Finding Change and the Iron Trilema

This week’s festival will tackle some of the most complex questions in modern society. For example, the event, “Where Does Change Happen?” addresses two important issues. First, the division of power between local, national, and global institutions; second, what change do we want?

What do we know about this division of power? One of the key principles to understand is the Iron Trilemma. Every society needs to choose two out of the three elements: democracy, nation state, free financial markets. It is impossible to have all three at the same time because financial capital will move toward countries with the most minimal regulations. Those economic moves create economic crises in countries with higher regulation. To avoid this problem, a country can either control financial capital, submit to market demands at the expense of democratic demands, or surrender national autonomy to global regulatory organisations to eliminate competition between nations.

Today we have free financial markets and nation states. This means that we have lost democracy somewhere. This seems surprising at first, but if we look to Europe, more and more countries are forced to adopt austerity measures. The cuts in social programs are largely supported by the citizens. However, under the pressure of markets, national elites still cut the social safety nets and they do so against the will of their own population. Is that what we call democracy?

What are the solutions to this problem? If we want democracy we need to lose either the nation state or free financial markets. Abandoning the nation state means a move toward global democracy. Limiting financial markets brings us back toward the Bretton Woods system of capital control. Both solutions require international cooperation, but not of the same nature. In the first case, we need to strengthen international organisations to allow global democracy; in the second, nation states need to work together to control the movement of capital.

A second important element in this activity is “change”, but change for what? This question is probably harder than the first. To have constructive change we need an objective, something to change toward. What is this objective? Different members of society have different visions. Our present government wants to maximise economic growth. The OECD general secretary pleads for more human economics at the beginning of June in Montreal. What do we want? Fairness? Opportunities? Wealth? Can we have all of them?

For a long time it was thought that societies had the choice between growth or fairness: if a society wanted more wealth it came at the cost of increased inequality. Recent work seems to indicate that this is a false dilemma. It might be possible to produce wealth while simultaneously reducing inequality. The Price of Inequality by Joseph Stiglitz proposes ways to do it. “Where Does Change Happen?” will discuss others.

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