Schadenfreude Capitalism

Project Syndicate January 5, 2012

larger | smaller

comments: 5

PRINCETON "“ The protracted financial and economic crisis discredited first the American model of capitalism, and then the European version. Now it looks as if the Asian approach may take some knocks, too. Coming after the failure of state socialism, does this mean that there is no correct way of organizing an economy?

In the aftermath of the subprime crisis and the collapse of Lehman Brothers, fingers were pointed at the United States as an example of how badly things could go wrong. The American model had supposedly failed, its reputation weakened first by the Iraq invasion, and then by the financial crisis. Anyone who dreamed of the American way of life now looked stupid.

Immediately after Lehman Brothers' collapse, German Finance Minister Peer Steinbrück put this diagnosis as a challenge not only to the US, but also to other countries "“ notably the United Kingdom "“ that had "Americanized" their financial system. The problem, Steinbrück argued, lay in over-reliance on highly complex financial instruments, propagated by globalized American institutions: "The financial crisis is above all an American problem. The other G-7 financial ministers in continental Europe share this opinion."

Criticism of America did not stop there. Steinbrück's successor, Wolfgang Schäuble, persisted in the same tone, attacking "clueless" American monetary policy, which was supposedly designed only to feed the American financial monster.

But such criticism ignores the problems faced by banks that did not use or deal in complex financial products. Bank regulators had long insisted that the safest possible financial instrument was a bond issued by a rich industrial country. Then came the eurozone's sovereign-debt crisis, with its roots in lax government finance in some (mostly southern European) countries.

Critics now had a new focus. Naturally, many conservative Americans were delighted by the imminent failure of what they saw as Europe's tax-and-spend model, with its addiction to a costly and inefficient welfare state.

They were not the only critics. The chairman of China Investment Corporation, Jin Liquin, commented skeptically on a proposed Chinese bailout of Europe, which he called "a worn-out welfare society" with "outdated" welfare laws that induce dependence and sloth.

Criticism of large European transfer payments may have some justification, say, insofar as French, Greek, and Italian civil servants could indeed retire young. And restrictive labor laws have indeed discouraged many firms from hiring new workers. But such criticism captures only one small part of Europe's difficulties.

The fiscal problems of Greece and Spain were also the result of spending a great deal on high-technology and high-prestige projects: facilities for the Olympic Games, new airport buildings, high-speed train links. And Spain and Ireland before the crisis did not have a fiscal problem, owing to the rapid economic growth produced by a real-estate boom that seemed to promise a new era of economic miracles.

One of the most widely used Chinese terms of recent years is ???? (xìng z?i lè huò), best translated as "schadenfreude": somebody else "“ some other society "“ tripped on an enormous political banana peel. Asian critics looking at America and Europe could easily convince themselves that the Western model of democratic capitalism was collapsing.

But haven't similar capital investments and soaring property prices also been an increasingly important part of China's transformation since the 1990's? Chinese citizens are now not only frustrated with the high-speed trains' increasingly obvious imperfections and inadequacies, but are also wondering whether their government has set the right priorities.

Schadenfreude comes in several flavors. Russia's Prime Minister Vladimir Putin and Argentina's President Christina Kirchner liked to think that their versions of a controlled economy and society built in the aftermath of default on foreign debt offered a more viable alternative to cosmopolitan international capitalism. Both now face major problems with disillusioned populations.

In short, the world's major economies share many more vulnerabilities than is commonly supposed. A response to global challenges based simply on schadenfreude may promote a short-term sense of well-being, as people often like to think how lucky they are to have escaped a mess that originated elsewhere. But soon they encounter their own banana peel; indeed, today's global economy is a riot of slipping economic models. And tomorrow the cacophony will be even louder.

So, is there any absolutely sure way of organizing economic life? If the quest is for a way of securing perpetual security or dominance, then the answer is "no."

Underpinning comparisons of different models is the wish to find an absolutely secure way of generating wealth and prosperity. In a market economy, however, competition rapidly leads to emulation, and high profits associated with an original innovation turn out to be transitory. From a longer-term perspective, there are only temporary surges of relative wealth, just as there are only temporary surges of apparent success in a particular way of doing business.

During the Industrial Revolution in Western Europe in the late eighteenth and early nineteenth centuries, the pioneers and innovators in textiles, steel, and railroads were not, on the whole, rewarded with immense riches: their profits were competed away. The late nineteenth and the twentieth century produced a different sort of growth, because public policies and resources could be used to protect accumulated wealth from the otherwise inevitable erosion stemming from competitive pressure.

Behind the idea of a particular model of growth was the belief that a sensibly ordered state could somehow capture and eternalize the fruits of economic success. Like it or not, states cannot organize themselves in that way any more than individuals can.

Harold James is Professor of History and International Affairs at Princeton University and Professor of History at the European University Institute, Florence. He is the author of The Creation and Destruction of Value: The Globalization Cycle.

You might also like to read more from Harold James or return to our home page.

Share Tweet

Reprinting material from this website without written consent from Project Syndicate is a violation of international copyright law. To secure permission, please contact distribution@project-syndicate.org. var OB_langJS = 'http://widgets.outbrain.com/lang_en.js'; var OBITm = '1292502431965';var OB_raterMode = 'none';var OB_recMode = 'rec'; var OutbrainPermaLink='http://www.project-syndicate.org/commentary/james63/English'; if ( typeof(OB_Script)!='undefined' )OutbrainStart(); else { var OB_Script = true; var str = unescape("%3Cscript src=\'http://widgets.outbrain.com/OutbrainRater.js\' type=\'text/javascript\'%3E%3C/script%3E"); document.write(str); } print recommend Send link clip secure rights COMMENTS

You must be logged in to post or reply to a comment. Please log in or sign up for a free account.

COMMENTS

You must be logged in to post or reply to a comment. Please log in or sign up for a free account.

Username Password New registration Forgotten password bkkopp 08:09 04 Jan 12

Schadenfreude is often an understandable but short-lived impulse. Three points seem to stick out:

1. Economists and historians of economy do not seem to have sufficiently proven that property bubbles always have a highly destructive effect. The downside of 'boom and bust' has a high material and social, and yes human, cost. It does not seem to be established thinking, particularly not in home-owner-societies, that property bubbles offer unearned, and frequently untaxed, income to property owners, and on the downside, yes, property owners loose their equity in the property, but large numbers of worker that were employed by the property boom, see Spain, Ireland and the US, loose their jobs and their economic existence. It should be a priority policy goal to avoid property bubbles.

2. The European-type welfare state, including those elements that equally exist in the US and elsewhere, are not sustainable. Restrictive labor laws, and over-regulation in general, not only discourage firms from hiring, which is particularly relevant in Italy and Spain, but more generally discourage entrepreneurship. This erodes the job base in a more permanent way than just a cyclical downturn.

3. There is no sure way to organize an economy. A prosperous economy is rather like liberal democracy - never perfect and the future is always uncertain.

Zsolt 10:25 04 Jan 12

Brilliant overview article!

To me these are the two most important paragraphs:

"...In short, the world’s major economies share many more vulnerabilities than is commonly supposed. A response to global challenges based simply on schadenfreude may promote a short-term sense of well-being, as people often like to think how lucky they are to have escaped a mess that originated elsewhere. But soon they encounter their own banana peel; indeed, today’s global economy is a riot of slipping economic models. And tomorrow the cacophony will be even louder..."

"...Underpinning comparisons of different models is the wish to find an absolutely secure way of generating wealth and prosperity. In a market economy, however, competition rapidly leads to emulation, and high profits associated with an original innovation turn out to be transitory. From a longer-term perspective, there are only temporary surges of relative wealth, just as there are only temporary surges of apparent success in a particular way of doing business..."

In short whatever the external clothing of a certain society is, the internal drive is the same for each nation and individual: how much profit can I generate for myself, regardless of what others are doing, even if I have to exploit them and the environment around me. The best example today is Europe, where although each participant understands the necessity of staying together they still cannot extend beyond their own comfort zone to help out others, as even the basic trust, or mutual consideration is missing from their connections. And it is the same truth from the other side as well, the countries in trouble do not feel their responsibilties that with their reckless spending they threaten the whole economical collaboration.

So is there a solution then?

Yes, but instead of short term reflex and panic reactions and actions first we all need to "sit back behind the schoold desks" in order to study this global, integral, interconnected system we evolved into, which interconnected system made all our previous methods, attitude and solutions obsolete. It seems leaders and public alike still do not dare to digest the complete attitude and lifestyle change we are obliged to make in order to come out on top of this crisis and start building a sustainable future.

It is as if we want to ignore evolution around us, although we have a chance to step forward in a huge qualitative leap, building a completely new humanity where meaningful peace, global cooperation, global prosperity for each and every human being could become reality.

Humans are truly the most sophisticated living creatures with multiple talents and vast capability to adapt. All we need is to establish the proper foundations we can build on.

And in the global world the proper foundations mean a mutual, considerate, necessity based human model working together in an equal manner for the benefit of the whole. We need a system where the strength and weaknesses of each individual and nation are taken into consideration and are balanced out.

Regarding motivation to accept this foundation the deepening and unstoppable global crisis is providing the push from behind, and the vast amount of objective, scientific studies explaining the nature of global world and how humanity could harness it in a positive way provide the positive pull from the front.

We can decide which driver we want to use.

gamesmith94134 07:07 05 Jan 12

Gamesmith94134: The plot thickens on the rise of the redback---- Aug 20th,2011

Nervous Americans peg their greenbacks to yuan (worth about 4.9, not the other way around. Does Mr. Gary Shteyngart's description in the overstretched America depends on the forbearance of its Asian creditors really thicken the plot on the rise of redbacks became stranger than fiction? I assume the exchange rate was not applying to the role or key of the dollar, but a part of fantasy based on the zero-sum balance equated if it does apply. Then, shouldn't Boeing sell more planes to China 15% cheaper after the fact of the assumption of the zero-sum balance is being effective, or China should have raise the price above its market value in China by 15% to compensate the currencies exchange rate difference? So, if it is based on the zero-sum balance on Sovereignty debts; it is not a solution on the exchange between the dollar and yuan; and it is not appropriate policy on the fair trade practices at the market price either.

Why did the American buy Chinese goods? It was economical and successful because its value was above the American's similar goods available or fit to market need by the marginal pricing at a lower rate. In a word, it is cheaper and more acceptable than American made products by the American consumers.

In retrospect of the 70s, since the open trade between American and Chinese, the standard of living in China was about 1/10 of American, as in $300 to $3000 estimated; so the products from China was relatively cheaper at a fraction of American market price after they were profitable and imported. However, the cost of imported American's product to China was beyond the marginal pricing acceptable by most Chinese; then, the trade deficit turned into sovereignty debt for American which accumulated in 1.2 trillion dollars to-day.

Did America take advantage on Chinese to cut inflation by importing Chinese merchandise during the 80s when yuan was 8.6 in its exchange on a dollar? Or it was alarming after American realized its creditor Chinese owned more than 8% of its debts? We may not get a proper answer off the questions if each takes its political stands of sovereignties and not to ameliorate on the advantage and disadvantages with the system to trade. Perhaps, the culprit is not the exchange rate or the status of the dollar that takes the facilities of its role or key as the writer suggested; but differences on the standard of living implicit a viable exchange; it illustrates as profitable and beneficiary results. When Sino- American trade was available; American took the route of high tech, Chinese absorbed the burden of labors.

It was all agreeable till the trade deficit shown. It means American consumed more of the Chinese than they sold to China; and more strive to survive in the basis of the standard of living in America. It is because they did not buy Chinese products in yuan, and they paid in dollar. Only the trader or merchants profited from the exchanges on the differences on the standard of living; or American consumer benefited on the cost in cutting the effects on the inflation to meet the standard of living.

When we understand the failing economy, it was the imbalance on the supply and demand in the Keynesian term; but individual standard of living constrains inflation and deflation with the marginal survival or trade viable. If we attempt to compare the rate of exchange and the economies with American to Chinese in searching the comfort zone; I do not think either one will give up its stability to respond. However, the situation to the north and south under the Euro; at equal currency, separated themselves with creditors and debtors. So, exchange rate may not be significant to its balance; it is still the standards of living made their difference.

In the moment of time, it is how the choice and opportunity makes trade viable; and equality in standard of living by sovereignties is not feasible.

May the Buddha bless you?

GreedyPig 01:32 05 Jan 12

The author is not being intelectually honest as most of those anglo saxon economists which became ideoligically orphan when everything they believed to be true was suddenly destroyed by the invisible hand.

1. The European states with the most protective, more generous and inteventionist welfare are the countries with the highest living standards in the world and having the healthiest economies.

2. Has everyone already forgot that in 2009, there was a world wide agreement from every developed and developing countries to flush money into the economy to stimulate it aprevent it to fall from the abyss caused by the catastrophic anglo saxon recession acumulating huge amounts of debt in the process?

3 Has everyone forgot that the FED and the ECB flushed trillions of dollars into the bankrupt finance sector in order to prevent systemic failure thus transfering huge amounts of the bankrupt finance sector debt to the states balance sheets???

4. And that soon after the morally bankrupt ratings agencies started a series of downgrades of the debt of the most vulnerable European countries virtually blocking their access to bond markets with a spiral of self fulfiling propecies/downgrades???

5. Has everyone forgot that the morally bankrupt economists of the Chicago school have sold the idea that free trade was beneficial to the western citizens even though they have to compete with different rules (no human rights protection, low wages and benefits, indicriminate pollution, currency dumping, social dumping)? Look at where are a the manufacturing jobs now? When was the last time you touched some gadget or toy which was not made in Asia regardless of the brand?

6. The western consumer was left either without a job or with a lower paid (adjusted to inflation) job, or with a precarious job.

How do you expect the western citizen to propser or have money to buy products and return his earned money back into the economy?

Specially when all the income is going to a small group which is acumulating it and removing it from the economy?

7. The western governements were hence left without a large chunk of their corporate and individual tax revenues. So how do you expect them not to accumulate debt just to maintain what already existed?

And please do not even bother talking about GDP growth, ask any average Chinese, Malaysian or Singaporean what happened to the cost of living in these countries.

This current winner takes all globalised system exported by the united states to the rest of the world is only able to proceed in asia as long as an army og migrant workers is willing to leave their families behind, live and work in horrible conditions and retire back to their home town to reuinte with their families after 10 or 20 years.

Lets face it, American capitalist screwd the western citizen in the name of corporate profit.

RedBaker 07:48 05 Jan 12

The subprime housing crisis was brought about by HUD quotas for low-moderate income mortgages. The quotas applied to Fannie Mae and Freddie Mac, and all the big banks which wanted to expand. The quotas were 30% in 1995, and increased steadily to a preposterous 56% of all mortgages in 2008. The collapse was a foregone conclusion, virtually mandated by our genius government.

Add to this the other government interference in the market - cheap money from the Fed, threats from the Dept. of Justice, political support from both parties, and the seven-layered sleeping regulatory monster (Fed, Controller of the Currency, OFHEO, SEC, Treasury, FDIC, Office of Thrift Supervision). Government required the extreme risk, and regulators ignored the extreme financial peril.

Most commentators know nothing of the causes, but that does not stop them from condemning the "free market" which in truth was nothing but big government gone awry. The news media, academia and the intelligensia are all rewriting history, absolving government.

Wall Street should have defied HUD and refused to finance the scheme. I wonder if they have learned anything.

AUTHOR INFO Harold James Harold James is Professor of History and International Affairs at Princeton University and Professor of History at the European University Institute, Florence. He is the author of The Creation and Destruction of Value: The Globalization Cycle. MOST READ MOST RECOMMENDED MOST COMMENTED What Can Save the Euro? Joseph E. Stiglitz Fragile and Unbalanced in 2012 Nouriel Roubini A Summit to the Death Kevin O'Rourke Occupy the Classroom? Dani Rodrik The New International Economic Disorder Mohamed A. El-Erian A New World Architecture George Soros America's Political Class Struggle Jeffrey D. Sachs Did the Poor Cause the Crisis? Simon Johnson The Second Great Contraction Kenneth Rogoff To Cure the Economy Joseph E. Stiglitz Rethinking the Growth Imperative Kenneth Rogoff When China Rules Ivan Krastev The Exchange-Rate Delusion Michael Spence Who Will Fix the US Economy? Henry Mintzberg Two Models for Europe Hans-Werner Sinn ADVERTISEMENT PROJECT SYNDICATE

Project Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.

Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 54 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.

PROJECT SYNDICATE Capitalism Then and Now Harold James Is globalization reversible? Do currencies rise and fall like empires? How does culture influence economic development and performance? ...read more European Observer Dominique Moisi Can American global leadership be replaced or shared? How will Europe's large and growing Muslim communities affect European policy toward the Islamic world? ...read more The Rebel Realist Joschka Fischer Has the project for European Union reached its end? Is further EU enlargement antagonistic to deeper integration? ...read more © Project Syndicate 1995 - 2012 How to become a member | Member papers | Support us | About us | Contact us _bizo_data_partner_id = 790 var OBCTm='1292510578203'; var _comscore = _comscore || []; _comscore.push({ c1: "2", c2: "8756795" }); (function() { var s = document.createElement("script"), el = document.getElementsByTagName("script")[0]; s.async = true; s.src = (document.location.protocol == "https:" ? "https://sb" : "http://b") + ".scorecardresearch.com/beacon.js"; el.parentNode.insertBefore(s, el); })(); _qoptions={ qacct:"p-f8E80KYHdFRZg" }; (function(w, c) { (w[c] = w[c] || []).push(function() { try { w.yaCounter6251587 = new Ya.Metrika({id:6251587, clickmap:true}); } catch(e) { } }); })(window, 'yandex_metrika_callbacks');

You must be logged in to post or reply to a comment. Please log in or sign up for a free account.

Schadenfreude is often an understandable but short-lived impulse. Three points seem to stick out:

3. There is no sure way to organize an economy. A prosperous economy is rather like liberal democracy - never perfect and the future is always uncertain.

Brilliant overview article!

To me these are the two most important paragraphs:

So is there a solution then?

Humans are truly the most sophisticated living creatures with multiple talents and vast capability to adapt. All we need is to establish the proper foundations we can build on.

We can decide which driver we want to use.

Gamesmith94134: The plot thickens on the rise of the redback---- Aug 20th,2011

In the moment of time, it is how the choice and opportunity makes trade viable; and equality in standard of living by sovereignties is not feasible.

May the Buddha bless you?

Read Full Article »

Comment

Show comments

Schadenfreude Capitalism

Related Articles