Fair capitalism or bankruptcy | Japan time

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Global crises have increased in frequency and intensity over the past 20 years, with worrying implications for future economic development.

The World Bank warns that the poverty reduction effort has suffered its “worst setback” in a quarter century, due to the COVID-19 pandemic. Inequalities are growing within and between countries and in many key sectors, from education to health.

Given the magnitude of these problems, public policy cannot focus solely on income and wealth. The situation calls for a holistic approach with long-term horizons. Otherwise, subsequent governments will always be tempted to seek short-term improvements with immediate political payoffs (such as increased household purchasing power), rather than investing in future well-being. We will need to quantify the necessary trade-offs so that politicians can explain to voters why they should accept having a little less now to gain more later.

We also need to be careful about how we measure inequality. Is it fair to demand that developing countries reduce their greenhouse gas emissions at the same rate as advanced economies, even if the latter have historically contributed much more?

The challenge for decision-makers is to adopt strategies that are both global and granular, adapted to specific contexts. Otherwise, there is a good chance that measures aimed at correcting one type of inequality will induce new ones. We can fight climate change by subsidizing new solar panel installations, but we must be prepared to hear complaints from those who already reduced their carbon footprint before the introduction of state incentives.

Advocating for equity in all its dimensions requires a broad perspective on inequality – a frequent consequence of zero-sum dynamics, rent-seeking, “private taxes”, free-riding, corruption, discrimination, etc The most salient forms of inequality change over time, often evolving with the broader legal environment. At the end of World War II, work was considered a basic right, while during the pandemic access to high-speed internet at low prices became a top priority.

The ever-changing nature of these issues implies the need to broaden the concept of social welfare, so that policies do not end up simply perpetuating insider benefits. It must also become more adaptive, so that we can cope with challenges such as climate change and energy price spikes. And it must develop new tools (such as universal basic income) to help disadvantaged and marginalized people overcome long-standing structural barriers and take calculated entrepreneurial risks (which ultimately benefit society). whole society).

The concept of social return should guide policy development. In education, for example, we know that developing human capital from early childhood provides the best long-term return on investment. But social policy does not necessarily mean public or state action. We must remain open to using markets in situations where they add value. For example, in pension systems, a funded pillar can ensure that the greatest number of people benefit from the generally higher returns of the markets, rather than being stuck with the lukewarm returns of the pay-as-you-go system.

Taxation is another key lever in the fight against inequality, as it generates the revenue needed to support inclusive social policies and reduces income and wealth gaps. This is not about treating wealth itself as a problem. Instead, we should follow philosopher John Rawls’ principle of difference, that inequalities are only justified if they benefit those most in need. The research of the economist Philippe Aghion shows that innovation satisfies this condition: if it increases the weight of the richest 1% (in income and wealth), it also tends to increase social mobility and it does not increase not necessarily inequalities with the rest of the population.

That said, the current structure of taxation could be improved to achieve desirable goals such as simplicity, efficiency, stability, fairness (eliminating loopholes that only benefit the wealthy), better incentives (to working or protecting the environment) and neutrality (so that a euro earned in one year is not taxed more than a euro earned in ten years).

Finally, an essential step in the reform of contemporary capitalism consists in reviewing the rules of competition. The market is far superior to any centralized system when it comes to price discovery and the dissemination of economic information; but it must also be rigorously supervised and regulated by the public authorities. Regulation and enforcement to ensure competition has become all the more important now that digital and robotic technologies have restructured markets and ushered in what Harvard Business School’s Shoshana Zuboff describes as “surveillance capitalism”.

The pathology is reflected in a sharp and growing inequality of business performance. In 2016, the White House Council of Economic Advisers noted that “a 90th percentile company sees returns on capital investments more than five times the median. This ratio was closer to two just a quarter of a century ago. Moreover, as Aghion shows, the top 1% of exporters now account for 67% of all exports, while the top 1% of patent filing companies account for 91% of patents and 98% of references in research papers ( an indicator of the most valuable patents). The margins of the top 10% of companies have increased by 35% since the early 2000s and their profitability has increased by 50%, indicators that have stagnated for most other companies.

The changes proposed above would mobilize the widespread demand for fairness in the service of efficiency, guaranteeing genuine equality of opportunity for individuals and companies. The alternative is a return to a rigidly hierarchical society with less freedom for all but those at the top of the pyramid.

It remains to be seen whether the current string of financial, environmental and geopolitical crises will provide momentum for the kind of change needed. The danger is that they could just as easily become a distraction or, worse, an excuse for fatalism and complacency.

Bertrand Badre, former managing director of the World Bank, is CEO and founder of Blue Like an Orange Sustainable Capital and author of “Can Finance Save the World?” (Berrett-Koehler, 2018). Yann Coatanlem, economist and fintech executive, is president of Club Praxis and author of “Capitalism against inequalities” (Presses universitaires de France, 2022). © Syndicate Project, 2022

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