Social Market Economy – Third Way or Compassionate Capitalism Social Market Economy – Third Way or Compassionate Capitalism? Marcus Marktanner, American University of Beirut, Lebanon Prepared for: Birzeit University, Institute of Law Ramallah, Palestine, December 4, 2008

Social Market Economy – Third Way or Compassionate Capitalism? Table of Content Liberalism: One Way Socialism: Another Way Social Market Economy (SME): Which Way? SME: A Superior Way? SME: How to Pave the Way? Embarking on the SME: A Rocky Way Conclusions

Social Market Economy – Third Way or Compassionate Capitalism? Liberalism: One Way Was not the first political economy Mercantislism  Physiocracy  Liberalism Classical Economics: Smith, Ricardo, Marx Neoclassical Economics: A Natural Law? A theory of allocation without distribution Liberalism: A games without rules The First Globalization Wave (1870-1929) 1929: Great Depression and the End of Liberalism From Liberalism to Keynes

Social Market Economy – Third Way or Compassionate Capitalism? Socialism: The Other Way Physiocracy recycled Why was Marx a Classical Economist? Efficient Allocation vs. Just Redistribution Justice of what? Efficiency, consumption, opportunity? A theory of distribution without allocation Socialism: No market game The Marxian Legacy in Developing Countries 1989: Fall of the Berlin Wall and the End of Socialism From the End of Socialism back to Liberalism

Social Market Economy – Third Way or Compassionate Capitalism? Social Market Economy: Which Way? What’s the difference? Combining market efficiency with equal opportunity The market is in the heart, yes But, the market needs to be in order SME: The market as a game with rules Ordoliberalism: The state defines the rules of the game How? Theory matters, but history, too! Order policy requires principles of economic policy

Social Market Economy – Third Way or Compassionate Capitalism? Social Market Economy: A Superior Way?

Social Market Economy – Third Way or Compassionate Capitalism? Social Market Economy: How to Pave the Way? (1) Build fiscal capacity to become more equal and productive

Social Market Economy – Third Way or Compassionate Capitalism? Social Market Economy: How to Pave the Way? (2) Because investment in social opportunities creates economic ones

Social Market Economy – Third Way or Compassionate Capitalism? Social Market Economy: How to Pave the Way? (3) And vice versa

Social Market Economy – Third Way or Compassionate Capitalism? Social Market Economy: How to Pave the Way? (4) And Social and Economic Opportunities Create Higher Incomes

Social Market Economy – Third Way or Compassionate Capitalism? Social Market Economy: How to Pave the Way? (4) The East Asian Tigers Example

Social Market Economy – Third Way or Compassionate Capitalism? Embarking on the SME: A Rocky Way Different countries require different policy priorities Social Market Economy starts with the state Fiscal capacity building is not a goal in itself The less market efficiency is aligned with equal opportunity, the more the state must invest (not consume) The introduction of the Social Market Economy, however, is not easy. Take the case of the Arab world

Social Market Economy – Third Way or Compassionate Capitalism? Embarking on the SME: A Rocky Way (2) Challenges to SME introduction in the Arab world: Legacy of import-substitution Political constraints Geopolitical constraints Geoeconomic constraints

Social Market Economy – Third Way or Compassionate Capitalism? Conclusions The SME needs more awareness Awareness in developed and developed countries SME works better, the more are committed to it Developed countries must help paving the way towards the third way of the SME to prevent development to end in a dead end as socialism and liberalism did. Developed countries best show their compassion for capitalism by opening their markets and committing themselves to ordoliberal capacity building.