly falling prey to moral hazard. The bubble has a tendency to drive people crazy. More and more people become crazed to make money through speculative activities and no ethical justification seems to be needed for such activities.

  Human beings are consciously or potentially driven by the desire to obtain wealth and fortune. Once the bubble occurs, increasing numbers of people grow eager to pursue profit - even those who had till then been composed – sooner or later join in, driven by such an instinct. As a result, the economy eventually plunges into the engulfing foam of the bubble, the real economy being neglected.

  The bubble is initiated by the speculative activities of people who find some opportunity to make enormous profits. They are economic moves detached from the real economy. There is a serious danger that these bubbles play on the above-mentioned social psychology, so that beyond a certain level it becomes practically impossible for individuals and the private sector in general to restrain or control them.

Thus the responsibility to prevent bubbles should be taken on by the governments, and yet repeatedly we see governments incapable of holding back the runaway bubble. This is indicative of a malfunction

of the capitalistic system and the respective government, thus constituting a problem we need to diagnose, and so reform the structure.

The collapse of the US economy that originated with the subprime crisis is largely attributable to financial liberalization or globalization due to the enlargement of the Shadow Banking System (SBS). Due to unregulated financial liberalization a financial system runaway has developed which no government can stop. Stemming the bubble runaway and getting capitalism into a controllable state should be indispensable items on the agenda to reform the financial system. The Dodd-Frank Act (the Wall Street Reform and Consumer Protection Act), which was enacted July 2010, is based on the same cognition as the Glass-Steagall Act of 1933.

(ii) Corruption and Injustice

When the excellence of the capitalistic system is evoked, it is usually put as follows. It is based on a market system in which innumerable individuals participate on their own free volition and reasonable judgment, and exchanges are determined in such a way as satisfies both buyers and sellers. Such exchanges are efficient and reasonable with freedom and fairness being guaranteed.

Compared with other economic systems such as the socialistic system and feudal systems, this is true, for there is little arbitrariness while freedom and fairness are guaranteed, and the originality and ingenuity of individuals are thereby fostered.

 And yet this system has also a weak point. Although better than other systems, it is subject to corruption and injustice.⁵

 Mainstream, Classicals and Neo-classicals take the classical dichotomy for granted. When they analyze an economic system composed of the real economy and money, they analyze the real economy in terms of relative prices disregarding money, saying it is no more than a veil. Then they take up money as a problem of determining absolute prices.

However, this method is a static and non-monetary approach to the actual economy, which is dynamic and monetary. Let us focus on the “monetary” aspect here.

Capitalism is a system which is inconceivable without money. When the real economy grows to a certain degree, the degree to which it depends on outside capital necessary for production and service activities grows larger. Finance has its own existence value, for the smooth functioning of the financial system enables smooth growth of the real economy.

At the same time, however, finance is a sphere in which there is ample room for fraudulence. When finance enjoys unlimited freedom, the room for fraud grows disproportionately large.

Unlike goods, money can freely be created, however much, by the financial institutions – supply side. The technique of procuring huge amounts of money, starting with the issue of stocks and debts, has recently brought about “securitized products”, which have been combined with the technique of “leverage” – demand side. Thus the present world sees the money game rapidly developing on a global level. These demand side activities, unless some regulations are imposed on them, tend toward the speculative, are enveloped with a veil, and the scope for fraudulence is vast.

There are several types of corruption as well as dishonesty on the part of the financial institutions. Let us take three types.

Forced Saving ― Simply speaking, this means a behavior adopted by financial institutions which buy goods ahead of the public with money they create. As a result, the amount of goods left for the public decreases proportionately. Thus the public is forced to save. This shows that the financial institutions which hold the right to create money and credit, or firms which can procure money from them, can get whatever goods they require at will. Thus the market system can be misappropriated by means of money and credit creation.

Stock Market Malpractice ― The stock market is a market representing the capitalistic system. It is an important means by which firms can procure the money they require. At the same time, however, the stock market is a place which enables many wrongdoings. From illegal operations to suspicious borderline dealing, including insider trading, stock price manipulations by means of disinformation, LBO, M&A, various methods are adopted in the stock market by means of which unjustifiable profits are obtained, and takeovers are accomplished.

Way of Usurping Profits through Nonexistence, or Opacity of Markets ― As a　strong point of capitalism, we can in many cases point out its transparency, because it is a system based on transaction in the markets. In the case of the financial markets, however, this strong point is sometimes lacking.

In recent years “securitized products” have multiplied at an amazing rate. All sort of things are securitized. Then, by combining these, new securitized products are put out on and on.

However, many of these have been transacted in a very opaque way without markets. Moreover, hedge funds, which have played a major role here, have not been subject to oversight by any governmental organization – an enlargement of SBS. The financial institutions have had a tendency to emphasize the importance of independence. However, the funds have carried out operations with huge amounts of money, to such a degree as to endanger the world economy, as exemplified by LTCM in the case of the Russian national debt default in 1998.

Capitalism is based on transactions in the market, and its transparency has been believed able to guarantee fairness and efficiency, but the runaway effect in the form of “market non-existence” and “opacity” of the financial system threatens to disintegrate it.

(iii) The Disparity Problem

Capitalism bases the foundations of economic activities on the markets. Economists seeking to work out its mechanism have placed absolute trust in the general equilibrium theory established by Walras. However, there is one point to which a theory of exchange (the general equilibrium theory is representative) does not pay attention ― a distribution of income and/or wealth. Or we might put it another way. The task of a theory of exchange is to explain the phenomenon of exchange in the market, given wealth and/or income distributed among the people.

Moreover, economics has a proposition to the effect that “perfect competition brings about the Pareto optimality” – the so-called “first proposition of Welfare economics”. Even if we disregard here the statics of perfect competition, and the unreality of the utility function, this proposition does not tell at which point on the contract curve in the well-known Bowley-Edgeworth box diagram the exchange will be determined. Supposing that by chance there is some combination of goods, it only tells us at what point on the contract curve a transaction will be made. All the points on the contract curve are Pareto optimality.

Mainstream economics takes the problem of “justice” in terms of “commutative justice”. This is an idea that the market mechanism attains “justice” through exchange behavior. Although it sees the markets as the place “justice” is realized in terms of exchange, it precludes a value judgment of the state of distribution of stock. In other words, “distributive justice” is consciously or unconsciously excluded.

When economists applaud market efficiency, they tend to emphasize an  equality in the premise without paying attention to the equality of the consequence coming about as a result of competition. This is also problematic, for in a capitalistic system there is no “equality in the premise”.

There exists the conviction that, left to the free mechanism of the market, the economic system will be efficient. However, in a society in which there exists a great disparity in the ways of obtaining wealth or incomes (a disparity from which a capitalistic society cannot be exempt), there is the possibility that if left to the free mechanism of the market a great disparity could result.

The world which has been driven by market fundamentalism – the modern version of laissez-faire ― has indeed seen, as a result, a very great disparity in income and wealth in many countries, notably in the US and the UK as developed nations, and even more notably in the emerging nations.

Let us take the US as an example (the distribution trend in family incomes from 1979 to 2007 reported by the CBO in October 2011); the top 1% showed an overwhelming rise in income in the latter half of the 1990s and from 2003 on (in 1999 twice as much and in 2007 three times as much as 1979). Contrastingly, the other classes have remained stagnant. The upper 81-99% class has shown a 50 % increase, while the upper 21-80% class has shown a 25 % increase. The lowest class has shown little increase.  That is why this period is called “the Period of Great Disparity”. Although President Obama has always emphasized the importance of the middle class, the real fact is that he cannot find an effective measure of reversing the persistent tendency.

                                        

3. Globalization

3.1 Five Factors Which Have Caused Globalization

We have already five points as the cause which have brought about globalization since the latter half of the 1980s. That is, (i) Neo-Liberalism, (ii) financial liberalization, (iii) liberalization of capital transaction, (iv) New Industrial Revolution, and (v) the collapse of a socialistic system.

(i) is a development in thought in the wider sense. (ii) and (iii) is a conscious movement on the side of governments and financial institutions aiming at promoting the financial liberalization. (iv) is a rise in the IT revolution, initiated by many US young entrepreneurs. (v) is a collapse of a rival to the capitalistic system due to several reasons. Let us explain each of them.

(i) Neo-Liberalism

Like many terminologies in political philosophy, neo-liberalism has been historically used as having a different meaning⁶, so we need to specify it. Here we would adopt it as having been used from the 1980s on with Hayek and Friedman as representatives, and yet as having been understood among the general public as well as politicians through the mass media⁷.

　The main claims of neo-liberalism run as follows: Leave everything to the market economy (market fundamentalism); Respect free activities of individual to a maximum degree; Government should not interfere with the market; Government should not adopt discrete economic policies; Structures should be reformed so that as many as regulations should be discarded. Neo-liberalism thus set out has dominated economic thinking over these three decades.

 It should be kept in mind that it can be easily found out that among the representative

scholars of neo-liberalism there is a great difference in political philosophy – for example, a perception of liberty, and market. We can recognize great difference between Hayek and Friedman, or Hayek and Robbins/Knight. However, this is not the place to make comparison at this dimension. We are talking here of it “as having been understood among the general public as well as politicians through the mass media”.

 Firstly, Neo-Liberalism got an absolute support from Thatcher and Reagan –

among others, in the case of Thatcher, Hayek while in the case of Reagan, Friedman. As both governments aimed at strengthening military powers, they never came to become small government. However, it matters here that both advocated neo-liberalism as management and political thought⁸. In the case of Thatcher neo-liberalism was invoked as social philosophy against the strong trade union, the existence of state enterprises, and the old-fashioned City, while in the case of Reagan it was invoked as social philosophy for favoring entrepreneurs, implementing sharp reduction of income tax for the upper class and sharp reduction of corporate tax, while increase of income tax for the middle and low class.   

  Secondly, Neo-Liberalism got a strong support from economics profession. The US

economics, stimulated by Monetarism of Friedman, has showed more and more tendency against Keynesian economics, and then, through Monetarism, the New Classical School has become the mainstream macroeconomics as represented by Lucas, Kydland and Prescot.

All of them advocated Neo-Liberalism. In fact their economic models assumed

economic agents as being able to form rational expectation, the instantaneous equilibrium in the market, and Say’s Law, rejecting the involuntary unemployment. The so-called “ineffectiveness of economic policy” hypothesis and financial engineering based on the efficiency market hypothesis can be said to be along the same line.

　The previous mainstream economics was the one called “the Neo-Classical Synthesis”, which was composed of Keynesian economics (the IS-LM theory) as macroeconomics and Walrasian general equilibrium theory as microeconomics. In this framework, discretionary economic policy (or fine-tuning economic policy) was considered to be essential in the situation of underemployment in the mixed economic system. In this framework, at the same time, neoclassical microeconomic theory, which is based on Pareto Optimality and perfect competition brought about by the market system was regarded as essential. The social philosophy at that time was built on this Neo-Classical Synthesis.

  Neo-Liberalism, in a nutshell, might be said to have been built on the framework in which neoclassical microeconomics is preserved, and new macroeconomic theories such as Monetarism and the New Classical theory are advocated as an alternative to Keynesian economics. Thus over these three decades, economic theory and social philosophy could be said to be on the same boat^{9 10}. It should be noted that this phenomenon has appeared for the first time in the history of economic thought. So far there was a constant conflict between economic theory and social philosophy.  

 To sum up, Neo-Liberalism has got a great support from major governments as well

as from the economics profession and has made a great contribution to the globalization over these three decades¹¹.

                                                                                                     

(ii) Financial Liberalization

The second factor which has caused globalization is financial liberalization. This was

initiated by the financial institutions aiming at abolishing the regulations in order to

widen methods of procurement of capital and the place for investment. What was the

most important was persistent activities aiming at attenuation of the Glass-Stegall

Act, which finally led to the Gramm-Leach-Briley Act in 1999. Thus financial

liberalization was completed to an excessive degree.

  These activities led to a rapid increase in the activities of hedge funds, structured

investment vehicles, private equities and so forth, together with a rapid increase of the

securitized commodities such as MBS, CDO, MBS, CDO, CDS as a means of

procuring finance¹².

(iii) Liberalization of Capital Transaction

International movement aiming at the liberalization of capital transaction was advocated by the IMF in earnest in the 1990s – the so-called “Liberalization of Capital Account”. The central figure of this movement was S. Fisher, who was responsible during 1994-2001¹³.

After the former Breton Woods System collapsed in the early 1970s, the IMF’s

function had remained unclear. Then it has come to feed its way into financing the developing countries (which, therefore, overlapped the function of the World Bank).

 The 1980s had seen the debt crisis of the Latin American countries, greatly afflicted by the two-time Oil shocks in the 1970s. Faced with these phenomenon, the IMF has come to tackle the liberalization of capital account transaction as the major task  

  However, the article of agreement of the IMF did not deal with the liberalization of capital account from a start, so the IMF needed to work it out. The movement of reforming the article of agreement reached the apex in 1997, when the South East Asian financial crisis took place and the movement has ended up in failure. That said, this movement could be said to have gone together with the movement of attenuation of the Glass-Steagall Act above-mentioned.

  The latter half of the 1980s saw a great increase in foreign direct investment (FDI) by Japanese firms into China, and the South Eastern countries (Thailand, Malaysia, Indonesia and so forth) due to appreciation of Yen, which contributed to an high economic growth there through promotion of exports. This does not tell the whole story. In the early 1990s, India and Brazil, quite differently came to adopt a policy of allowing for capital liberalization, which brought about international capital movement (FDI), and economic development came to be carried out.

 It should be worth noting that the Japanese government had been critical of the IMF and the World Bank, both of which promoted capital liberalization, among others speculative international monetary system, as is shown by the idea of the Asian Monetary Fund, and the Miyazawa Proposal. Japanese proposals were not able to  bear fruit due to harsh opposition of Rubin and Summers¹⁴.

(iv) New Industrial Revolution

The IT industry was initiated in the US in the 1980s. Initially, Japanese firms were able to continue to lead the world by setting up sections responsible for applying the technology developed there within the firms. However, the situation dramatically changed. The IT revolution in the US was to attain startling rate of growth due to the originality of young entrepreneurs such as Microsoft, Apple, Yahoo, Google and so forth while the Japanese established firms were to suffer from struggling a competition with the US newly born firms.

  While until the 1980s the Japanese firms had lead the world economy in terms of the power of industrial technology, the US came to lead the Japan in the 1990s.

It should be worth mentioning, moreover, that because of the IT revolution, great opportunity of attaining high development was to be given to the country such as India which lacked in infrastructure firstly in the form of outsourcing.

　　

(v) Collapse of Socialistic System － Why Did the Soviet Union Collapse?

Here let us see practically how the Soviet Union came to collapsed, concentrating focus on after the 1970s, putting aside a discussion of a systematic problem such as the argument that Socialistic system is a system which is doomed to contain intrinsic failure.

Sharp Drop in Petoleum Price and the Defeat of the Afgan War – The 1970s saw a sharp increase in petroleum price due to the two-time Oil Shock. The developed countries, which plunged into the great depression due to the oil shocks, succeeded not only in exploring the North Sea Oil Fields, the Alaska Oil Fields and so forth, as a result of which oil production saw a great increase but also in developing an alternative energy (such as Atomic Power Plan) to petroleum. On the other hand, in the side of the industry consuming petroleum, there occurred a rapid development for efficient use of petroleum. As a result of these developments, the situation dramatically changed in the mid-1980s which saw a sharp decrease in petroleum price.

 Thus, the Soviet which largely depended on the revenue of petroleum, was to suffer

from extreme decrease in fiscal revenue. To make the matter worse, it had made huge military expenditure for the Afgan War (1979-1989). It had struggled the war and finally ended it by the humiliating pullback.

The Rise of Gorbachev – It was Gorbachev who came to the front (Secretary in 1985).　It was in the sphere of politics rather than in that of economy which he promoted, historically speaking, a great reform. He went on approving political freedom on a scale such as the Soviet Union has never seen before. This was called “New Thinking” or “Europe as a Common House”. Among others, what was important was an approval of democratic movement developed in the Eastern Europe. This political surge toward liberalization finally resulted in the unification of West Germany and East Germany.

Within the own territory, Gorbachev introduced the presidential system as well as a plural political party system in March 1990. He himself became the first president. 

 These political trends, however, led to weaken his power of leadership. It was a coup d’etat which took place in August in 1991 that determined his destiny. On this occasion, it was Yeltsin, who was given credit for the suppression of the coup, who took the political power. He came to conclude the Belavezah Accord with the leaders of Belarus and Ukraine, which proclaimed the collapse of the Soviet Union. It was a natural course that capitalism was to enter into the empty area thus created (this is to be dealt with below).

3.2 Four Types of Globalization

Globalization can be broadly classified into “financial globalization” and “market system globalization”.

Financial globalization is a phenomenon caused by (the above-mentioned) financial liberalization and liberalization of capital transaction in which financial business can freely make operations without any oversight from any governmental organization over the whole globe. Financial business has procured huge amounts of money through various methods and entered financial markets in various countries, as a result of which unification of the financial market on a global scale has rapidly proceeded.

Let us take a look at “market system globalization”. The market system is one in which goods and services are freely transacted among firms and consumers, according to their own decisions, via the market. It is important that even transaction for labour as good be established there. The phenomenon that sees this type of market system being adopted in and permeating more and more countries over the globe is known as market system globalization (It can be classified into three types as will be shown below).

What about the relation between financial globalization and market system globalization? The salient tendency seen in recent years is of financial globalization progressing, thereby promoting the progression of market system globalization. Financial business has moved into the forefront of actively investing funds in the areas on the globe which are judged to yield profit. Due to the evolvement of financial globalization, huge amounts of money have, through financial business, flowed into multinational corporations and the major local firms. This tendency, together with the quantum development of IT technology, has built up a great momentum for some of the underdeveloped countries which had long remained stagnant.

On the other hand, as the development of financial globalization brought about an extraordinary glut of financial capital, leading to enlargement of the Shadow Banking System, it became increasingly difficult for governments to oversee the behaviour of financial institutions, as a result of which the world economy has become ever more unstable due to massive speculative behavior on the part of the financial institutions.

Four types of globalization can be identified as constituting the great transformation of the world political economy system brought about by this phenomenon: (i) Financial Globalization, with the US-UK leadership aiming at regaining hegemonic powers, (ii) Market System I – Globalization, with the collapse of the Cold War order and the ensuing convergence toward the capitalistic system, (iii) Market System II – Globalization, with the rise of the emerging nations – the so-called BRICS (Brazil, Russia, India and China), and (iv) Globalization of Market Integration – the EU (or the Euro System).

(i) Financial Globalization － Usurpation of Leadership by US-UK Financial Finance Capital

As the background to the occurrence of financial globalization we can indicate a great changeover in the 1970s and 1980s in the world capitalist system in which the US economy had so far ruled the roost. The Breton Woods regime as a currency system, which had defined the postwar capitalistic world, showed a weakening due to the recurrent dollar crises which finally ended up with the “Nixon Doctrine” on August 15, 1971, declaring the dollar-gold link finally severed. Then, subsequent to the Smithsonian agreement, the major countries agreed to shift to the flexible exchange system.

  As factors bringing about this state of affairs we can indicate the economic development of the actual economy in Japan and West Germany. This tendency has become more and more conspicuous over time, eventually causing a continuum trade friction between the US and Japan. The US almost forced Japan to self-regulate its volume of exports. This is a problem not only between individual industries but also of the balance of trade.

  Two oil shocks occurred in the 1970s. Both of them were connected with the political upheaval in the Middle East and heightened the role of OPEC – a cartel of the oil-producing countries – in the world political economy. The resulting exorbitant rise in the price of crude oil plunged the world economy into serious depression.

  It was around this period that Prime Minister Thatcher (1979-1990) and President Reagan (1981-1989) appeared on the scene. In order to revive the stagnant economy, they advocated exploitation of the market system, unrestrained economic activities on the part of the entrepreneurs, deregulation, and anti-labor union, anti-welfare state policies. These correspond, in terms of economics and economic thought, to a shift from Keynes=Beveridge to Hayek=Friedman.

With these developments in the world economy and politics, it is “financial globalization” that was arrived at by the US and the UK as the way to regain their position as the centre of the world.

The US and the UK governments allowed their financial institutions to carry out investment and speculation freely, eschewing supervision by regulatory authorities. Thus investment banks and commercial banks as well as hedge funds were enabled to carry out investment and speculation on an amazing scale through the development of securitized products and the technique of leverage.

However, by the first half of the 1980s financial globalization had still failed to have conspicuous effect in terms of the US and the UK regaining their position in the world economy from Japan and West Germany. It was, rather, the Plaza Accord in 1985 that was to bring about a a truly notable effect. Due to this, Japan was forced to intervene in the foreign exchange market with the aim of appreciation of the yen.

In the 1990s, under the leadership of the US and the UK, “financial globalization”, together with the financial products created through finance engineering, developed at an ever faster pace. This has contributed to recovery of control of the world financial market by US and UK financial capital. In addition, during the same period US business activities also achieved successful recovery by making use of IT technology.

In contrast with the above, Japan, which had been the only winner in the world economy up until the early 1990s, failed to accommodate to the Plaza Accord well – it failed to deal with the bubbled economy and was plunged into the “Lost Two Decades”. This should be described as self-trapped rather than trapped.

  In the latter half of the 1990s, the Japanese financial institutions were driven into a situation in which they were forced to withdraw from the world financial market because of the domestic financial crisis (together with the required observance of the capital adequacy rate by the BIS). Moreover, even in respect of entrepreneurial spirits, the Japanese firms were left far behind, trailing in the dust raised by the US firms. This was an extremely different state of affairs from that of the 1980s, when the Japanese firms successfully incorporated innovative technology. As a result, the Japanese economy was not able to attain satisfactory GDP growth.

It remains unclear how far the US and the UK governments and their financial industries, which promoted financial globalization, foresaw the development of such a state of affairs. However, this movement of financial globalization was, in consequence, to define the line along which the world economy proceeded. In this process, Japan was to lose the position it had reached in the early 1990s.

(ii) Globalization of the Market System I  ― The End of the Cold War System and Convergence to the Capitalistic System

When we consider the phenomenon of globalization, we need to distinguish between the concepts of “Globalization of the Market System” and “financial globalization”. Reference here is to the phenomenon that saw market systems constructed in countries which had no such system, growing widespread on the global level. In this section, among other things, we will consider the former Soviet bloc (together with China), which has come to adopt the market system subsequent to the collapse of the Cold War regime (Globalization of the Market System also extends to the appearance of the Emerging Nations, which will be dealt with in the next section).

Emergence and Decline of the Socialist System

We have so far considered Capitalism, focusing on its features and ambiguities lurking there. However, when we see it as a regime, Socialism also crops up, having always been compared with capitalism. Economists also engaged in a great controversy in the interwar period, dividing between the camps of capitalism and socialism (the so-called “socialistic economic calculation controversy”).

The post-world war period saw the emergence of the US-Soviet Cold War regime, in which the two antagonistic economic systems came to struggle for mastery. In the socialistic system, markets, firms and the price mechanism are almost non-existent. Goods and services are bought and sold, but the prices are not determined in the markets. The production activities of the economy as a whole are planned by the national central planning bureau, while the lower organizations carry out production following the allotted lines. Thus in this system there is no room for voluntary activities for entrepreneurs (whose existence is officially prohibited).

　The contest for mastery between the two systems came to an end due to the abrupt collapse of the Soviet bloc in the early 1990s. Is it true to say that a socialist system collapses because it is doomed to collapse, by its very nature? It is easy to judge so with hindsight, after the collapse. However, until just before the collapse, no one was not able to predict that the socialistic system would collapse so resoundingly and completely. The only people who predicted the collapse were the extreme liberalists (libertarians). However, they hardly differed in terms of attitude from exponents of the extreme left, who continued to stress the collapse of capitalism (any society or system is bound to collapse – some day).

For better or worse, man is liable to forget what has so far passed. While the collapse and decline of the world capitalist system had continued in the 1930s, it was the Soviet Union that had succeeded in attaining economic growth. Moreover, the economic performance of the Soviet Union was not lagging behind the US in the 1960s – “the age of heavy industry”.

Transitional Process toward Capitalistic System

However, immediately after the collapse of the Soviet Union, the conviction became almost universal that there are fatal flaws in Soviet-type socialism, so capitalism won the battle effortlessly. This is not the place to discuss right and wrong on this point. What we see here is that the former socialist camp, once it collapsed, has spent these two decades in reversal, adopting the capitalistic system (China is an important exception. It introduced capitalistic elements under the sway of the Communist Party). Let us see how the big nations – Russia and China – tried to shift towards the – sharply contrasting – capitalistic system.   

                   

The Path Trodden by Russia － At the end of the 1980s the Soviet bloc came to fall apart, as exemplified by the collapse of the Berlin Wall. Then, after the coup d’etat by Yanayev and its suppression¹⁵, the Belavezha Accord was concluded among the three leaders of the Soviet Union, Belarus and Ukraine in December 1991, with declaration of the establishment of the CIS (Commonwealth of Independent States) and the abolition of the Soviet Union. Russia is the largest nation of the CIS and Yeltsin was elected the first president.

  Yeltsin aimed at making Russia a capitalistic society, adopting the so-called “Shock Therapy”. His presidency, which covered the period 1991-1999, had two distinct features marking the former and latter periods.

  The former half is the period that saw rapid transformation into capitalistic society by means of Shock Therapy. This was led by Gaidal and Chubais, with Sachs as advisor, who succeeded in economic reform in Poland and welcomed Schleifer (L. Summers was his protégé) as well. Their methods were price liberalization, privatization of national firms applying the “Boucher method”, and establishment of the stock market. The outcome was far from happy. In 1992 the Russian economy suffered hyper-inflation of 2510 per cent and minus 14.5 % in terms of GDP as compared with the previous year. This hyper-inflation together with the collapse of the social security system brought about a sharp drop in the living standards of a considerable part of the population while the Boucher method would lead to the Oligarch (the new Zaibatsu).

  The latter half was a period of political and economic turmoil. It started with the Moscow Turmoil in October 1993, which saw Yeltsin victorious. However, in the event of the presidential campaign Yeltsin struggled and was forced to ask the Oligarch for great help. He was re-elected but the influence of the Oligarch was conspicuous. Moreover, Yeltsin’s health conditions continued to decline. The Oligarch came to take over ownership of many national firms through the policy of the collateralized stock type of privatization.

  In this state of affairs, Russia plunged into fiscal collapse due to the default of the Russian national debts in 1998. Officials and the military were left waiting for their pay, and use of the ruble was stopped in transactions between firms (a phenomenon quite the reverse of the liquidity trap).

  Yeltsin resigned from the presidency on December 31, 1999, appointing  Putin, hitherto virtually unknown, as his deputy. Subsequent to Putin’s election as president, the Russian economy, due mainly to the surge in oil prices, began to show miraculous recovery and growth. Putin, who was in earnest about reforming Russia politically and economically, thereafter changed the course to strengthen state control, and expel the Oligarch. While the Lehman shock also hit Russia, the influence of the sovereign state over firms became all the stronger, as attested by the so-called “Putin List”.

Thus the way adopted for transforming Russia into a capitalistic society – the abrupt introduction of a market economy – resulted in the gratuitous concentration of wealth in the hands of a very few people (the Oligarch through misappropriation of market economy), and would send the masses on an infernal roller-coaster ride. And yet Russia has succeeded in generating rich middle class due to the high rate of economic growth since 2000 while wealth was to shift to the officials from the Oligarch this time, again through undue methods depending on the authority of the sovereign state.

The Path Trodden by China － “The Great Leap Forward” policy (1958-1960) advocated by Mao Zedong, far from bringing the advance promised by the name, led to a calamitous economic situation. Due to the production of iron without the right technological background, a huge labor force was called in, agricultural production being neglected, which resulted in some billions of people starving to death.

  Then, in the period of 1965-1977, China saw the so-called “Great Cultural Revolution”, which, again contrary to the name, was the negation of all cultures.

Learning being negated, intellectuals and students were expelled into remote areas. This was initiated as a movement for Mao to regain power, having lost authority due to the failure of the “Great Leap Forward” policy.

The long “Great Cultural Revolution” was soon to kindle internal strife among the leaders, and the economy plunged into a miserable state. Under these conditions new initiative was shown by some people in some rural areas, who secretly began to try to revive the economy through privatization of land. The revolution, at long last, ended with the arrest and conviction of the “Gang of Four” ¹⁶.

Then the “Economic Reform” policy was launched in 1978 with Deng Xiaoping as leader. This was a starting point on the way to attaining the miraculous economic development of the Chinese economy which has continued up until today. This policy is, in substance, to transform the Chinese economy into a capitalistic system, although it is called “Socialist Market Economy”.

The strategy which China adopted for a capitalistic society was gradual reform, in total contrast to Russia’s “Shock Therapy”.

In spite of recurrence of the fierce political power struggle, in China there has only been the one official political party – the Communist Party. Although Liu Shaoqi was harshly criticized, branded as “Capitalist Roader” and “Revisionist” and suffered a violent death, Deng Xiaoping came back from the dead like a phoenix and adopted Reform policy. This policy aimed at transforming the

Chinese economy into a capitalist economy, and yet China continues to follow a political system in which the one party is the Communist Party.

It was due to an increase in production through the introduction of a system of land privatization in the villages as well as the growth of the so-called “township enterprises” thanks to a huge increase in consumption demand with increased agricultural production that the Chinese economy started developing after the devastation wrought on it by the Great Leap Forward and the Great Cultural Revolution. A policy of welcoming foreign firms into the special district in the coastal area then followed, leading to miraculous economic growth in the region.

In 1985 Deng advocated the so-called “Xian Fu [Wealth as Prioritized]” theory. Thus the rapid growth of the market economy was accomplished mainly by private firms.

  In 1992 Deng went on a “South Tour Speeches”, insisting on speeding up reform policy against the conservative group. This contributed to bringing the Chinese economy back into a capitalistic system, in the midst of the political and economic confusion brought about the Tiananmen Square Incident in 1989. Following Deng, the guiding principle in the mid-90s was to privatize small state-owned enterprises while maintaining big national firms under the control of the government. This principle was reconfirmed in the 15^th National Congress of the CCP in 1997 with the decision that economic growth should be left to private firms, confining national firms in the four fields, as a result of which the share the national firms occupy in the economy continued steadily to decline as the years went by.

Thereafter the government was to permit the local governments in the inland area to attract foreign capital in a proactive way, igniting economic development there, too.

In December 2001 China entered the WTO, bringing in treatment of foreign capital equal to that of domestic capital and liberalization of tariffs as necessary requirements. It also allowed liberalization of labor mobility to a large extent. Thus the so-called “Socialist Public Ownership” has now become nearly a mere façade.

(iii) Globalization of Market System II ― The Rise of the Emerging Countries

Globalization expressed as the global operations of business activities contributed to bringing about large-scale economic development in some of the countries that had so far been labelled developing countries. This phenomenon was ascribed not only to the business activities of the developed countries but also to those initiated by the entrepreneurs who set about promoting the development of their own economy and industries. The result was the rise of the emerging countries as represented by the B[R]ICS – Brazil, [Russia], India and China, attaining such a position as to greatly influence the world economy

What is important in this regard, especially after the Lehman Shock, is that the map of the world economy has been greatly transformed from “the growing developed countries vs. the stagnant developing countries” to “the stagnant developed countries vs. the growing emerging countries”. Above all, the Asian area has attained a high rate of economic growth at every door. Moreover, economic growth in the South American zone has also been gaining attention. This is, to a large extent, due to the fact that economic growth in China and India caused a huge demand for minerals and agricultural products on the one hand, while the areas had a relatively stable financial system on the other.

In consequence, the US ambition, entertained in the early 1990s, to control the world economy alone has been shattered, and one might say that the world has reached a stage where it is groping for an alternative world order.

During these two decades, the economic growth of the developed countries has been slow or stagnant, whereas the emerging countries represented by the BRICS have consistently attained high rates of economic growth (this is true of Russia only over the last decade). As a result, taking many by surprise, the BRICS have not only been rapidly catching up with the developed countries, but have also rapidly come to loom far larger in various phases of the world economy. Indeed, China has shown such remarkable performance as to rank as one of the G2 (the other being the US).

Moreover, these emerging countries came through the tidal wave of the Lehman Shock in a very short time and regained the same high rate of economic growth as before, so that the future of the world economy is expected quite certainly to revolve around them. The world map in terms of the economy and geopolitics has dramatically changed.

Briefly describing the case of Brazil and India, which we have yet to consider, we will refer to the presence of the BRICS in the world economy.

Brazil ― In the 1980s and the first half of the 1990s, Brazil had suffered from the accumulated debt and hyper-inflation. However, in 1990 President Collor (1990-1992) adopted a policy of promoting the market economy, opening up abroad and privatizing the national firms; this would greatly change the course for Brazil. In 1994 President Franco (1992-1994) created the Real under the dollar-pegged system, which contributed to conquering hyper-inflation dramatically. Furthermore, President Cardoso (1995-2002) achieved a sound fiscal situation through implementation of the Fiscal Responsibility Act and the Fiscal Penal Act. President Lula (2003-2011) followed the same line. When the 21st century dawned, Brazil was able to accomplish a high rate of economic growth due to the rapid growth of demand for agricultural goods from China, and has since asserted its status in the world economy as a resource-rich country.

India ― India had long operated on a socialistic economic system and suffered

from economic stagnation. PM Rao (1991-1996) adopted a new economic policy in 1991 to emerge from economic stagnation. This was a relatively liberal policy, including liberalization of trade, foreign exchange and capital, deregulation, privatization of national firms and financial system reform. This line was to be followed by the successive PMs, including PM Singh (2005-  He carried on with the new economic policy as the Secretary of Finance of the Rao Cabinet).

  India has been able to attain an amazing rate of economic growth due, among

other things, to the growth of the IT industry, which had begun with the development of business outsourcing thanks to increased orders from US and European firms. In India the literacy rate remains low. And yet, at the same time, India has produced a vast number of young people endowed with intellect and knowledge so has thus been able to achieve great development based on IT technology as well as English as a lever.

The Presence of the BRICS in the World Economy － Up until the end of the 1980 Brazil, India and Russia had suffered serious economic stagnation and confusion due to their respective shortcomings. In the early 1990s, however, Brazil and India succeeded in attaining a high rate of economic growth by liberalizing the market, although sharp increase in demand for agricultural produce in Brazil and for IT services in India, on the part of US and the EU firms, also contributed to economic growth (in the case of China, a similar phenomenon had already come underway at the end of the 1970s).

  In the case of Russia, the Shock Therapy of the 1990s brought about only destruction and confusion. When the 2000s began, however, it succeeded in attaining economic growth thanks to the high rise in the price of oil and natural gas. And President Putin succeeded in rectifying the market economy system while stepping up the power of control by the sovereign state.

  Economic growth in the BRICS is closely connected with an important series of world events occurring from the latter half of the 1980s.

  Firstly came the collapse of the Soviet bloc. A movement for political and

economic liberalization was initiated by Poland, followed by other East European

countries, finally leading up to the demise of the Soviet Union. (In the case of

China, economic liberalization started in 1978. And the shockwave from the Soviet

bloc hit China in the form of demand for political liberalization – the Tiananmen

Incident. However, this was suppressed. China would eventually return to the

Economic Reform course, persuaded by Deng Shaoping’s series of lectures in the

South.)

Secondly came Financial Globalization. This was initiated by the US, which had tried to improve its position by means of trade conflict and foreign exchange intervention (such as the Plaza Accord) but in vain, being confronted with the rising economies of Japan and West Germany.

As financial globalization developed in the 1990s, the US and the UK saw an upturn. No wonder the BRICS came round to a policy of liberalization in general. Brazil and India had suffered from economic stagnation. Russia had suffered from economic meltdown while China needed foreign capital to maintain its high rate of economic growth. Financial globalization, in hindsight, contributed to the vigorous economic growth of the BRICS thereafter through the mobility of capital and high rise in the prices of primary goods due to index speculation.

To sum up, the BRICS have been able to attain high economic growth, reaping benefit from both “Market Globalization 2” and “Financial Globalization”.

  Table 1 shows the difference in terms of average annual GDP growth, while table 2 shows the GDP top 10 in terms of PPP in 2010. The BRICS are included here. Above all, China’s figures are amazing. Although in per capita terms there is a great gap as compared with the developed countries, we can say that in terms of national powers they have achieved an equal footing.

  In recent years forecasting how the BRICS will be getting on in the coming years is a popular pursuit, but it is no more than intellectual guesswork. What is certain, however, is that China is soon going to reach No.1 placing, judging from performance over the past two decades.

Table 1-1 Annual Average Rate of Growth of GDP (%)

                          

China	10.46	1991-2010
India	7.54	2001-2010
Russia	6.58	2001-2010
Brazil	3.61	2001-2010
	******
US	2.55	1991-2010
Germany	1.47	1991-2010
Japan	0.97	1991-2010

Table 1-2　GDP Ranking in Terms of Purchasing Power Parity（2010）（unit: Billion Dollars)

               

1	1 US	110086
2	China	4658
3	Japan	4310
4	India	4060
5	Germany	2940
6	Russia	2223
7	UK	2173
8	Brazil	2172
9	France	2145
10	Italy	1774

(iv) Globalization of Market System Integration  – The Euro System (or EU)

The Euro system (or the EU) might be described as a sort of golobalisation which has continued over a long period, for it has aimed at the creation of a common market, mobility of labor and capital, and adoption of a common currency (the Euro). The movement started immediately after the Second World War, and has by now reached these goals.

The EU and the Euro system were set up in the 1990s when modern globalization began to gain momentum, and the Socialistic system collapsed. The EU adopted a policy of bringing the ex-Soviet bloc members into the EU. In that sense, the EU or the Euro system can be said to constitute Globalization of Market System Integration, which includes a partial Financial Globalization (in the form of the Euro), Globalization of Market System 1.

  

  However, the Euro system, which had been applauded with a touch of envy in the early 21st century, has turned out to be a system prone to great drawbacks one year after the Lehman Shock.

The policy the Euro leadership adopted to address the Euro crises which broke out in May 2010 has been enforcement of an ultra-austerity budget with bailout for the PIIGS – Portugal, Ireland, Italy, Greece and Spain - and a monetary policy by the ECB (which initially adopted a low-rate interest policy only, and then extended the policy to LTRO (Long Term Refinancing Operations).

The underlying idea of the Euro leadership is that with an ultra-austerity budget and structural reform, such as liberalization of the labor market, sales of the public sector and so forth, the afflicted country can enhance its international competitive power and enjoy a healthier budget. One might say that provision of bailout and the ECB monetary policy were calculated to protect the financial system from the instability that could arise with implementation of this policy.

  What came about in consequence, however, was even greater crisis among the PIIGS. An ultra-austerity budget implies an ultra-deflationary policy. Continued restructuring, increased taxes and pension cuts led to a sharp decline in effective demand, high rates of unemployment, and further deterioration in the budget situation.

The afflicted Euro member states, which had neither monetary policy nor exchange rate policy at their disposal, are now, furthermore, obliged to implement an ultra-austerity budget, which means that they are not only deprived of any economic policy to combat depression but also are forced to adopt a large-scale deflationary policy. Consequently these economies are even worse off, and trapped in a deflationary spiral.

Moreover, the bailout is used only to stabilize the Euro system, and to save the big German and French banks as lenders to the PIIGS, while the populations are required only to shoulder the heavy burden. This could cause very serious political and social problems.

The Euro leadership has never addressed the fundamental causes which reside in “the expanding intraregional disequilibrium” (a sort of the North-South issue) and “the situation of the member states, losing all control over economic policies” (due to incomplete currency integration). In consequence the Euro system has been driven close to collapse on several occasions.

The expanding intra-regional disequilibrium can be typically expressed as the economic imbalance between Germany and the PI (I) GS. In the early days of ECB monetary policy, assigning top priority to the German economy, Germany had expanded exports while the PI (I) GS had made huge investments in real estate by exploiting low rates of interest. Or, to put it another way, surplus savings which had accrued in Germany had been lent to the PI (I) GS – a regional version of the so-called global imbalance. This imbalance has continued since the birth of the Euro. However, with the Lehman Shock as triggering event, this brought about the Euro Crisis when the PI (I) IGS bubbles started bursting.

What is more problematic is not so much the fallout of the Euro system as the survival of the EU per se, for the EU is now losing its founding spirit – the spirit of European community. The Schuman spirit is dwindling dramatically while nationalism is becoming prevalent. The risk is growing of a divided Europe and the spread of racism amid rising nationalism. In consequence, the EU is ironically losing the ability to eliminate these risks, although the EU was set up for the very purpose. The Euro system as well as the EU is facing a major turning point¹⁷.

4. Lehman Shock and the Present                                     

4.1 Collapse of Neo-Liberalism and Resurgence of Keynes

The Lehman Shock, which broke out in September 2008, caused the meltdown of the U.S. financial system and abruptly drove almost all the nations of the world into critical conditions. Many financial institutions as well as manufacturing firms have gone bankrupt, which has brought about the soaring number of unemployed throughout the world. Various governments made strenuous efforts to surmount the crisis, injecting huge amounts of public money to stabilize their monetary systems, and implementing drastic fiscal policies to cope with massive unemployment.

At the same time, this is a state of affairs that marked a great turning point in the

world economy. For “Neo-Liberalism” and the “New Classical School” have collapsed in front of this calamity, and governments all over the world were forced to surmount the crisis with their intuitions.

It has been argued fervently that the market society must be a system of  

self-discipline: one should confront the future with self-discipline in mind; success or failure should be attributable to one’s own responsibility; the government should not interfere with the market economy – such are the credo and motto of the Neo-Liberals.

What has happened in reality? Almost all the American mega-banks and investment

banks have pleaded with the government for bailout. They had taken pride in making portfolio selection on the basis of financial engineering (multi-layered securitized papers were issued based on this technique). However, as soon as their banks were on the brink of collapse, their CEOs hurried to the government, asking for huge amounts of public funds (and yet, despite these fatal blunders the top management has seldom been fired).

One of the causes of this messy state of affairs is ascribable to the fact that the

realization of a “pure market society” has been advocated to an excessive degree without taking other things into consideration. Excessive liberalization has made too short-term speculative activities unruly, bringing about an atmosphere of neglect for social ethics by many managerial staff and, on the part of the public, dreams of get-rich-quick schemes. The consequence of these behaviors was abandonment of the “Principle of Self-Discipline” and the pleading with the government for bailout. (The scandal has shaken the American society over the behavior of the AIG managerial staff, who received huge sums of public funds to award themselves lavish bonuses. They justified this behavior on the ground of “redemption of contract”. Here we see the collapse of business ethics). By contrast, many people have been unable to repay their mortgage loans and faced foreclosure, with much debt being left. The point to stress here is that they alone have been required to observe the “principle of self-discipline”.

It is worth noting that Neo-Liberalism has involved serious self-contradictory failures

– the phenomenon of market non-existence and the phenomenon of market opaqueness.

As the world economic crisis went from bad to worse reference to Keynes, who advocated economic policies to surmount the Great Depression in the 1930s, showed widespread increase. While hardly any of the economists were able to do anything for the Great Depression, Keynes deftly put forward his own economic theory and policy proposals. Now the same phenomenon emerged again, for the insignificance of the established macroeconomics has been exposed in the face of the world economic crisis.

    It is not so much to the New Keynesians as to Keynes that the world has turned. M. Woolf and J. Ackerman declared their abandonment of the Neo-Liberalism they had embraced. R. Shiller and G. Akerlof urged the necessity of implementing Keynesian economic policy. J. Galbraith and P. Krugman also emphasized that Keynesian fiscal policy should be an effective means to tackle the present economic crisis. In October 2008, the (UK) Chancellor of the Exchequer, Darling insisted on the necessity of fiscal policy, praising Keynes. The economic policy staffs of the Obama Administration and many economists who are supportive of it are New Keynesians. The document announced on January 9, 2009, “The Job Impact of the American Recovery and the Reinvestment Program”, in which the Keynesian way of thinking is reflected, was written by C. Romer, Chairperson of the CEA and became the backbone of President Obama’s economic policy (“Emergency Economic Stabilization Act”).

4.2 Thereafter - Austerity Measures

Until May 2010, the Keynesian policy line had been predominant, putting the Obama Administration at the top, among the governments in the world. However, around June 2010, the world was to see a great turn in the stance of economic policy (except for China).

  The inception occurred from the Greek fiscal crisis which was revealed in the fall of 2009. While the EU leadership was not able to decide concrete measures for it, it turned out that Ireland, Portugal and Spain were being situated in the same situation. Then in the spring of 2010, the Greek crisis was abruptly extended to the Euro Crisis. Faced with this situation, it was a huge bailout (110 billion euro) by the EU/IMF to Greece, with conditions of an implementation of austerity measures that the EU leadership finally came to make a decision. Since then, this was to be a persistently repeated policy of the EU.

Reflecting this state of affairs, the G20 at Toronto (June 2010) showed an outlook quite different from that at London (April 2009). Notwithstanding President Obama appealed to a conquest of the depression through fiscal policy, the Toronto G20 ended with a big chorus of austerity measures mainly advocated by the EU.

  In the US, in fact, criticism of the budget line adopted by the Obama Administration has become louder and louder. The fiscal policies which Obama planned such as the Job Act (June 2009), the Hire Act (February 2010), a big scale fiscal stimulus policy (May 2010) were foiled, due to not only the rising movement of the “Tea Party” which harshly opposed the fiscal stimulus but also the increased passive tendency to it among even the Democrats. This situation was to be given acceleration by the decision of the Toronto G20, leading up to the fatal defeat of the President-Democratic Party in the midterm election in November 2011. Confronting the Republican Party, which adopted

a balanced budget policy through spending cut and no increased tax, the Obama Administration was to walk on a difficult path for implementing all sorts of economic policies. Starting with a compromise (postponement of the Bush Cut and Unemployment Benefits in December, the passing of the budget of 2010 (by accepting big claims from the Republican Party) in April 2011 and so forth, the Administration accepted the Budget Control Act (which forced it to adopt austerity measures) in the Debt Ceiling Crisis in July 2011. Following this, the Super Committee held in November could not reach a consensus, which determined to cut 120 billion dollars annually mainly from the defense and social securities (absent other alternatives) from the end of 2012 (the so-called Sequester).  　

Thus since June 2010, the US and the EU (including the UK) have turned into austerity measure policy, abandoning, de facto, economic policy for the depression. It is an ultra deflationary policy. In the midst of stagnant private demand, there is no agent other than the government which can increase effective demand. However, because the government is implementing big spending cut, effective demand is continuously in the decline, which are to make the fiscal situation worse. It puts the cart before the horse to aim at balanced budget.

The only economic policy adopted for meeting the depression might be the QE policy. But the effectual effect of it is to bail out and then encourage the megabanks to make room for financial investment, without substantial effect on the real economy.

4.3 The SBS Remains Intact

The Dodd-Frank Act was enacted in July, 2010. However, the implementation process

was to cause a very long delay mainly due to the Republicans’ opposition and the Banking lobby activities. It was not until early 2014 when all the implementation process has been somehow finished.

  What will this long delay implicate? The financial institutions, having successfully bounced back from the brink of failure due to huge bailout from the government¹⁸, have been trying to obstruct the setup of organizations designed to oversee their speculative activities. They have also been making great efforts to weaken the Act and make big loopholes, lavishing huge amounts of money on the political arena and engaging in lobbying activities with some success¹⁹. Thus the SBS has remained intact, which suggests the serious risk of a huge financial crisis again hitting the world in the near future.

It needs to be borne in mind that it is so far only the US that has put through a

financial regulatory act. Unless the other countries including the UK and the EU

could enact the same sort of acts, the world would be left with a big loophole.The financial field is, for better or worse, now global.

The following is the present state of UK and EU action in tackling financial instability. As compared with the US, implementation of the measures is much slower.

In the UK, in December 2013, the Financial Services (Banking Reform) Act was enacted, which adopts the Ring Fence method advocated by the Vickers Report (ICB). The Government asked the banks to reform the structure along this line immediately.

  The Euro group is considering whether it should adopt the Volcker rule and/or ring-fence method. In Germany the Ring-Fencing and Recovery and Resolution Planning of Credit Institutions Act was enacted in May 2013, which was based on the Liikanen Report. In France the Banking Reform Act was enacted in March 2013, which adopts a ring-fencing method.

It should be noted that financial regulation reform is not a priority for the EU. The crisis of the Euro System continues, rooted in the inherent properties of the System.　

5. Conclusion　

This chapter firstly discussed the essential characteristics and the issues involved of the Capitalistic System, which is fundamental in assessing Globalization. Secondly it discussed Globalization, selecting five factors which caused Globalization and typing four types of Globalization. Thirdly it explained what the Lehman Shock brought about in relation to the Globalization and what occurred thereafter.

  The final conclusion of this examination, roughly speaking, runs as follows.

    Globalization, in a nutshell, has given great opportunities for the emerging nations to attain high rate of economic growth to such a degree that they could become members of the G20 (though in the case of Russia severely suffered from the Shock Therapy).

      Globalization has contributed for the US and the UK to regain the economic power from Japan especially through financial globalization. Although this gave the opportunities for the emerging nations, it has the world economy more and more fragile as well, due to its excessiveness.

     We cannot and need not prevent the advent of Globalization. But we need to know what capitalism is and how it should be managed in order to prevent excessiveness especially in the financial globalization.

Now we could say several things which are important in considering the Globalization.

The current economic crisis is the consequence of excessive financial liberalization, supported and promoted by Neo-Liberalism and the New Classicals, which has brought about the unregulated issue of multi-layered securitized papers and related moral hazard of many financial institutions. Ironically enough, in the midst of market fundamentalism, we have witnessed the phenomena of market non-existence and market opaqueness.

In what direction will the market society move henceforward? What is clear at the moment is the collapse of Neo-Liberalism, and the movement of the market society in a very different direction. In order to prevent the phenomena of market non-existence and market opaqueness which the excesses of Neo-Liberalism have brought about from re-occurring and subdue the SBS, many governments are moving to improve the system in such a way that they can control and oversee the financial market.

And yet this movement, however, is proceeding extremely slow. The Dodd-Frank Act finally managed to make implementation this year. And the UK and the EU managed to act regulatory reform acts somehow very recently. This slowness allowed financial institutions to behave in the same way as they did in the pre-Lehman shock, meaning by this the SBS has remained intact. It might bring about another financial meltdown in the not-too-distant future unless the implementation would be made more seriously and faster.

  Another important problem concerns the behavior of firms. In these crises many big firms representing the market society (not only financial institutions but also manufacturing firms) have shown immorality. They had advocated the following principle: we must make decisions for the future with the “principle of self discipline” in mind; if firms failed in this enterprise they should disappear due to the market mechanism, through which the market society can attain efficiency, freedom, justice and growth. However, we have witnessed that many business leaders who had been advocating the “principle of self discipline” were the first to plead with the government for financial help, bearing the principle of “too big to fail” in mind. Amazingly enough, moreover, having got huge bailouts, they have displayed shameless behavior in awarding themselves big bonuses, as was seen in the case of the AIG. The fact that this kind of injustice, corruption and selfishness has been prevalent in the US business community is eloquent evidence that we need a new business model for the future of the market society. If a new type of business model were not created, the market society would face a bigger problem in the not-too-distant future.

  The world is still navigating without mariner’s compass.

1) Financial capital has another feature. It divides itself, creating various kinds of financial products. This is sometimes done for the sake of finance itself (as a tool for obtaining a larger share of GDP), neglecting its original role of getting the real economy growing. On this issue, see “method of reaping profits due to non-existence or opacity of markets” later

2) On accounting and debt contract, see Akerlof and Shiller [2009].

3) Accounting is seldom discussed in economics.

4) In recent years the stress has come on “current value accounting”. However, the problem raised here as “accounting” can not be solved with this method, but results from ambiguities which are intractable even in the capitalistic system which has “rationalism” as an immanent attribute.

5) The points raised below cannot be dealt with in the framework of corporate social responsibility (CSR), for capitalism cannot eliminate all scope for fraudulence, and moreover, CSR, which claims to oversee a firm by calling in staff from outside, drives firms into self-contradiction in the capitalistic system, which has self-responsibility as a fundamental principle.

6) In the 1930s when the term “Neo-Liberalism” was first coined, it was tinged with “Ordo-Liberalism”. It was a declaration against it that Hayek and others were determined to set up the Mont Pelerin Society.

7) Although “The Washington Consensus” was first coined by J. Williamson in 1989, it came to be used with a different meaning, which is tinged with Neo-Liberalism adopted here. This term is not used in this paper for avoiding this confusion.

8) It would be misleading if Thatcherism and Reaganomics should be grasped exclusively from the point of view of Neo-Liberalism, for both possessed strong nationalism as well.

9) It should be noted that the “New Keynesianism” – another dominant school of macroeconomics – does not belong to the Neo-Liberalism. It sees the fundamental flaw in the market economy in some rigidities of prices, and advocates the necessity of discretionary economic policy for addressing unemployment which should be ascribed to them. What makes the matter complicated, however, is that while it shares social philosophy similar to that in the age of the Neo-Classical Synthesis, it accepts important ideas from the New Classicals. 

10) Libertarianism is quite often argued in relation to Neo-Liberalism. However, it might be wise not to use it here because it has many different meanings. The most popular is the one advocated by M. Rothbard, which allows for no place for nation and government.

11) It should be noted that during this period activities of government had greatly increased, betraying the slogan of Neo-Liberalism (during the Reagan Administration, for example, the US fell from the largest foreign creditor into the largest foreign debtor).

12) For further details, see Secion 2 of Chapter 2.

13) He got a job at the Citi Group during 2002-2005.

14) By the way, Japan had suffered from its own financial crisis in the 1990s, as a result of which Japanese financial institutions came to adopt a policy of withdrawing from the international theater. During the same period, the Japanese government adopted a contrasting stance from the US administration. In consequence, Japan was to be left behind the financial globalization led by the US. It is an interesting problem whether this should be evaluated.

15) Amidst this crisis, Yeltsin’s great performance, which he personally decided on (a speech urging the people to resist the tanks), not only crushed the coup but also came to lead, in consequence, to the fall of the Soviet Union - the most dramatic event showing the power of the influence of leadership in modern history

16) In the midst of the Great Cultural Revolution, Zhou Enlai tried to induce the politicians who had been purged to return to the centre of politics – including Deng Xiaoping, whom he saw as a prospective leader. In order to crush this endeavour the Gang of Four staged the Anti-Rinpyou Anti-Confucious campaign (Confucious  implying Zhou Enlai). The death of Zhou Enlai in 1976 was to cause huge and spontaneous criticism of the Gang of Four among the masses, which generated a great momentum to put an end to the Great Cultural Revolution.

17) In this chapter globalization was treated in terms of five factors and four types, but

the theory of Global Imbalance is not, so it might be better to refer to it briefly.

Eichengreen introduces four theories. Firstly, the standard analysis by Bernanke. Here

great attention is paid to excessive savings, above all, in China. Maintaining that the

US current account deficits at the present level cannot be sustained, this theory argues

that substantial adjustment of asset prices for spending and substantial change in

relative prices for balance of trade should be required in both sides. Different from

this, the following three argues that the correction of the present global imbalance

should not be required. The second one is “New Economy” theory, which argues

that because the US economy is attractively growing, the foreign investors would like

to make huge sum of loans indefinitely. The third one is “Dark Matter” theory. It

argues that it is wrong to think that the US has accumulated huge sum of foreign debts

and casts its doubt on the statistics of current balance, arguing that seignorage,

insurance services, knowledge services are not taken into consideration there. The

fourth one is “savvy investor” theory. It argues that because the US investors are more

savvy than foreign investors, the US foreign assets yield higher rate of yields than the

US foreign debts, so the US has no difficulty in paying high foreign debts.

  Rodrick advocates an idea of Globalization Paradox. According to it, globalization

can work if and only all the nations should obey the same rule worked out by the

technocratic global government. However, because every nation would be reluctant to

hand over sovereign and freedom of managing economy, there is no possibility for the

birth of such a global government – thus, globalization paradox. 

18) The FRB then encouraged the megabanks through a series of QE policy, which means that the FRB and the mega banks are on the same boat. Big powers are concentrated in the FRB, and we see very strong adhesion in personal terms among the FRB, the mega banks and the Treasury Department.

19) The US Society has a potential risk that the two Americas – the mega banks and the public – are to be involved in a serious battle, which leads up to the more fundamental problem – What sort of Capitalism the world should aim at from now on?

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