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January 20, 2013, Sunday

Bringing a new perspective on the global economic architecture (3)

This is my last article focusing on the common denominators reached at the Antalya Forum held last month. Recent developments in the world economy that are being discussed extensively, such as the fiscal cliff, excessive expansion of balance sheets, printing too much money, currency wars, trade protectionism, etc. have shown once again that in order to create a working economic order, with the parameters of a sustainable future, the code or mode of conduct, and the patterns of individual as well as corporate behavior should be restructured with a different payoff matrix.

As I have been discussing in this column recently, to accomplish this we need a working and reliable institutional setting. Historically, issues such as corporation law and capital accumulation were approached with different perspectives in specific societies, which consequently resulted in dissimilar economic structures and levels of development. In that regard, the role of property rights, the nature of incentive schemes, decision-making structures, and information and coordination mechanisms should be designed so that the relationship between the system, entrepreneurship and morality can be more aptly defined.

Looking at empirical evidence, Adelman and Morris (1999) have shown the role institutions played in successful growth and development in the 19th century experience. They found that institutions determine the nature of the market by dictating property rights, land tenure and its allocation, the distribution of assets, human resource development, the size and the structure of transportation investment, and crucial relative prices affecting the speed of agricultural and industrial change.  

As an alternative to the current system, therefore, institutionalizing a new incentive system around a new payoff matrix for our daily economic behavior is both possible and necessary. This is because institutions form the incentive structure of a society, including political and economic entities. Economic performance reflects the nature and the quality of the institutional framework that economic agents operate in. While private material incentives reward proper economic behavior with a greater share of national output, moral incentives promote man's sense of altruism and his sense of responsibility toward the general or social good. The use of moral incentives assumes that social recognition and approbation are just as important as the provision of material goods in motivating proper economic performance.

While “globalism” essentially means a self-enclosed economic and technological world -- but one without political, legal or moral boundaries or limits -- it is religion and/or ethical considerations that locate the human being in a metaphysically open context which goes beyond the confines of homo faber. This requires a common understanding of humanity in so far as it is based in an absolute realm that transcends all finite economic prospects, regardless of geographical or temporal scope.

The important point to note is that as long as moral capacity and creativity are motivated by the correct institutional framework, the operation and performance of the free market system will also be enhanced, and this will bring further material benefit to society in terms of an increased spectrum of choice, employment and quality of goods and services. What we are trying to do here is to prevent the entrepreneur from causing harm to the free market system as well as to the society in general and therefore facilitating sustainable development while maximizing material wellbeing.

To sum up, in order to carry out economic activities effectively, each system makes its own assumptions about human behavior and accordingly establishes its own institutional and organizational mechanisms so that: 1) they can organize the process of decision-making arrangements employed by economic agents, including the government; 2) they can devise a mechanism that provides information and coordinates decisions made by consumers, producers and the government as to consumption, production and the use of inputs, so that the production and consumption of the proper basket of goods and services are guaranteed; 3) they should be capable of enforcing property rights for a broad cross-section of society so that a variety of individuals have incentives to invest and take part in economic life; 4) they can provide the material or moral incentives to regulate the activities of economic agents; 5) they should be able to constrain the actions of elites, politicians and other powerful interest groups, so that these people cannot expropriate the incomes and investments of others or create a highly uneven playing field; 6) they should provide some degree of equal opportunity for broad segments of society so that individuals can make investments, especially in human capital, and participate in productive economic activities.