Money Matters: Modern economics in a global world

By Tucker Slosburg The Daily Record Newswire While a Senate report released this week called for stricter regulation regarding the financial market, the world thought-leaders of economics called for something more last weekend at Bretton Woods. No, it's not 1944 and the conference participants were not establishing the International Monetary Fund, but, yes, most participants agreed that we need to rethink our conception of macroeconomics and modern finance. The original 1944 Bretton Woods conference in New Hampshire came about as Allied nations sought to rebuild after the war. The Institute for New Economic Thinking, a group formed in response to the recent financial crisis and dedicated to developing alternative and new ways of understanding economic thinking, sponsored last week's conference. It's no wonder, then, that Bretton Woods arose again -- the world had drastically changed; its economic models had not. In a conversation with Martin Wolf, the chief economics commentator for the "Financial Times," and Larry Summers, former director of the White House National Economic Council, Summers indicated that macroeconomics, particularly academic programs, failed to grasp the applied aspect of the field by focusing too heavily upon theory, thus ignoring some of the realities of the world, particularly in areas such as options theory, principle agent theory, efficient market theory ... the list continues into areas of nuanced study that I don't purport to understand. Wolf asked Summers if these fields provided use, or merely served as academic exercise (I'm being polite as to what Wolf actually said). Summers responded cautiously that overspecialized fields do provide frameworks for understanding the economy, but we may not see it for some time. He also added that anger and dissatisfaction with current reforms or the current system do not and should not provide a blueprint for proper financial reform. Honest, but cautious. Just as technology has increased exponentially over the years, so too has the world of modern finance and economics, but it appears that the academia models failed, in part because our conception of finance and global economies remains outdated. We never grasped a realistic account of how global economy functions -- to some extent we never had to. After all, the first Bretton Woods conference established the U.S. dollar as international currency. But now, 60 years later, we've come out of our cave to realize the world has changed. To be sure, the rest of the world is increasingly accepting democracy and embracing parts of capitalism, but as of right now, it hasn't necessarily improved the well-being of those in need, nor has it benefited us at home -- scores of articles document the widening economic inequality. "People all over the world are indeed demanding more environmental protection, more public goods, more education, more health care, more decent jobs, more economic security, more political participation, and more social capital. These are the key determinants of well-being. This is also where the growth reserves of the world lie. ... One lesson of the crisis and of the revolution in the Arabic world is that neither autocratic capitalism, nor market democracy did deliver those goods." That was from Professor Jean-Paul Fitoussi's report "Capitalism, Socialism and Democracy: What Lies Ahead?" Just as the Middle East is realizing a new type of democracy rooted in and adapted to its own culture, so too must America and Europe reassess how democracy and capitalism relate in the future. The current financial crisis and slow recovery should not be viewed as a singular indictment of democracy or capitalism, but rather a realization of the mutual stodginess to preserve a pre-globalized conception of international commerce. As I see it, free markets and democracy still provide the optimal chance of social mobility, but the failure of proper regulation allows for a skewed market. If nations failed to regulate under a pre-crisis model, how ought we to regulate moving forward? On this subject, Summers hits at the crux of the regulation issue: ignorant regulators versus one co-opted by the industry they seek to regulate? What incentives exist for a knowledgeable and un-co-opted person to take a regulatory post as opposed to making money working within the industry? Is it nobility or altruism? Nobility and honor are the key traits of an aristocracy. Say what you want about democracy, America is about self-reliance, social mobility, conspicuous consumption, and wealth accumulation. ... Not because we are selfish (well, partly), but because we believe those traits ultimately provide service or products for our fellow countrymen. In short, if regulation doesn't pay, then why do it. Ultimately, though, we still have no new model moving forward with regards to macroeconomics, global capitalism, and variations on democracy. In some ways, it's the post-war era all over again. We have a re-emerging economy, a new global order, and the opportunity to re-shape the world. Still, until we develop a method of functioning regulation and develop a more comprehensive way to understand global markets, we will continue to inch by instead of shooting forward. Published: Tue, Apr 19, 2011