18
DEC
2011

Crisis as an Opportunity

Along with dealing with the symptoms, the crisis can herald the start of a new era in human society

In medicine, diagnosing an illness is considered a good thing. It allows us to pinpoint the problem and treat it. The same applies to the economy. The economic and financial crises are global, affecting virtually every country in the world. It is hard to estimate the overall damage of the crisis, as we are nowhere near its end, but it is clear that the crisis is a continuation of the downturn of 2008, and that it is the greatest economic and financial challenge the world has had to face since the 1930s great depression. The way in which governments, federal banks, and international financial institutions handle this evolving, expanding crisis will have a major impact on the future of the planet.

Every crisis presents an opportunity. The current one presents an opportunity to examine the state of the global economy, the global financial system, the state of economic and financial relations in the international system, as well as the social relationships within each country, and even within each business. Introspection is not a process performed while in euphoria. Rather, it is done out of the plights and distress of crises.

In truth, the global crisis is not confined to the economy. It is just as acute in education, domestic issues such as divorce and domestic violence, ecology, and the dwindling natural resources of the earth. Every so often Nature “reminds” us of our fragility through an earthquake, a tsunami, a hurricane, or some other natural disaster, but by and large, the immediate and foreboding effect of the global financial crisis makes the ideal wakeup call for us to reconsider the premises on which our economy, and indeed society are based.

The Challenges Posed by Globalization

The great depression of the 1930s and the failure to resolve it with the paradigms of classic economics led economist John Maynard Keynes (1883-1946) to develop the Keynesian model. This model asserts that to assure economic growth there must be active intervention of the government in the financial markets.

Eight decades later, the Keynesian model has proven itself a failure. It does not resolve the global economic crisis, which started as a financial crisis and evolved into a crisis in the real economy of the entire world, reflected in unemployment, salary cuts, and resultant social disorders. The failure of the old and familiar financial models led Nobel Prize Laureate, Joseph Stiglitz, to declare, “In a way, not only there is a crisis in our economy, there ought to be a crisis in economics.”[1]

However, for a new economic paradigm to succeed, it must take into account the new conditions that have arisen in the human society of the 21st century. The world has shrunk to become a small village, in which interdependence and mutual influence among its parts are growing. We have become a global-integral system, comprised of interconnected elements, obligatorily tied to one another, affecting one another, affecting the future generations, and for the most part, adversely.

Thus, according to a report by the Sustainable Europe Research Institute (SERI), “Humans today extract and use around 50% more natural resources than only 30 years ago, at about 60 billion tons of raw materials a year. …Given current trends of growth, our extraction of natural resources could increase to 100 billion tons by 2030.”

Another adverse effect of globalization is concentration of power and wealth. According to a press release by Credit Suisse, “Less than 1% of the world’s adult population … own 38.5% of global household wealth.” This release taps into the core arguments of the Occupy movement that has emerged in the fall of 2011 in numerous cities across the U.S. and around the world.

Much has been said about the repercussions of globalization. The New York Times columnist, Thomas Friedman, author of the World Is Flat: A brief history of the twenty-first century, introduced in his October 11, 2011 column two theories that represent the two ends of the debate concerning the impact of globalization. The first theory is that of Australian environmentalist, Paul Gilding, author of The Great Disruption. Gilding said, “I look at the world as an integrated system, so I don’t see these protests, or the debt crisis, or inequality, or the economy, or the climate going weird, in isolation—I see our system in the painful process of breaking down,” which is what he means by the Great Disruption, said Gilding. “Our system of economic growth, of ineffective democracy, of overloading planet earth—our system—is eating itself alive.”

An opposing theory is that of John Hagel III, who sees the current situation as a beginning of a “big shift,” stemming from a combination of globalization and the information revolution. According to Hagel, today is the beginning of a time of thriving for humanity, albeit today we feel it as pressing due to our continued use of inefficient institutions and practices.

At the end of the day, according to Hagel, we are in the midst of an era of a vast global flow of ideas, innovations, and opportunities for profits through collaboration. Hagel believes that the great task ahead “…calls on us to learn faster by working together and to pull out of ourselves more of our true potential, both individually and collectively.” Whether we lean toward one or toward the other, both approaches show us that the crisis has arrived just in time to be a wake up call.

Indeed, we are called upon to adjust the economic and social systems to the requirements of the global-integral system that is the world today. However, to realize our potentials, a fundamental shift in the thought processes and financial conduct that led us into the crisis is required. Just as the great depression of the 1930s led Keynes to form a more suitable economic paradigm for his time, we must change our current paradigms and adapt them to the reality of a global and integral world, if we wish to emerge from the current crisis stronger. The crisis enables us to see that in such a world, the old paradigms have become dysfunctional, and the best example of that is the capitalistic paradigm.

Capitalism in the Time of Globalization

The global crisis has put two of the tenets of capitalism to a test that that they seem to be failing. Those tenets are that supply and demand balance themselves, and that by working in one’s own interest, an individual actually benefits the public. To pinpoint the issue, let’s return to the origins of capitalistic thought. In his 1776book, The Wealth of Nations, Adam Smith wrote, “As every individual … endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”[2]

For this reason, adds Smith, “The demand for those who live by wages, therefore, necessarily increases with the increase of the revenue and stock of every country, and cannot possibly increase without it. The increase of revenue and stock is the increase of national wealth.”3

Smith’s assumption that supply and demand balance themselves through an “invisible hand” determined the rule that leads capitalistic thinking to this day—that the individual’s aspiration to maximize profits leads to the maximum profit for the entire society. However, the primary condition that contemporary economic thinking developed—as a necessary precondition for an efficient free market—is free competition. The market must include an unbounded number of manufacturers and consumers, all of whom posses all the relevant information, none of whom has any effect on the prices in the market, and the cost of transportation of goods is inconsequential in relation to the trade itself.

Those conditions were supposed to manifest in the global world in the most ideal form. The development of global trade increased the number of manufacturers and consumers in the market, and significantly lowered the cost of transportation of goods. The information revolution of the internet also contributed a great deal to the competitiveness and to presenting the complete information in the hands of manufacturers and consumers. It would therefore make sense that we should be experiencing the free market economy at its glory. How then did we end up in a global crisis that we cannot seem to resolve?

The reason for the emergence of the global crisis is that while globalization increases the chances of certain classical assumptions to come true, it also contributes to the undermining of another supposition: the surmise regarding the connection and mutual effect of the elements in the market. In a world where the free market is behaving according to Smith’s ideal, people work in their own interest and are neither affected by others nor affect their well-being. Yet, people are not living in an isolated bubble. People are social beings, whose well-being is interdependent with that of others, and that interdependence is experienced today more than ever before. This influence of social relationships among people introduces an element that is seemingly not factored into Smith’s theory.

Multiple studies describe the social integration that the world is currently undergoing, as part of the process of globalization. Among the most noted is the study of Dr. Nicholas A. Christakis and Prof. James Fowler, made famous in their book, Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives—How Your Friends’ Friends’ Friends Affect Everything You Feel, Think, and Do. They conclude that “The spread of influence in social networks obeys what we call the Three Degrees of Influence Rule. Everything we do or say tends to ripple through our network, having an impact on our friends (one degree), our friends’ friends (two degrees), and even our friends’ friends’ friends (three degrees). …Likewise, we are influenced by friends within three degrees.”[3] Our health, wealth, and indeed happiness are largely a function of what people three degrees of remoteness from us think and do.

Likewise, Prof. Ludger Kühnhardt, director of the Center for European Integration Studies in Bonn stated, “The 21st century, unlike the period after the Congress of Vienna, is no longer a zero-sum game of winners and losers. Rather, it is a century of multiple networked nodes.”

Negative Externalities

One example of the influence of human interconnectedness on economic dynamics is called “negative externalities.” This term concerns the cost inflicted upon one by an action to which that one has no connection. Thus, if a factory pollutes a nearby lake, killing the fish in that lake, it inflicts harm on the fishermen whose livelihoods depend on the fish in the lake. This is a negative externality.

The traditional solution involves supervision by the authorities. Yet, overproduction and over pollution abound despite the supervision, and despite the mounting evidence that we are living in an interconnected and interdependent world. The methods that leaders and decision-makers are trying to apply to deal with the problems of our interconnected world are the same methods they have used for decades, when the world was far less connected and interdependent.

The question is not whether decision makers will have to revamp their approach to solving the global crisis, but how much will taxpayers have to pay before they realize it and act on it.

Into the Future

The failure of capitalism, as expressed in the current crisis, demonstrates the immediate need to build a new economic paradigm. The heads of the Organisation for Economic Co-operation and Development (OECD) and the International Labor Organization (ILO) have recently issued a warning that “the overall number of unemployed is still at 200 million worldwide, close to the peak recorded at the depth of the Great Recession.” Even in the G20 countries, “The analysis … expresses concern that employment may … grow at a rate of just under one per cent (0.8) until the end of 2012, resulting in a 40 million job shortfall in G20 countries next year [2012] and a much larger shortfall by 2015.”

In light of the perilous future, rising food prices, and the intensification of social unrests throughout the world, it is clear that a new paradigm is required, one that suits the new, globally interconnected world of the 21st century. The new paradigm must take into account the integral and interdependent nature of the world today, and instead of the obsolete concept that man’s selfishness will ultimately lead to greater common good, there is a need for perceiving humanity as a complex entity, whose elements are interdependent. Moreover, the rate at which the crisis is spreading and escalating indicates that the window of opportunity before us is closing. We are living on borrowed time, and should therefore hasten our steps toward the transformation. The only question is, “What kind of transformation should that be?”

One possible description of it can be found in the words of director general of the World Trade Organization (WTO), Pascal Lamy: “The real challenge today is to change our way of thinking—not just our systems, institutions or policies. We need the imagination to grasp the immense promise—and challenge—of the interconnected world we have created. The future lies with more globalization, not less — more co-operation, more interaction between peoples and cultures, an even greater sharing of responsibilities and interests.”[4] In his closing words, Lamy predicted, “The future lies with more globalization, not less—more cooperation, more interaction between peoples and cultures, and even greater sharing of responsibilities and interests. It is ‘unity in our global diversity’ … that we need today.”

Putting Words into Actions

The new world is pushing people closer, forcing us to care for one another in genuine solidarity, and to rethink aggressive competition and excessive consumerism. It is leading us, kicking and screaming, into harmony with the laws of the global-integral system.

To adapt ourselves to this global-integral world, we must study how it works, how all the elements are connected in the industry, in banking, and in government systems. Therefore, the key to success lies in the proper system of education that informs people of the nature of the world today. This education program will not only inform, but also help us practice new codes of communication and human relations, thus educating us on how we should build our social relations to survive in an interconnected world.

As noted by Lamy, the continued evolution of humanity toward globalization and integration are a certainty. If we learn how to adjust our interrelations and economy to the new reality, we can achieve harmony and balance with the laws of the new system. This new balance will entail mutual guarantee (each person guaranteeing the well-being of others), social solidarity, genuinely free education for all, rethinking our use of natural resources, and harmony in the global economy.

As long as we remain in our current perception of the world, our understanding of the essence of the change under which the world is going—forming a new, and mandatory economic-socio-ecologic balance—we will not know how to operate correctly. Only if we reeducate ourselves and learn about the new reality will we understand its causes and the nature of the change required of us. Through education, we will understand that we must overcome the elements that separate us on all levels, and that we must unite in ties of mutual guarantee. When we achieve that, we will discover that the new reality is also a giant opportunity. The transformation of thought is the key to our success and to global prosperity. And without this global crisis, we would never deem such a transformation desirable or even feasible.


[1] http://www.dictionaryofeconomics.com/resources/news_lindau_meeting (the above-mentioned statement is in Stiglitz’s video at 10:05 minutes.

[2] The text in bold was emphasized by author of this essay

[3] Nicholas A. Christakis and James Fowler, Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives—How Your Friends’ Friends’ Friends Affect Everything You Feel, Think, and Do (NY: Back Bay Books, 2011), 26

Leave a Reply