The 2008 financial crash and the shift of power from west to east raise questions about the future of capitalism. Robert Skidelsky appraises the latest thinking, from Ha-Joon Chang, Anatole Kaletsky and Ian Bremmer.
23 Things They Don’t Tell You About Capitalism
Allen Lane, 304pp, £20
Capitalism 4.0: the Birth of a New Economy
Bloomsbury, 416pp, £20
The End of the Free Market
Viking, 240pp, £20
These three books are about the future of capitalism. Their inquiry is stimulated not just by the financial collapse in 2008-2009, but by the shift of power from west to east. These events have robbed free-market capitalism of much of its sheen. Anatole Kaletsky says it will be replaced by “Capitalism 4.0”, Ha-Joon Chang by a “better-regulated capitalism”. Ian Bremmer discusses the rise of “state capitalism”. None of them sees socialism as an alternative. Chang and Kaletsky also discuss the future of economics. They both believe that bad economics – “free-market ideology” or “market fundamentalism” – lay behind the global crash of 2008. Of the three books, Chang’s is the most successful, Kaletsky’s the most ambitious, Bremmer’s the most conventional.
Chang, an economist of Korean heritage now teaching at Cambridge, is both incisive and entertaining. His book is composed of 23 short chapters, each starting “What they tell you”, followed by “What they don’t tell you”. What they tell you is that free markets and minimum government work best. What they don’t tell you is that this formula is bound to deliver inferior outcomes. For one thing, “free markets” don’t exist. Markets only work because they are propped up by governments, and would work (and have worked) a great deal better the more they are propped up and regulated. Economics’s claim that it determines the “boundaries” of state and market scientifically is a delusion. “Economics is not a science like physics or chemistry, but a political exercise,” he writes.
Chang’s general theme is that, contrary to the current orthodoxy, the free-market era inaugurated by Ronald Reagan and Margaret Thatcher delivered worse outcomes, for developed and developing countries alike, than the more statist capitalism which preceded it. A macro policy geared solely towards inflation control, coupled with a micro policy based on tax cuts for the rich, financial and labour deregulation and globalisation, has produced lower rates of growth, hugely increased inequality and more financial crises, and also replaced real investment with speculation in financial assets. Contrary to free-market mythology, making people rich doesn’t make the rest of us richer. The “free-market” United States doesn’t have the world’s highest standard of living.
Chang, a development economist, is equally scathing about the conventional wisdom applied to poor countries. Poor countries are poor not because their poor people can’t compete with their rich-country counterparts, but because their rich people can’t. Most people in poor countries are more entrepreneurial than people in rich countries: they need to be so in order to survive. What keeps them poor is not lack of entrepreneurial drive, but lack of productive technology. Far from state intervention and import substitution policies bringing developing countries disaster, these places grew faster in the 1950s and 1960s than during the later, “Washington consensus” years. Sub-Saharan Africa is stagnant not because of bad geography, the “curse” of natural resources, ethnic rivalry or bad governance, but because of the “free-market policies that the continent has been compelled to implement [in the past 30 years]”. In the 1960s and 1970s, per-capita income grew at 1.6 per cent a year, compared to zero or negative growth since the 1980s.
The main question that Chang leaves unanswered concerns the durability of various systems of political economy. The older, state-led systems (what Kaletsky calls Capitalism 2.0) may have produced better results by most measures for a time, but eventually they imploded, in developed as in developing countries. Free-market economics may have been an extreme reaction to this failure, but its critique of bureaucratic capitalism was powerful. The new capitalism will have to recognise that both governments and markets are fallible, and work out a synthesis of the two.
This is the theme of Anatole Kaletsky’s Capitalism 4.0. The author’s main idea is that, following the 2008-2009 meltdown, the ideologically driven Reagan-Thatcher capitalism is evolving into a more pragmatic, experimental system. “The central argument of this book is that global capitalism will be replaced by none other than global capitalism,” Kaletsky declares with a flourish. It is typical of his penchant for the theatrical gesture.
Kaletsky shines with erratic brilliance, rather like a hedge-fund manager who makes you a fortune with one throw of the dice and wipes you out with the next. His historical epochs are marked by an oscillation between market and state, each regime ending in crisis. Laissez-faire Capitalism 1.0, inspired by Adam Smith, lasted from the Napoleonic wars to the First World War, the Russian Revolution and the mass unemployment of the 1930s. Then came the Capitalism 2.0 of John Maynard Keynes, Franklin D Roosevelt’s New Deal and the welfare state, which eventually provoked Capitalism 3.0 in the 1970s in reaction to rising inflation. Capitalism 3.0, a modified return to laissez-faire, has just self-destructed, leaving the door open for Capitalism 4.0. Capitalism 2.0 assumed that governments were infallible, Capitalism 3.0 that markets were infallible. Recognition that both can fail implies a new collaboration between economics and politics.
So far, so good, if not exactly mind-boggling. More interesting is Kaletsky’s attempt to reconcile his generally euphoric account of the pre-2007 “Great Moderation” (it produced “tremendous economic progress and social benefits”) with his repudiation of the “market fundamentalism” that underpinned it. His solution is to argue that a relatively “normal” correction in the financial markets was converted into a “near-death experience for the global economy” by the “incredible political mistakes” of George W Bush’s treasury secretary Henry Paulson, who, in the space of a few weeks in September 2008, wiped out shareholders of the government-backed mortgage underwriters Fannie Mae and Freddie Mac and failed to bail out Lehman Brothers – supposedly as a result of his ideological objection to government interference with the markets.
That a three-week delay in applying the “correct” remedial measures to a US banking failure caused the world economy to collapse is wildly implausible. Kaletsky’s assertion recalls Keynes’s remark that, starting from a false premise, a relentless logician can end up in Bedlam. The premise in Kaletsky’s case is that there was nothing inherently wrong with the global economy before 2007, plentiful evidence to the contrary of the kind supplied by Chang notwithstanding. Financial innovation was good, growing indebtedness was a “rational” response to “transformative economic trends”, and so on. It defies belief how he can write that during the post-Thatcher era workers were becoming less vulnerable to unemployment.
Yet it is hard to expect anything different from a Times columnist who described the credit crunch of 2007 as a “storm in a teacup”. Such overconfidence in his own judgement might reasonably dent one’s faith in this economic guru, but Kaletsky is worth persevering with, because once he has got over the problem of explaining away his previous misjudgements, he opens up a fertile field for thinking about the future of our political economy. He offers a scathing critique of conventional economics; and it is especially good to see him give due credit to George Soros’s theory of “reflexivity”, ignored by the academic mainstream. He makes a wholly convincing case for continuing with the fiscal and monetary stimulus until “global capitalism is again fully fit”, rightly pooh-poohing the Osbornite wisdom that “rising interest rates will choke off economic recovery” and that the national debt is a net burden on future generations.
Kaletsky’s programme for Capitalism 4.0 is also admirably coherent. Governments should be smaller, but smarter and more active. On the macro side, this amounts to the reinstatement of Keynesian demand-management, with a “nominal GDP target” replacing both the full employment target of old Keynesian policymakers and the inflation target of their monetarist successors. The chief addition to the armoury would be prudential bank regulation. He recommends a switch from income and capital taxes, which predominate in the US and the UK, to the consumption and energy taxes more usual elsewhere: paradoxically, if left-wingers want more state spending, they have to accept a less redistributive tax system. Health care, pensions and education systems should be partly privatised. Governments, acting together, should set “parameters” for such global variables as exchange-rate movements and trade imbalances. There is a brief but incisive discussion of the contradiction between China’s authoritarian system and the “freedom to innovate and compete” that lies at the heart of the capitalist system. This leads to the conclusion that, as China’s living standards approach western levels, the Chinese will increasingly converge on western norms.
This is also the conclusion of Ian Bremmer’s far narrower The End of the Free Market. Indeed, the main oddity of the book is its title, as it is mainly about why free markets will not end, but will see off the challenge of what the author calls “state capitalism”. Bremmer detects a disturbing emerging market trend towards a “bureaucratically engineered” capitalism, in which the “state dominates markets primarily for political gain”. This is not old-fashioned socialism – the state does not own the economy, but uses giant, privately owned companies as instruments of policy.
In the aftermath of communism’s collapse, surviving statist economies and authoritarian political systems were seen as residues that would evaporate in Francis Fukuyama’s “end of history”. What transformed them into challengers was the 2008 meltdown, and the huge transfer of wealth to oil- and commodity-rich but authoritarian regimes in Asia, the old Soviet Union, Latin America and the Middle East.
Governments in these regions use mainly privately owned national oil and gas corporations, which control three-quarters of the world’s crude oil reserves, to monopolise their own extractive sectors and as a springboard to secure long-term contracts for supply and development from other developing countries. The resources for this economic aggression are provided by the “sovereign wealth funds” – state-managed pools of excess cash, deriving from commodity sales, which can be invested strategically, and which need answer to one shareholder only, the government.
Fifty of these funds now control $6trn of world reserves, China owning one-third of this sum. Initially set up to help states survive the volatility of commodity prices, sterilise the inflationary effects of net cash inflows and guard against capital flight, these funds are increasingly being used to transform exported natural resources into foreign assets. They have there¬by shifted the world balance of wealth and power to the authoritarian world and set up a rivalry between the state-capitalist and free-capitalist systems for control of the “hybrid” states, mainly poor and middle-income, which belong to neither camp, in a replay of the main game of the cold war.
Bremmer is aware of the flaws of free-market capitalism: the short-term bias of shareholder capitalism, the lack of “intelligent government oversight” of markets. However, these are dwarfed by the failings of state capitalism: its bureaucracy, waste and corruption, its lack of popular appeal, its lack of an ideological glue to hold resource-rich, authoritarian governments together in a common cause. By contrast, free-market capitalism is more resilient, more inventive, more empowering, and therefore bound to be more enduring. It is hard to disagree, but it is also true that Bremmer’s conclusion is an artefact of the way he has set up the argument. He presupposes that authoritarian governments have no interest in the welfare of their people. This is untrue: they understand that economic success is legitimising. As such, the outcome of this competition of systems will turn, to some extent, on their relative success in delivering what their people most want.
The assumption of all three of these books is that we have entered the economics and politics of the long term and that the debate we need to have is about what form it will take.
We need to remind ourselves that the long term is made up of a succession of short terms, and we don’t yet know how the present short term will turn out.