[Viewpoint] Lessons from a crisis

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[Viewpoint] Lessons from a crisis

Economics and macroeconomic policies are going through a type of convergence. Keynesian textbooks, largely ignored in the macroeconomic field over the last three decades, came off dusty bookshelves to provide solutions to governments faced with a financial crisis unseen since the Great Depression.

World leaders joined Washington crisis fighters to rescue their economies with expansionary fiscal and monetary policies prescribed by old master John Maynard Keynes.

The fire has, for now, been contained.

And out the window went hitherto mainstream neoclassical economics based on rational expectations and faith in the market’s self-sustainable capability that preached the dangers of government intervention and the limits of the worth of expansionary monetary policies.

Of course, it’s the nature of the trendy to chuck out the old to move onto the new.

But it is too early to determine the future of neoclassical economics.

Keynesian solutions calling for government stimulus to pump liquidity and create demand in times of crisis carry merit.

But neoclassical disciples have warned that deficit spending and loose monetary policy can harm the economy in the longer run, backfiring by causing ever escalating costs. Their assumptions have been confirmed and developed over the years. We have no idea how today’s generous liquidity injections will eventually culminate.

We can date last year’s financial crisis to the past expansionary policies and low interest rates needed to bail out the technology and banking industries during the bursting of the dot-com bubble in 2002. Today’s aggressive policies without a well-timed exit strategy can produce an even more monstrous bill.

Macroeconomic policy works differently in the short and long runs. When to shift gears remains the most tricky and crucial move in economic policy making.

Equally unclear are microeconomic policies such as regulation and supervision. Pro-business and pro-market approaches are different, but many regarded them as one. As result, the largest financial institutions capitalized on their market positions to expand, pocket massive gains and ventured into risky investments for bigger returns. Policies meant to contain the problem at times wreaked havoc on the market and generated great pain and losses for many participants.

The market’s role does not end inefficient distribution of resources via prices. The market can contribute to the real economy in helpful ways when it provides an environment to incubate healthy businesses and spawn their creative and innovative output.

Innovations often come from unexpected places. If the market failed in its regulatory function, technology giants like Microsoft and Apple could use their market status to stamp out newcomers, exploiting their market value.

We must contemplate whether our own economic policies are also involved in this problem.

The government has removed the cap on cross-stakeholding among conglomerates, facilitating their defense of management control and hereditary management.

The Justice Ministry is also poised to allow a poison pill system to thwart takeover bids, which also works to help defend management control by local companies.

These new policies all serve to stimulate the market and investment.

But even if individual policies have merits in theory, they may not function in such a way in the real market.

The market is respected in economics because of its inherent ability to sift out weak and inefficient companies while promoting competitive and innovative ones.

If it loses this function, the policies have been pro-business, not pro-market.

The market must offer a dynamic environment that evolves and transforms through competitive forces, and competition must be fair.

The market must contain fundamental forces restraining concentration of power and inefficient management for the sake of efficiency and broader economic prosperity.

The voice and role of the antitrust Fair Trade Commission has become too muted during cries for greater market freedom.

Excessiveness and one-sidedness is a trap economic policies must not fall prey to at any time.

*The writer is head of Sogang University Graduate School of International Studies. Translation by the JoongAng Daily staff.

by Cho Yoon-je
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