The emergency room

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Where do capitalism and democracy go from here? Thomas L Friedman and Pratap Bhanu Mehta in conversation with Shoma Chaudhury

Thomas L Friedman and Pratap Bhanu Mehta in conversation with Shoma Chaudhury at THiNK 2011
Photos: Shailendra Pandey

Shoma Chaudhury (Moderator):
The Occupy Wall Street movement may not be driven by any political thought. It may not have any solutions. But it is frustration, a global frustration we cannot underestimate and whose authenticity we cannot discard. This past decade, there’s been a lot of euphoria about globalisation — we’ve been told that if you let money do its work, benefits will trickle down and that one should not interfere with markets. But clearly that has not come to pass; that argument is discredited. What must take its place is something that I think thinkers across the world are grappling with. It is one of the most urgent questions of our time. To discuss that, that emergency room, we have Tom Friedman who, in many ways, has been the messiah of globalisation. He is, of course, the author of many influential books: The World Is Flat, Hot, Flat and Crowded and most recently, That Used To Be Us, which is about how and why America has gone wrong.

Also with me is Pratap Bhanu Mehta, who is the director of the Centre for Policy Research in Delhi and absolutely one of my favourite commentators and thinkers in India. He too has been a believer in markets and in liberal capitalism but recently he has been rethinking and repositioning his thoughts.

Thomas L Friedman
“I’m called the messiah of globalisation but I was just writing about it because I was excited about its potential”
Thomas L Friedman

SC: Let me start with Tom. You were, if not the messiah, certainly a believer in the excitements and potential of globalisation. You believed that it would drop the verticals, nation states would not be important, talented people could access each other and the world would become flat. We find today it’s just become more spiky. The New York Times said that just 1 percent of America has more wealth than 90 percent of America and that the top 25 corporate heads earn more than their companies pay in taxes. So what went wrong, Tom?
THOMAS L FRIEDMAN: First of all, simply in defence of my own arguments, I would have to really recast what you said. If you read The Lexus and The Olive Tree and The World Is Flat, my argument all along is that the State is actually more, not less. There is a school that [says] the State would disappear with globalisation; I was never in that school. I was in the school that said hardware is the overall macro-economic platform you use: socialism, communism, free markets. Software is the regulatory environment, the rule of law. Everything I write is about how you have to get that in the right balance and that’s really what I believed then, what I believe now. And I think what happened basically in the last decade — I know I’m here to speak about America but I find that’s what’s going on in India — was that basically our financial system grew so large, partly because it was able to tap into massive pools of global savings from China and elsewhere that was looking for higher returns. Something Indian economist Jagdish Bhagwati said that I really liked was that markets are designed to promote and fund creative destruction: the creation of new companies that will replace old companies. Wall Street really morphed into destructive creation. Basically, the financial system, in pursuit of higher returns, went into the business of betting on whether Lyndy’s sold more cheesecake than Strudels. And the returns built from that became so large that they eventually corrupted our political system. I’m not saying anything that I haven’t written already. Our Congress today has really become a forum for legalised bribery. It became a way to raise donations from Wall Street. So it got out of balance. We’re not going to get it into balance. That’s what markets do. I’m called the messiah of globalisation but I was just writing about it because I was excited about its potential. I was also the first person to write about the backlash of globalisation. I’ve been keenly aware it has its upsides and its down sides. The government has to cushion the worst and try to nurture the best.

Pratap Bhanu Mehta
“Capitalism and democracy go together only up to the point that capitalist structure is fair or getting fairer”
Pratap Bhanu Mehta

SC: Tom, if one really believed that you created this mess, then we wouldn’t be inviting you into the emergency room. But you’re still the doctor that we’re asking for the diagnosis. Pratap, I was just reading that there are two very interesting theories that have come up about this new phenomenon. Paul Gilding has called it the great disruption and John Hagel says that the loss of jobs is because of bad attitude. People need to pull their socks up and gear themselves for a braver, new world. Which do you think, Pratap, is the correct theory or do you have a third theory about it?
PRATAP BHANU MEHTA: I think one of the great lessons of this crisis is that we should be very careful about theories. This is the first crisis that was actually caused by intellectual complicity, not just crony capitalism. And if one were to characterise what that intellectual complicity was, it was basically to take a model and convert it into an invariant law. The first thing about a model is [that] it’s true only under certain conditions. You have to be intellectually, from a policy perspective, very sensitive to how those conditions are changing. I think the beauty of Keynesianism is not monetary expansion — it’s that the ceteris paribus clause is the most important part of a model.

So I think the question we need to think through is not the model, the theories. But what are the conditions we are confronting now and how might those conditions change and what will be appropriate for those conditions? So in that context, just two or three things. One, I think we have to be careful about characterising what the ‘it’ is here. As we know, markets have also come in very different varieties, they’ve been regulated differently. Even in the United States, 15-20 years ago, intellectual property rights had a different structure; financial markets had a different structure. So there have been different modes of regulation of markets. I don’t think that there’s any reason to suppose that this will require giving up markets. What it will require is, of course, a radical re-thinking of some of the current organisational forms. It’s not clear, for example, that profit motives are going to deliver the kind of technological innovation we need for, say, climate change. The intellectual property rights revolution has not always promoted innovation in fields like pharma. So there will be a certain rethink of organisational reforms.

 The OWS movement has seen thousands of youth protesting against income inequalities
Voice of dissent The OWS movement has seen thousands of youth protesting against income inequalities
Photo: AFP

The second element, the real heart of the matter, is capitalism and democracy go together only up to the point that capitalist structure is fair or getting fairer. Inequality of particular kinds is inherently unfair. Creative destruction is genuinely innovative in the kinds of products that emerge. And the third and the most important [element], which I think Tom hinted at, is that a liberal society is premised on what Michael Walzer once called ‘The Art of Separation’. The social contract says that you can make money but you cannot have it distort other aspects of human existence and processes. I think the real crisis in this occasion was that not only did money corrupt politics, which is the obvious case to focus on but its penetration into intellectual life. Think of the interesting complicity between the economics profession and Wall Street, the penetration into media. In fact, the slightly left-of-centre liberalism in the US, Europe, India was precisely about creating these barriers. And I think the focus will have to re-shift back to that.

SC: Tom, you mentioned regulatory frameworks. That for globalisation to have been a positive and have yielded all the potency that it had, there should have been great regulation and good frameworks. Pratap has brought up a very interesting dilemma, which is that actually corruption occurs where the synapse between money and government happens. And he’s argued in his columns that it’s a real dilemma because if you leave markets unregulated, it has its own corruptions. If government tried to regulate it, that’s where influence begins to work. So when we’re rethinking this new framework, how are we going to get around this?
TLF: Again, I can only speak from an American point of view. To me, there are several really basic reforms I think we’ve learnt we need. If a bank is too big to fail, it’s too big. You have moral hazard built into the institution. One of the things we’ve learnt here is that we have banks that are way too big to fail and, therefore, they have to be broken up. That’s been Paul Volcker’s argument. I think the second big change that again came out of this crisis is transparency. We had a global derivatives market that was basically completely opaque, so no one could see that one insurance company, AIG, had built up trillions of dollars of a risk that was vulnerable to any shift in the market and could destabilise the whole system.

SC: You’ve also written recently that America is finding it difficult to swim in a world that has a ‘Made in America’ tag. So can you talk us through a little bit about this idea of American exceptionalism? What are these qualities that you have faith in?
TLF: In the new book That Used To Be Us, which I wrote with my friend Mic – hael Mandelbaum from Johns Hopkins, we argue that America basically had a formula for success that goes back to our founding fathers. One, educate your people up to and beyond the level of technology. Second, have the world’s best infrastructure. Third, the world’s most open immigration policy to attract the most dynamic and energetic immigrants. Fourth, the best rules to incentivise risk-taking and prevent recklessness. Last, to have the most government- funded research to push the boundaries of science and technology so innovators and entrepreneurs could pluck them off and start new industries.

We argue in the book that basically we made two of the most fundamental errors a country can make at the end of the Cold War. The first was we misread our environment, which is the most dangerous thing a species can do. We thought the end of the Cold War was a victory and in many ways, of course, it was — it was a great victory for freedom. It also, in a wonderful sense, unleashed two billion people, just like us, able to compete, connect and collaborate. And just when we actually needed to lace up our shoes, we put our feet up. Then we compounded it with the first decade of the 21st century, after 9/11 by spending a whole decade tragically, maybe even necessarily, who knows, historians will decide, chasing the losers from globalisation called al Qaeda and the Taliban rather than the winners, India, China and Brazil and the others. So we really dug ourselves into a deep hole.

So then if you look at the five parts for that formula for success, what do you see today? Education: in our biggest cities, we have 50 percent drop-out rates from high school. If you don’t have a high school degree in today’s economy, there is no longer anything down there for you. The biggest company in Baltimore, Maryland, 50 years ago, was Bethlehem Steel. You could get a job there, drop out of school, join the union, get a good job, be able to buy a house, get a mortgage, two kids and a dog and retire. Today, the biggest employer in Baltimore is Johns Hopkins University, Medical Centre. They don’t let you cut the grass there at Johns Hopkins without a BA. So first we’ve fallen down on education. Second, infrastructure: We have a huge infrastructure deficit. You fly from Hong Kong to LA Airport, it’s like flying from the Jetsons to the Flintstones. You can really see the stark difference. Third: immigration. I would love all of you to come to America. But unfortunately, if you have been watching our Republican debates, it is basically a debate on who can build the most number of electric fences to keep the Mexicans out. So the sign we are putting up on our country is “Go Away”.

So we are off our game. We are off our five principles.

“Our Republican debates are usually about who can build the most number of electric fences to keep the Mexicans out” Thomas L Friedman

SC: Pratap, in India we are all feeling the same rumbles. Could you run us through a similar diagnosis of what is wrong with India?
PBM: Let me tell you two things very quickly. One, we have to acknowledge that different countries and citizens within the same country are positioned differently in relation to what’s going on. In India, you have both processes simultaneously — millions are clamouring to join capitalism as millions are disenchanted with it, because they see the destructive aspect it is taking. At one level, I think the story you’d tell about India would be similar to Tom’s. Infrastructure — no brainer. Education — no brainer. Government funding of science and technology innovation — no brainer. What is interesting is how industrial policy, in a loose sense, is back in all countries. Immigration — the real question is whether there can be any labour mobility for the poor, not for the skilled.

In fact, one of the critiques of this form of globalisation is precisely that. And even if you have labour mobility for the skilled, its effects on reducing global inequality are much less than labour mobility for the poor or lower middle class. So we stand differently on the immigration story. I think for us the critical question is the following: 20 years ago, we created — or there was at least an implicit assumption that we will create — a new social contract. The fundamentals of India’s position in the global economy, at the moment, give it certain advantages. It is true that demography adds two or three percent to your growth rate.

There’s a new paper by Ashok Modi which demonstrates that for Uttar Pradesh and Bihar. So, demography gives us an advantage. Labour costs give us an advantage. The flat world that Tom Friedman talked about actually does give us an advantage. In fact, that is the big structural challenge for the US, which is, even if they innovate, the imwhole manufacturing process and the catch-up ability of countries like China and India is much greater than what it was 15-20 years ago. So, at one level, this is [not] our game to lose. But the contract was the following, which is, you let private capital, appropriately regulated, free to produce high growth, that high growth will translate into high government revenues, even without raising taxes. As we did see for a 10-year period — 20, 30, 35 percent annual rates of increase in government revenue. That increase in government revenue needs to be deployed in all these things we are talking about — education, health.

In education, I think, at one level, we understand the dynamics. I think the demand side equation on education has changed. And there’s a real push from the bottom, which will transform our education system. It is happening despite the government. If you look at morbidity figures, malnutrition figures, that is the one issue — public health — which we really are lagging behind. And that is actually fixable. It doesn’t take much.

SC: Listening to both of you talking about changing structures, to me the elephant in the room is ethics. So, how does one create ethics? A dharma of capitalism?
PBM: If one puts on a historical hat, I think the dharma of capitalism is a much more complicated question. The brutal truth is that the dharma arises, not out of good moral intentions, but out of a competition of interest. Let me draw on something more mischievous, related to the financial crisis. It turns out that the attraction of money, in part, is that it is objective, unambiguous, not dependent on small closed hierarchies. So I think the very things that make democracy and equality exciting actually produce these pathologies.

TLF: It is actually that old-fashioned stuff that you give from temple, church, synagogue, mosque, parents, teachers and role models.

SC: Pratap, can you leave us with a last thought?
PBM: I think Tom is right. We are in now a different and complex social system. We need to get over our rigidity.

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