The challenges of the global economic system

It is a system that seems 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 depends in large part on its ability to adapt to rapidly changing realities and market conditions. In this context, it is worth examining the theoretical basis of the global economic system, which reflects changing cultural perceptions.

In 1776, when Adam Smith published his timeless book “The Wealth of Nations,” economics was not seen as a separate science, but rather as 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 patterns in different time periods and geographies. Nevertheless, today’s global economic perceptions are based on fundamental principles initially put forward by Adam Smith and enriched by theories developed by John Maynard Keynes, mainly in the 1930s.

Today, a large part of humanity resides in countries operating within an international system of production and consumption with common characteristics. People living in the United States, Europe, Russia, China or Africa are influenced by systems of economic governance that share the capitalist vision 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.

John Maynard Keynes

A common feature of the modern globalized economic system is the functioning of the market mechanism. Despite the existence of important variations, the market mechanism is generally based on private property and the entrepreneurial spirit that derives from private initiative, while it is based on free trade within the framework of the World organization of commerce.

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

On the political dimension, the world economic system appears compatible with different political perceptions. In the United States, Europe and other similar systems, the underlying principles include the rule of law, free elections and the guarantee of minority rights, while at the international level, the principles of peaceful settlement of disputes. disputes and respect for international law and intergovernmental agreements are added. At the individual level, these economic systems are based on free choice, diversity, gender equality and the right to free movement and immigration. Unfortunately, these principles are not being observed to the extent desired by all countries. In fact, even within the EU, some countries, for example Hungary and Poland, deviate considerably from these standards.

In recent decades, experience suggests that the dominant economic system generally leads to an improvement in living standards, but it is also associated with side effects related to the distribution of wealth and negative impact on the environment. . So it would appear that today’s challenges require a new creative combination of the main ideas of Adam Smith and John Maynard Keynes – a combination that relies 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.

Clearly, the current economic system is far from perfect and will continue to change in a connected world where information, scientific discoveries and technological inventions are both the basis and the threat to our well-being. In this constantly evolving framework, it is essential that we also clarify our economic perceptions in Cyprus, as they form the basis for decision-making that will affect future generations.

The ultimate goal cannot and should not be the predominance of a system based on firm and outdated ideologies or preconceived ideas. On the contrary, we must strive to adopt and incorporate positive elements from different directions, aimed at developing an improved and coherent system.

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

Andreas Charalambous is an economist and former director at the Ministry of Finance. Omiros Pissarides is the Managing Director of PricewaterhouseCoopers Investment Services


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