Free Capital Mobility and Capital Control

Economists, albeit, argue for free trade, but when it comes down to the idea of untrammeled capital flow, it doesn’t seem to get unanimous support. It is a natural phenomenon that almost everything we see in nature (i.e. fluid, air, etc) travels down the concentration gradient. Same way, it had been thought that freeing international capital flow would help the countries that are struggling economically as the capital should flow down the concentration gradient; but in reality it doesn’t quite happen that way. During the 1980’s, world’s economic policy makers’ prevailing view was that “money should move freely around the globe, allowing capital to find the most profitable and productive investments, no matter what country there happen to be in.” [Wessel, Davis, 1998] Even though policy makers want to make the world a safer place for free trade in goods, services and capital, according to Rodrik “….. the idea of global capitalism is inherently impracticable. Capitalism is, and will remain, a national phenomenon.” (Rodrik)

Capital is the most important ingredient of a country’s economic existence. It is really important we understand what we really mean by the word ‘capital’. According to the Merriam- Webster dictionary, the etymology of the word ‘capital’ says that in Medieval Latin this word came to mean the head of cattle or other livestock. De Soto in his book ‘The Mystery of Capital’ suggests that the cattle and the livestock are low maintenance possessions; they are mobile and can be moved away from danger; they can be counted etc. On top of it, they can generate future value by reproducing, or giving us milk, meat, leather, etc. Thus the word ‘capital’ begins to do two jobs simultaneously- capturing the physical dimension of the assets (livestock) and its potential to generate future surplus (Paraphrased, De Soto, 2000; pg.40-41). So, capital of a country is a very important component for its stable economy. All the countries, rich and poor, have capitals in their own place. But, some countries know how to inject life to their capitals while the rest of the other countries don’t- and that’s what makes all the difference.

Economists have argued for free trade of goods and services for hundreds of years but free capital mobility is a fairly new phenomenon. We have learned that free trade of goods is beneficial for the consumer; it also boosts people’s living standard.