HERE YOU CAN READ THE FIRST PUBLISHED ARTICLE ABOUT MARKET FUNDAMENTALISM

Published in: Durst, D.C., Dimitrova, M., Gungov, A., and Vassileva, B. (Eds.) (1997). Resurrecting the Phoenix. Proceedings from the Conference on Civil Society in South Eastern Europe: Ethical and Philosophical Perspectives (pp.96-102). Sofia: EOS Publishing House.

The conference held on American University in Bulgaria, April 25-27, 1997.

MARKET FUNDAMENTALISM AND THE PARADOXES OF TRANSITION

 

Emil Asenov Geraskov

 

Indisputably, market reform and privatization of state-owned property have no alternative in East European countries. As in all developed market economy countries, 60 to 80% of the national wealth should pass into hands of less than 20% of the population. Because the market economy itself has changed significantly, and today differs from what it was in the 18th and 19th centuries, the question arises concerning what type of market economy should be chosen. We may suppose that a large number of the problems the countries in transition face today result from selecting an unsuitable market economy model.

To assess accurately the tendencies of modern capitalism, we should look at haw market relations have historically developed. As it is well known, Adam Smith was the first one to suggest and explain systematically the idea of the liberal market economy. According to him, supply and demand regulates naturally the economic processes. That is why government intervention is not desirable; it causes more damages than it brings benefit.

It turned out, however, that the economic model, created by the supporters of liberal market economy, functions without problems only in theory, while its implementation in practice caused an economic crisis in the 1920's and the 1930's, known as the Great Depression. What we witnessed during that period was opposite to supporters of the free market economy claimed would happen - efficient distribution of resources. It turned out that for an extended period of time the market economy stabilized at very low level, which led to ineffective use of labor and other resources of production. It seemed that during the time of the Great Depression capitalism suffered a complete failure.

The man who saved the system was John Maynard Keynes. He suggested that the market economy is unstable by nature, and for this reason, it is necessary that the government intervene actively in the ongoing processes. Keynes' model functioned quite successfully until the early 70's when inflation started spiraling upward. At that time the monetarists appeared on the scene and restored hope in the market by pointing at internal mechanisms, which sustain the balance of market forces. According to them, the best government is the government that controls least. To solve the problems of the liberal market economy, it is enough to regulate the money supply. This means that it is necessary to have a steady rate of growth in the money supply that will correspond to the long-term growth of economy. If these requirements are met, free market economy will be saved from its innate vice-periodical economic crises. Practice, however, did not confirm this hypothesis because the developed countries went again through a recession in the beginning of the 90's, after having applied the principles of monetarism for almost ten years.

As we can see, the monetarists' claim that they found the causes of economic crises proved to be ungrounded. For that reason, there is great probability that both rejection government's regulation function and the diffusion of liberal market economy principles worldwide will lead, in long run, to a prolonged crisis, deeper than the one in the 20's and 30's of this century. Even though imperfect, government regulation still provides opportunities for exerting influence over economic processes, while the spontaneous development of a crisis in economies based on liberal principles may cause an unprecedented global economic catastrophe.

The market economy, though necessary, is not only and the most important factor determining economic development. When pointing out its advantages, we usually give as examples the developed industrial countries. In reality, however, most of the market economies of the world, such as the countries of Latin America, the Caribbean, Africa and most of Asia, face serious problems. It sounds justified, then, to ask how rich countries with market economies differ from poor-countries with market economies.

In his studies, the famous economist and Nobel Prize winner, R. Solow, answers this question by showing that capital and labor do not represent major factors for increasing labor productivity and achieving economic growth.¹ He proved that 90% of increased productivity in USA during the first half of the 20^th century is a product of scientific progress and technological advancement which is calling "technology", or "technological change". In underdeveloped countries the contribution of this factor is much less significant: in Brazil, for example, it was about 20%. Later studies proved that Solow exaggerated the importance of scientific and technological progress to a certain extent. He had included in it additional factors, such as the acquisition of skills, the employment of better-educated and more qualified labor force, etc. In spite of this, the significance of scientific progress remains crucial, as other studies prove. Many works concerning the first two postwar decades of the development of the USA uncovered the strong and positive connection between research & development (R&D) expenses and the increase of labor productivity. Even today many new publications support and develop further Solow's model.²

The experience of the new industrial states indicates that creating favorable conditions for investors is not the only prerequisite for attracting a sufficient amount of investments.³ This is so because new technologies consist not only of modern equipment, but also of know-how, skills, and new types of organization. It has been determined that to introduce new technologies successfully, newly industrializing states should actively develop their scientific research sector and achieve a high level of education. South Korea, one of the new industrial countries, is good example of this.

Until the middle of the 1960's South Korea offered cheap labor and developed low-level technology and labor-intensive production. By the end of the 70's the country introduced capital-intensive production, such as steel production and shipbuilding. In the early 80's all efforts were directed toward developing knowledge-intensive sectors, including the production of computers and semi-conductors. The country had to put considerable efforts in developing science and education to achieve these goals. Expenses for scientific research increased 14 times during the period 1980-1992. The same tendencies were observed in education. In 1951 only 2.5% of the state budget was allocated for funding education, while in 1985 the number went up to 22%. The countries with the most dynamic development during the last decades, such as Singapore, S.Korea and Japan, are among the top four countries, whose high school students achieve the highest results in mathematics and science.⁴ On the contrary, countries that attract foreign capital solely on the basis of cheap labor and do not allocate sufficient funds for subsidizing education and scientific research cannot advance to a higher-level of economic development.

As we can see, education, science, and technology have created the wealth of so-called developed market economy countries. The primitive notion gaining popularity in our country has noting to do with the truth. Intellectual achievements have always been the foundation for social and economic progress. Any country without them is doomed to backwardness and impoverishment.

Introduction of new technologies leads to further liberalization of society because it brings forth-personal freedom and initiative. It depends to a great extent on the way in which stratification and inequality are realized among people. For inequality to exist, people should be allowed to compete among themselves with the different abilities they possess. We can distinguish two types of inequality - external and internal. External inequality means gaining a higher social and economic status not as a result of one's personality qualities and efforts, but rather because of some external factors called privileges. Internal inequality secures a higher status based exclusively on one's personal qualities and talents.

From a historical viewpoint, economic stratification has gone through different stages. In feudal aristocratic societies economic stratification was based on the privileges provided by the feudal state. More precisely, this happened through inheriting or conferring titles of nobility which, in turn, led to obtaining land and estate and resulted in a significantly higher living standard. It is obvious that external inequality dominates in a society based on the institutionalization of political and economic privileges.

Later, in the classical capitalist society, this stratification was based on acquiring and inhering private property. Can we classify private property as some kind of privilege in this case? It is apparent that after accusing or inhering property, a person gains external advantage over other who does not possess such property. Even if we admit that he acquired property because his intellect and talents surpass those of his opponents, still, we cannot classify it as an internal advantage because this person's superiority manifested itself in a certain situation in which incidentally he out-rivaled the others. However, in a different situation in which competitors, superior in intelligence and talent, appear, the property this person has already acquired will certainly be an external advantage and will allow him to prevail over the others who do not own such property. We can discern private property as a privilege even more clearly under circumstances where it is inherited by the children who have no personal contribution to its acquisition.

In this sense, similar to aristocratic society inequality in classical capitalism is external, but in this case it has an exclusively economic basis provided by the privileges of private property. Internal inequality is possible only when individuals compete among themselves in a relatively equal external condition. Even though mobility in capitalistic societies is much greater than that in aristocratic societies, capitalistic societies still remain pseudo-liberal in nature.

In totalitarian socialist countries inequality had a political nature because it was based on privileges provided by political power. Those that gained a higher social status were people who succeeded in becoming a part of the party and state structures. They were usually called nomenclature. This type of inequality, however, did not have economic characteristic because the nomenclature did not possess the means of production. As soon as they left the political elite, they lost their economic power as well. The managers in capitalistic societies find themselves in a similar situation, and for that reason they may be treated as a type of capitalistic nomenclature.

As D. Bell points out, the development of intellectual technologies in the modern world will provide a leading role to the intellectual class, which will bring about a new type of stratification.⁵ According to him, the people who succeeded in business in the societies of the 20^th century were ambitious, aggressive, assertive, and merciless. They will be replaced, however, by post-industrial societies which, following their own logic, will be meritocratic. In these societies status and income will not depend on inheritance and possession of property, but on intelligence, on the talents and the education of the people. This will be, as he points out, a society based on the principles of equal opportunity. It will provide all people with equal opportunities, regardless of their origin. Modernity, according to him, will be based on the principles of openness, change, and social mobility. Apparently, this type of society will be the first truly liberal society in human history and will enable every person to realize his capacities and ambitions to the greatest possible degree. Meritocracy will probably be the capitalism of the 21^st century.

Recent surveys indicate that modern societies are developing in this very direction. We can give as an example a survey conducted in USA by Herrnstein & Murray.⁶ Using the long-lived American tradition of measuring intelligence, as well their own survey based on the data collected by the National Longitudinal Survey of Youths (NLSY) which included 12 000 young people aged 14 to 22, Herrnstein & Murray follow the connection between people's intelligence and the class structure of modern American society. As a result, they determined the emergence of a new stratification based on intelligence, or, as the authors call it, cognitive abilities. Using the statistical distribution of the population according to their IQ, Herrnstein & Murray define five cognitive classes. According to them, the brightest young people of the United States become involved in a narrow stream of elite education and job providing them with a high living standard. This creates a cognitive elite which is beginning to gradually isolate itself from the rest of society and to transform itself into a closed community, inaccessible to others.

The emergence and development of the cognitive elite in the recent years has resulted in an increasing number of professions demanding higher intellectual abilities and a larger number of qualified specialists. According to Herrnstein & Murray, these specialists are engineers, professors, doctors, mathematicians, and scholars. The gradual concentration of society's cognitive elite is directed toward these professions. The average IQ (Intelligence Quotient) of the people of it is 120.

The process of concentration of the cognitive elite in highly prestigious professions can be traced clearly in higher education. In 1900 the major part of young people with high cognitive abilities were out of college due to economic reasons. At that time only 2% of incoming college freshmen had an IQ of 115 or above. Later, however, the number opportunities for intelligent young people to receive higher education constantly increased. The old selection system based on class, religious, or regional affiliation was replaced by selection according to cognitive abilities. In 1925 only 60% of the smartest young high school students had the chance to go to college, while in 1960 young people with a 100^th IQ percentile had a 100% chance of getting into college.

Segregation based on cognitive abilities continues after college graduating because the occupations requiring higher intelligence are much better paid than the others. The parents' material status is no longer a determining factor of the children's social status. Youth people who belong to the bottom 5% of the population with the lowest intellectual capabilities ability are 15 times more likely to be poorer than those in the top 5% with higher intelligence. These young people who have an IQ of about 100, but whose parents are chronically unemployed, have worked only low-paid jobs and do not have high school education, have about 90% chance to escape poverty by the age of 30.

Unfortunately, today some of the countries in transition neglect the fact that social and economic development is very complex process, and using purely ideological grounds, assert the view that this process is based on a single principle - the fundamental importance of market relations. Because of this, such an ideology can be named market fundamentalism. Apparently, it opposes pluralism which takes into consideration the complexity and the contradictory nature of social processes. The principles of market fundamentalism in the economy spread to every sphere of social life. Thus, they will be able to gradually transform modern pluralistic society into fundamentalistic ones.

In democratic societies the institution provide equal opportunities is the state. Its most important function is to provide equal opportunities to all children, regardless of their background, by redistributing income in favor of the poor strata of the population. By opposing the distribution function of the state, the advocates of liberal market economy object to the principles of equal opportunity.

They destroy all perspectives for social advancement of children coming from poor families by asserting the view that social security and free education should be eliminated. If this happens, it will create a caste society in which a hereditary oligarchy will rule, while due to economic reasons, many talented young people will not have the opportunity to receive adequate education and will be forced to be under-employed. This means that any country build its economy on the principles of market fundamentalism risks becoming a poor and underdeveloped state in a world in which only the nations that invest in the development of their most talented representatives continue to progress. That is why in any democratic state every power should be limited, including the power of money.

Endnotes

¹R. Solow, "Technical change and the aggregate production function," Review of Economics and Statistics 39(1957): 312-320.

²D. Greasley and L. Oxley, "Explaining the United States Industrial Growth, 1860-1991: Endogenous versus Exogenous Models," Bulletin of Economic Research 48.1 (Jan. 1996): 65-82, W. Nonneman and P. Vanhoud, "A Further Augmentation of the Solow Model and the Empires of Economic Growth for OECD Countries," Quarterly Journal of Economics 111.3 (Aug. 1996): 943-953.

³N. Hanna, S. Boyson and Sh. Gunaratne, The East Asian Miracle and Information Technology (Washington, D.C.: The World Bank, 1996).

⁴P. Wingert and S. Greenberg, "At the Top of the Class," Newsweek 2 Dec. 1996: 54-55.

⁵D. Bell, The Coming of Post-Industrial Society (New York: Basic Books, 1947).

⁶R. Herrnstein and C. Murray, The Bell Curve: Intelligence and Class Structure in American Life (New York: the Free Press, 1994).