Speaker: Economic Crisis Highlights Need for Free-Market Reform

April 27, 2009 — World-renowned economist Jeffrey Sachs warned a University of Virginia audience Friday of continuing global economic instability and called for a profound rethinking of free-market capitalism.

Sachs delivered the keynote address at the McIntire School of Commerce's 2009 Spring Symposium symposium, held in Old Cabell Hall.

Sachs, who directs Columbia University's Earth Institute and is a special adviser to U.N. Secretary-General Ban Ki-moon, told a near-capacity crowd that 30 years of unfettered free-market capitalism have led to the "simultaneous conjuncture of at least three crises" requiring a fundamental rethinking of our society's values and the recognition that "we've hit an end to one way of organizing our society, and our relations to the world."

After his keynote address, Sachs was joined for a panel discussion by U.Va. faculty members James F. Childress, Hollingsworth Professor of Ethics and professor of medical education; William Morrish, Elwood R. Quesada Professor of Architecture, Landscape Architecture and Urban and Environmental Planning; Gowher Rizvi, vice provost for international programs; and Saras D. Sarasvathy, associate professor of business administration and a member of the Strategy, Entrepreneurship and Ethics Area at the Darden School of Business. The panel was moderated by 1977 McIntire alumnus Jeffrey Walker, former chairman and CEO of CCMP Capital.

Market Values

Sachs characterized today's triple whammy of crises — financial, environmental and humanitarian — as the result of 30 years of badly misallocated resources. Accordingly, he said, today's "most critical challenge" is that of deciding how the world's resources will be used and how they'll be distributed throughout the population.

How did the allocation of resources get so badly out of whack? In Sachs' view, the answer is the near-complete surrender of political, moral, ethical, social and economic power to the forces of free-market capitalism.

"We need a robust and value-based approach to the resource challenge," Sachs said. "Instead, we have turned it over almost fully to the free-market economy alone in the past 30 years. That's the way resources have been allocated. Rather than ground the economy in a broad set of social institutions and a broad set of values, we let the market economy become unhinged. And it has become unhinged in a way that has now created a worldwide crisis."

Checks and Balances

Indeed, Sachs said, the world has long known that while markets are very powerful organizing tools for the exchange of goods and services, they can be extremely dangerous if left to their own devices. In fact, he pointed out, in order for markets to do what they're supposed to do — raise living standards and improve human wellbeing — they must be embedded in the broader society, working in complement with government institutions, powerful civil society forces and robust communities. Otherwise, Sachs said, "Things can go seriously wrong."

Three Problems

The reason things can go so wrong, he explained, is that markets are characterized by three fundamental shortcomings that necessitate their governance by other social institutions.

First, he said, markets are inherently unstable. "As much as we would like to think that markets are self-organizing institutions … we've learned over the course of 200 years, and especially since the Great Depression, that there are inherent reasons why the kinds of financial crises that have hit our economy in the last couple of years are not profound aberrations, but are the kinds of shocks that can regularly hit a market system if the markets are not properly managed by regulatory processes."

Over the course of the past 30 years, Sachs said, as the United States pursued a willy-nilly course of deregulation, "We forgot a lot of lessons."

Second, he argued, markets cannot ensure the humane distribution of income. Sachs pointed out that while the advent of global capitalism has, without question, brought hundreds of millions of people out of poverty, it has nevertheless left a billion people "struggling for survival every day" and "tens of thousands of people dying every day of poverty." In America, Sachs said, 30 years of unchecked free-market ideology has left us with a life expectancy that ranks 36th in the world, a broken public education system and "an underclass that is unique in the high-income world in the extent of poverty and hunger in our own midst."

Third, Sachs said, markets do not protect the physical environment. In part, he said, this is because the world has largely treated the natural atmosphere as a commons, and "market systems don't function properly in the commons." In addition, he said, future generations — who have a profound interest in how the world's "natural capital" is used — are unable to participate in the current natural dialogue on natural resource allocation. Moreover, he said, because markets lead people to think in terms of discounting future values into present values, "Markets actually direct us to use up resources, not to protect resources for the future."

Sachs scorned those who argue that climate change isn't real, pointing out that there is broad scientific consensus, backed by an array of scientific data, indicating the reality and urgency of global climate change. He saved his particular ire for The Wall Street Journal's editorial page — notable for its longstanding denial of global warming — calling it "an editorial page of such profound irresponsibility that it's probably the worst single page in worldwide journalism because it's the most important page for our national and therefore our international business community."

Trouble Ahead

Unless we are able to radically — and rapidly — retool free-market ideology such that it is firmly grounded in social, ethical and moral values, Sachs said, we can expect continued instances of traumatic financial instability.

Worse, he said, we can expect further geopolitical instability, born of resource scarcity resulting from environmental change and the rich world's unwillingness to provide meaningful aid to the world's poorest citizens.

Pointing out that almost every conflict zone right now — Afghanistan, Somalia, Yemen, Sudan, the frontier provinces of Pakistan — is also a "hunger hot spot," Sachs described today's current course of thought and action as "extraordinarily dangerous."

Such conflicts, Sachs said, "will keep coming until we recognize a basic truth, which is that unstable, hungry, impoverished societies can't function. And there's no way in the world that the market economy by itself is going to pull Somalia out of its trap of extreme hunger, poverty, disease and instability."

But There is Hope

For all his apocalyptic tidings, however, Sachs did offer a hefty dose of hope: the potential contained in new ideas, many of which are likely to be incubated in the world's great universities.

"There isn't one thing I said," Sachs told the audience, "that doesn't have a solution within our grasp. The solutions lie not in the limits of our technology, or our economy or our ability to fund change, but rather in our morals and in our intentions and understanding of these problems."

Indeed, Sachs said, we know from years of hard experience what needs to be done to stabilize markets—but we have to decide to do it. Likewise, he said, "there is nothing unsolvable about extreme poverty." With a small amount of money and through thoughtful development programs, enormous gains in food production, health, education and infrastructure can be achieved. Climate change, too, Sachs said, can be tackled with new technologies and by attaching a cost to the production of carbon emissions.

But most fundamentally, Sachs said, "We have to decide to do these things. It's really a matter of decision."

The Future Is Here

If such decisions are to be made, Sachs said, we'll need "frank public continuous discussion about values — because markets don't produce values; they reflect values."

And universities, Sachs opined, will likely play a key role in the generation of such values. "The values we need to live in a prosperous, peaceful, sustainable world have to be values that arise out of reflection, out of thought, out of discussion and debate," he commented. "And that's what universities do such a wonderful job of doing."

Sachs also said that the implementation of new ideas and programs will require a generation of highly skilled and intelligent managers, such as those that the McIntire School strives to produce.

Indeed, Sachs said, great universities such as the University represent treasure troves of ideas and expertise that must be harnessed.

"I believe that universities are unique institutions because they bring together the knowledge — the physical sciences, the policy sciences, the management sciences — that needs to come together to address these challenges. No other institution in our society has that intellectual capability, that range, that flexibility, that ability to draw all these different sectors together."

Sachs ended his talk on a hopeful note, and one that called on audience members to make the most of their own potential, as well as the opportunities presented within a university community.

"Our generation's challenge will be the challenge of sustainable development — how to live together on a crowded planet, how to harness the energies of the markets within a broader social commitment to fairness, to human rights, to environmental sustainability," Sachs said. "We're going to need everything our society can muster. And I believe that great universities like the University of Virginia will lead the way."

— By Mary Summers Whittle