What can be done to fight inflation, monopolies and financialization of the world economy?

Restructuring the world economy in the face of financialization and its consequences is a challenge. Today, the situation is not as dramatic as it was during the Great Depression, but only because governments are supporting demand through huge budget expenditures and unprecedented increases in the money supply. For example, the Bank of England has set the lowest interest rate in its history since 1644.

In 2008, central banks, avoiding the collapse of the banking system, expanded deposit insurance and rescued many financial companies, managing, albeit barely, to keep the economy from collapsing.

There are views that the established free market system is fundamentally sound. According to these views, all that is needed to remedy the situation is minor reforms, increased transparency and additional regulatory measures, such as restrictions on payments to top managers of financial organizations.

 

The importance of limiting payments to top managers

 

As part of the fight against financialization, restrictions on payments to financial executives are proposed to remove incentives that encourage short-term risk-taking and profit maximization at the expense of long-term stability. High bonuses and compensation are often tied to current financial performance, which motivates top managers to make risky decisions for the sake of short-term gains. By limiting payouts, such incentives can be reduced and managers' attention can be directed toward sustainable company development, long-term investment, and real economic efficiency rather than temporary financial successes.

However, the fundamental theoretical and empirical preconditions that underlie a free market economy are highly approximative and ambiguous. Nothing less than a total revision of the principles on which free economies and societies are built is needed.

 

Possible solutions to the problems

 

One of the key points to emphasize is a re-conceptualization of the free market. While the profit motive remains a powerful and effective driver of market economies, it is important to realize that unlimited freedom to this incentive is not always the best way to maximize efficiency. The experience of the last thirty years has amply confirmed this several times over.

The market is an extremely effective tool for coordinating the complex economic activities of a multitude of participants, but no more than that - it is a mechanism, a machine. And like any machine, it needs competent management and regulation. Just as a car can pose a threat if driven by a drunk driver, or save lives by bringing a patient to the hospital, the market can be both a source of prosperity and a cause of destruction. And just as an automobile can be improved with better brakes, a more powerful engine, and fuel efficiency, the market can be improved under the free market concept.

There are many models of capitalism, and the free market is only one of them, far from perfect. The last three decades have shown that, contrary to the promises of its proponents, it slows economic growth, increases social inequality, and leads to more frequent and larger financial crises.

 

There is no perfect model

 

The Anglo-Saxon model of capitalism differs markedly from the Scandinavian model, which in turn has its own peculiarities compared to the German or French models, not to mention the Japanese model. For example, there are countries for which the level of inequality seen in the US is unacceptable. Alternative models can reduce income stratification among the population by introducing different versions of the “welfare state”. Sweden, for example, uses high progressive income taxes, while Japan is known for its restrictions on excess profits and large stores. It is not easy to choose between these approaches, although the Swedish model is often considered more successful than the Japanese model. At the same time, one should not blindly follow capitalist dogma and ignore its negative aspects.

 

Proven recipes for combating problems

 

Reforming the economy in the face of the negative effects of financialization requires the application of proven recipes that have already yielded results in the past. One such recipe is to rebalance the financial and real sectors of the economy. Joseph Stiglitz, the renowned Nobel Prize-winning economist, suggests introducing measures that would limit the too rapid transfer of financial resources between sectors. This can be achieved through increased taxation of short-term financial transactions, known as the Tobin tax. This tax was proposed by James Tobin and aims to reduce speculative transactions, thereby returning priority to long-term investment in production.

Another effective method is to increase control over lending activities and reduce the concentration of financial risk in large financial institutions. Economist Paul Krugman, also a Nobel laureate, notes that one of the key factors in the 2008 crisis was lax regulation of the mortgage market and complex derivatives that concentrated risk. Krugman proposes stricter capital requirements for banks and the separation of commercial and investment banking (a return to the principles of the Glass-Steagall Act). This would avoid systemic risks and make the banking system more resilient to crises.

It is also important to return to policies that incentivize reinvestment of profits in production rather than in speculative market operations. Economist Mariana Matsukato suggests measures to support innovation and the real sector through public investment in science, infrastructure and technology. This will ensure long-term growth by strengthening the economy and reducing the impact of financial speculation. Mazzucato also insists that CEOs should be held more accountable for long-term results, which can be achieved by linking their remuneration to the sustainability of the company rather than short-term financial success.

In general, the world economy is not doomed, the main thing is to decide in principle on transformation and gradual transition to a more hybrid model of capitalism with a partially planned one, which has worked well in Scandinavian and East Asian countries.