Re-considering Capitalism

The main topic of conversation in international economic policy circles is 'global stimulus'. In a few weeks, we have the London Summit. The US is getting very irritable that it has pumped billions of dollars into its economy yet few others have matched the scale of its neo-Keynesian commitment.

This is serious stuff because if the rest of the world - most notably Europe and China - do not follow suit, it will be increasingly hard to hold the line within the American political class against 'America First' protectionism-lite.

For the Franco-German led EU and China this may not be quite so disastrous as we may think. Both are theoretically big enough to rely on domestic production and consumption after a painful adjustment but the UK and Japan are island states built on trade - and it is trade that threatens to collapse now.

There is an air of desperation in messages coming out of the Treasury and vectored through the economic liberal media in London. What London and Washington want is improved co-ordination of several countries’ currently highly variable commitments to neo-Keynesian pump-priming.

The Financial Times on March 9th reported a public call by Larry Summers (Obama’s chief economic adviser) for just such a co-ordinated programme that would issue public money on a global scale in order to tip the scales from deflation towards recovery.

The Financial Times & 'The Crisis of Capitalism'

The role of the Financial Times in the current crisis continues to bear some scrutiny. It is independent, of course, but it is also implicated in the ideology that led to the current crisis and it represents the voice of those determined on preserving the Atlantic economic system at all costs.

The newspaper has just started a major series on the future of capitalism with the remarkable implication (from the FT's banner headlines) that we should consider alternatives. No, not an alternative to capitalism, of course, but alternatives within capitalism.

What seems to be going on is a quite subtle and anxious shift back to managerial capitalism and even ‘soft’ corporatism in a pre-emptive strike against any democratic rejection of global market economics. The political implications of ‘another ideological god (that) has failed’ [Martin Wolf] worries its editors.

Driving recovery through state action has now (it would seem) overridden even the structural issue of global imbalances as the central concern of policymakers in order ‘to save the market system from its own excesses’.

The first contribution (by Martin Wolf) in what appears to be a long series of articles sets the scene – in essence, the Reagan-Thatcher project lies in shreds, the role of Government will increase and the era of free-wheeling finance capital has ended.

To anyone with a sense of history, this must be interpreted as a rearguard action to preserve both globalisation and capitalism by shifting power from finance back to managers (where it largely lay in the previous great cycle from the 1930s to the 1970s).

The impending collapse of trade and the need to create a framework for economic growth (in defiance of two possible challengers, neo-nationalism and low growth environmentalism) clearly requires a new if lightly administered corporatism.

Figures for manufacturing output in Q4 2008 tell the real story which is one of industrial capital, and the services sector dependent on it, wanting ‘auctoritas’ to command markets. Only China saw an increase in industrial value-added – collapses in South Korea, Japan and Brazil were devastating at over -30%.

All this has to be seen in the context of the Financial Times’ self-appointed role as ideological guide as world leaders move towards the April 2nd Summit. For a few weeks, it appears to itself as having global historical importance. We should not get over-excited.

The Financial Times is not a government. The UK is only one of several players in the coming game so the FT’s opinion should not be taken as deliberative of how things will happen but only of how the economic elite in the Atlantic economy may want things to happen.

As of today, there is still no agreement on co-ordinated stimulus nor on the framework for government global regulation. There are formidable national political and practical barriers to both.

The Financial Times and the economic liberal elite now want to draw a line under the era of dominance of finance capital (for which they were the claque for thirty years) and create the possibility for changes in market-based globalisation to save itself from itself and continue safe and sound through the next cycle.

The Problem of Democracy

The problem is, bluntly, democracy. The Financial Times’ editorial of March 9th lets the cat out of the bag. Politicians need to be given political cover to do what is necessary – “a united front is, therefore, essential.”

The aim of policy should not be, it suggests, the creation of grand schemes for global regulation or the investigation of ‘minutiae’ such as tax havens and bankers’ pay. It should deal with the fact of recession on the ground.

Politicians will then earn the authority to make the necessary changes in the economic framework for the next cycle. The policy prescriptions are fairly simple – a massive co-ordinated stimulus of course but also state re-capitalisation of the credit system and a significant shift of resources to the IMF.

We can almost see the naked fear in economic liberals’ eyes. Politicians are already engaged in populist campaigns over the symptoms of crisis but this is mere flummery. Similarly, grand schemes are of no intrinsic interest to the electorate.

The liberals' assessment is that globalisation (more than markets) is at threat because, if the recession does not turn into recovery soon, weak pro-capitalist governments will fall and strong capitalist governments will have to become nationalist or populist to survive. This is a race against time.

A massive stimulus will create equally massive burdens on subsequent generations and so must succeed in creating a recovery that helps remove this burden within a reasonable period of time.

The use of voters’ funds to ‘reward’ the bankers who led us into the mess constantly undermines the credibility of government as representative of the people’s interest.

And it is hard to see how any government can now divert resources from emergency welfare and job creation to help save jobs in faraway countries.

Economic liberals in Washington are fighting a rearguard action against political liberals in Congress. London is fighting a rearguard action against European caution and rising anger at home. This is why Gordon Brown's speech to Congress was of such importance. It was a call for Atlantic unity.

Whistling in the Dark

All in all, the Financial Times’ contribution to the debate on capitalism indicates an economic elite, the one that we have termed 'Davos Man' elsewhere, that is a bit frightened, whistling in the dark, deeply worried about the London Summit becoming no more than a talking shop of populist communiqués.

It is terrified that global dithering will remorselessly force the major blocs – NAFTA, the EU, China - into various forms of de facto protectionism. Worse, national capitalisms may discover that they can potter along quite nicely without the levels of global trade fuelled by the global credit boom.

Now this is the point where those who do not like theory should leave but the Financial Times, to its credit, is raising some important issues, albeit from its own ideological perspective, and we need to respond.

We should all consider what sort of world we want in the wake of this crisis because things are not going to return to 'normal' in the sense of what has been normal for the last thirty years. Electorates and businesses need to try and control the agenda or they will see themselves controlled.

When the history books are written, the crisis will probably be put down to group-think amongst the self-interested and to the excessive complexity and opacity of late finance capitalism.

The reassertion of the public interest and of transparency, responsibility, basic competencies and, even more important, comprehensibility and accountability are clearly required. All a bit obvious really …

Editorials in economic liberal media are becoming increasingly shrill in saying that markets are not at fault but that leaders are. This is, in our view, naive. A Board appointed Sir Ken Goodwin within a regulatory and legal structure created by successive governments. His demonisation is a red herring.

If you plant a person in a system, that person will work the system according to the rules laid down by others. The human race is not made up of saints and there is many an ordinary bloke who would have fitted in without malice to the national socialist or communist systems of their day.

The flaw is within human nature. There is nothing alien about this crisis when set against past bouts of Schumpterian creative destruction.

What we have to ask is why our leadership was ignorant of how markets worked and whether it wilfully chose to ignore what it should have known for reasons of self- or special interest. Markets themselves may be the first problem, weak leaders the second and selfish or corrupt individuals only the symptom.

Basically, we seem to have been faced with a stark and unnecessary choice – to accept the boom and bust of markets because people en masse are who they are or to consider restraints on human nature which, at their worst, might lead to the excesses of national and international socialism.

The 'Third Way'

Could there have been a ‘third way’ in which the realities of markets and of human nature might have been squared through good government, managed through moderately sized nation states rather than through trading empires?

This was not to be. The ‘third way’ presented in 1997 to the British electorate was nothing of the kind. Rather it was a council of despair about the ability to find a workable ‘one nation/social democratic’ national consensus within the prevailing 'group think' about markets promoted by economic liberals.

There was a determination within New Labour to try and ride the tiger of globalisation and hope that those economic dimwits who believed that tulips would continue to rise in price eternally might be right.

The point to be made (as the Financial Times ably reminds us today) is that the current crisis is not unique. It is standard fare, only bigger, for how capitalism works in practice – and we appeal in this matter to the pessimistic Schumpeter rather than to the optimistic Marx.

Capitalism is not about concentration and inevitable collapse but progress and innovation through waste and a brutal punctuated equilibrium. What does that sound like? Yes, just like evolutionary biology - a godless process of waste and disaster but also a progression to 'higher' forms of life.

The real cost of markets and of evolution without government intervention in economics and healthcare might be as awful (if we were but to know it) in terms of misery and death as any of the crimes of Stalin.

The point is that our leaders and our media were all surprisingly stupid when ordinary folk might have expected them to have read their economics and history as a condition of their employment.

The Financial Times, whose analyses are often the triumph of hope over experience, does get it right sometimes. The March 10th editorial refers to a ‘mindset that ignored markets’ instability [and] relieved policymakers of responsibility’. Precisely.

Failing to understand markets as managable social forces is as irresponsible as failing to understand natural forces when seeking to irrigate land or to plant crops. Perhaps the current crisis will be to the market what the Lisbon Earthquake was to the eighteenth century belief in a benign God!

There will be market believers who will welcome creative destruction, a periodic cultural Ragnarok, because it will renew and revitalize. At the other extreme, there will be those who want to concrete over human nature because it is messy and prefer the planned car park to the managed green park.

Between these two is where we should be – with a deep respect for the human condition whose wants express themselves through the market and through sexual selection but which accepts intervention to ensure that society remains co-operative and non-exploitative.

Praising the depression that wipes out businesses and jobs because it is innovative is like worshipping the asteroid that hurtles towards us from space because it allows new life forms to develop. That is anti-human.

The real third way is one of a human-scale and a respectful management of both markets and nature. Economic libertarians and deep greens now need to move to one side while the rest of us create some sort of balance in the world.

www.tppr.co.uk

www.pendrywhite.com

Recent Client Notes [Subscription Only]

Global

04.03.09 - Political Strains in Europe from the Right
05.03.09 - Update on the Global Economic Crisis
05.03.09 - Update on West Asia
05.03.09 - The ICC Indictment of Al-Bashir
07.03.09 - Grand Strategy As Obama Rewrites The Rules

Domestic

04.03.09 - Update on UK Conditions
10.03.09 - Update on Uk Conditions