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The challenges of the global economic system

comment pissarides today's global economic perceptions are founded on fundamental principles originally put forward by adam smith
Today's global economic perceptions are founded on fundamental principles originally put forward by Adam Smith

It is a system which appears to be compatible with different political perceptions

By Andreas Charalambous and Omiros Pissarides

The socio-economic challenges of the 21st century are universal in nature and the prosperity of any country relies largely on its ability to adapt to the rapidly changing realities and market conditions. Within this context, it is worth examining the theoretical underpinning of the global economic system, which reflects the evolving cultural perceptions.

Back in 1776, when Adam Smith released his timeless book ‘The Wealth of Nations’, economics was not considered a distinct science but rather part of a philosophical quest. Almost two and a half centuries later, the course of economies has been shaped over the years by factors and perceptions that have led to diametrically opposed models in different time periods and geographical areas. Nevertheless, today’s global economic perceptions are founded on fundamental principles originally put forward by Adam Smith and enriched with the theories developed by John Maynard Keynes, mainly in the 1930s.

Today, a significant proportion of humanity resides in countries operating within an international system of production and consumption with common characteristics. People living in the US, Europe, Russia, China or Africa are influenced by economic governance systems that share the capitalist view as a philosophical starting point. At the same time, consumption is increasingly based on similar patterns despite the significant cultural and religious differences of peoples.

comment pissarides john maynard keynes
John Maynard Keynes

A common feature of the modern globalised economic system is the operation of the market mechanism. Despite the existence of significant variants, the market mechanism commonly relies on private ownership and entrepreneurship that flows from private initiative, while it is based on free trade within the context of the World Trade Organisation.

Without a doubt, this universal model is surrounded by serious weaknesses, especially in terms of social inequality, the environmental dimension and climate change, as well as when it comes to tackling the phenomenon of demographic ageing. These weaknesses necessitate regulatory government intervention, as an essential complement to the private initiative.

In terms of the political dimension, the global economic system appears to be compatible with different political perceptions. In the US, Europe and other similar systems, the underlying principles include the rule of law, free elections and the guarantee of minority rights, while, internationally, the principles of peaceful settlement of disputes and respect for international law and intergovernmental agreements are added. At the individual level, such economic systems are based on free choice, diversity, gender equality and the right to free movement and immigration. Regrettably, these principles are not adhered to the desired degree by all countries. In fact, even within the EU certain countries, e.g. Hungary and Poland deviate substantially from these standards.

Over the last few decades, experience suggests that the prevailing economic system generally leads to an improvement in the standard of living, but it is also associated with side effects related to the distribution of wealth and the negative impact on the environment. It would therefore appear that today’s challenges require a new creative combination of the foremost ideas of Adam Smith and John Maynard Keynes – a combination that rests on a private enterprise-based economy, with a reformed state focusing on its strategic role and on smart regulation, without direct involvement in the production process.

Obviously, the current economic system is far from perfect and will continue to change within a connected world whereby information, scientific discoveries and technological inventions simultaneously form both the basis and the threat to our well-being. In this ever-shifting framework, it is vital that we clarify our economic perceptions in Cyprus as well since they create the bedrock for decision-making that will affect future generations.

The ultimate goal cannot and should not be the predominance of any system that is based on firm and outdated ideologies or preconceptions. On the contrary, we should strive to adopt and incorporate positive elements from different directions, aiming at the development of an upgraded and coherent system.

We should, after all, bear in mind that economic systems are not an end in themselves but rather the means to achieve the purpose of serving humans and the planet in general.

 

Andreas Charalambous is an economist and a former director in the finance ministry. Omiros Pissarides is the managing director of PricewaterhouseCoopers Investment Services

 

 

 

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