SPEAKING
FREELY Asia to follow serfin'
USA? By Joergen Oerstroem
Moeller
Speaking Freely is an Asia
Times Online feature that allows guest writers to
have their say. Please click hereif you are interested in
contributing.
In 1944,
Austrian-British economist Friedrich Hayek
published The Road to Serfdom arguing that any form of collectivism
- he targeted communism and fascism - would lead
to the destruction of all individual economic and
personal freedom. Under Hayek's banner,
politicians such as US president Ronald Reagan
and
British prime minister
Margaret Thatcher led the struggle against
communism, socialism and the social welfare state.
It is one of history's strange paradoxes
that unwillingly they and others sharing their
philosophy have led us into a situation where the
individual finds him/her in exactly the situation
against which Hayek warned so eloquently and
convincingly. Two illusions have emerged: the
illusion of ownership through the boom in leasing
and the illusion that one can live a risk-free,
consequences-free life.
After the end of
the duel between capitalism and communism in 1991,
centralization of capital has put economic
decisions in the hands of the few, turned
free-markets and free competition into a relic of
the past and removed any reminiscences of Scottish
economist Adam Smith's theory of the market acting
as an invisible hand.
Most of us looked
forward to liberal values with the individual as
owner of homes, cars and other durable consumer
goods, but it does not quite look that way. A
leasing economy has taken the place of the market
economy. Financial institutions provide money to
the consumer conditioned on de facto ownership
until the loan is paid back. The operation of the
debt market is based on revolving credits that
serve to perpetuate themselves and protect the
financial institutions rather than to truly serve
borrowers and consumers.
The large
outstanding loans indicate that payback
increasingly fills the role as exception to the
rule relegating individuals to leasing property
and goods. Looked at in the terms of capitalism
and communism, this is much more communism than
capitalism, albeit with the difference that large
funds instead of state-owned assets control
economic activity. The owners of quite a few funds
are anonymous and the funds are not always listed
on the stock exchange and are not always subject
to the rules of transparency. The public does not
know who owns their homes through mortgaging or
their cars through loans. A labyrinth of faceless
intermediaries has replaced the age-old direct
link between debtor and creditor.
Not many
will step forward to defend the workings of
centrally planned economies as they utterly
failed, but you have to look for brave people to
find praise for the workings of capitalism since
1990, it having delivered several financial crises
and accumulated wealth and income into a few
hands. The capitalistic model has proven itself as
a superior growth machine, but has squandered the
opportunity to allocate wealth in an equitable way
and lay the foundation for sound and stable
economic development. Furthermore, it is beginning
to rub out the very core market principles that
should have been its lodestar.
How has
it come to that? The property market in the
US and parts of Europe, with rising prices and
reckless lending by many financial institutions,
is the obvious starting point. By offering very
attractive loans, financial institutions lured
potential homeowners to buy beyond their means.
The loans did not draw interest or payback for an
initial period. The lender and the borrower hoped
that the value would go up, offering the
opportunity to extend the loan or even increase
the loan.
In many cases, elderly people
joined this wagon by borrowing to finance their
old-age consumption, not having a sufficiently
large pension. They mortgaged their home with the
result that after their death the home would not
go to their children but to the real owners: the
mortgage institution. The operation of the debt
market weighs heavily on revolving credit that
serves to perpetuate itself and protect the
institutions behind it rather than to truly serve
borrowers and consumers.
As the subprime
crisis in the US shows, this was simply
irresistible to almost the whole range of
financial institutions entering this market,
inventing new financial instruments to reallocate
and resell the loans between financial
institutions. Millions of people jumped into this
frying pan, rejoicing in being homeowners without
realizing that they were nothing of the sort, in
reality transferring their homes from individual
ownership to institutional ownership.
Even
worse. As falling home prices do not yield
sufficient money to redeem original loans, buyers
depend on lenders to offer terms stretching over
many years. They become serfs as Hayek warned, not
of the state but of financial institutions with an
obscure ownership having little or no interest in
softening the economic blow for millions of
people.
The stock market shows a similar
pattern. In 1965, individuals owned the majority
of US stocks, with 84% and only 16% in the hands
of institutions/funds. In 2005, institutions owned
67% and individuals 33%. Ordinary common sense
tells that control over the large part of
corporations in the US has changed from individual
stockholders to institutional ones with the
inescapable observation that the whole panoply of
measures to ensure corporate governance geared to
the old model had to be changed. The misery of
the individual is being almost completed by the
credit card business. Outstanding debt is growing
enormously and is now about US$900 billion, equal
to 7-8% of current US gross domestic product. Each
month, credit cards holders pay to the companies
16% of outstanding balances, but that figure
covers those who pay the full amount as well as
those carrying debt forward from month to month
with an interest rate of more than 13%. This
explains why it does not take long for some credit
cards holders to run up an insurmountable debt.
Analysis of the subprime crisis tells that
it is neither new nor special. Like all previous
crises, solutions will be found. Debts and assets
will be shuffled around between institutions. Some
individuals, corporations and financial
institutions will declare bankruptcy and after a
while the debt will have been brought down to a
manageable level.
But there is something
new behind the veil. And that is the obliteration
of individual ownership of homes and many durable
goods with the individual replaced by the real
owners the financial institutions and/or funds.
Inspired by British statesman Winston Churchill,
we might put it this way: never in the history of
mankind have so few owned so much taken from so
many who believed it was theirs'.
The
present debt crisis suggests a need for the
consumer to get back to the basic principles of
individual responsibility plus accountability and
for the financial system to reinvent ethics
prohibiting products that through their complexity
disguise risks and make the debtor and creditor
unknown to each other.
If not, the
unanswered question is what kind of society this
will bring about. Certainly not a liberal economy
and a market state with the invisible hand and the
individual in the driver's seat. The world may
enter an era of institutionalized economics with
capital, money, ownership and power to steer the
economy according to the wishes and preferences of
institutions.
As recent experience
suggests, that will tend to override signals from
the market, open the door to accumulate capital
value and make a virtue of short-term profits
irrespective of long-term consequences. The
potential for the individual to pursue his/her
preferences and safeguard economic interests will
be limited, very limited indeed. That is why
Hayek's prophetic words may come true more than 60
years after he wrote them and inside the kind of
society he thought would prevent this from
happening.
Asia is still in the early
phase of searching for an economic and social
model. At present, it is a mixture of Western
capitalism and Asian institutionalism. Further
down the road, Asia may have to follow either the
US and disown private ownership with all the
consequences that implies for economics and social
structure, or endorse the old-fashioned core
virtues of the market economy. It would be one of
history's whims if Asia swings towards the market
economy and private ownership at the very moment
these long-cherished assets lose favor in the US.
Joergen Oerstroem Moeller is
visiting senior research fellow, Institute of
Southeast Asian Studies, and adjunct professor,
Copenhagen Business School. The views expressed
are his own.
Speaking Freely is
an Asia Times Online feature that allows guest
writers to have their say. Please click hereif you are interested in
contributing.
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Times Online Ltd. All rights reserved. Please
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