Capitalism 4.0 - the birth of a new economy
Reviewing Anatole Kaletsky's book on the changes happening to capitalism
We are in danger of forgetting just how serious was the financial crisis which hit the world economy over two years ago. However, with government spending cuts beginning to hit, we are still coming to terms with the fallout as we struggle to emerge from the deepest recession since the 1930s. It is no wonder that people’s confidence in the economy has yet to recover. Many books have been written about the financial crisis and the economic outlook, and no doubt many more are to come. Capitalism 4.0 is one that is worth engaging with. Anatole Kaletsky maps out how capitalism has developed over the centuries and outlines what form it will take post-crisis. There are implications for politics and morality.
What we call capitalism is often confused with the market economy. Capitalism is an economic system with a market economy at its heart but it comes in many variants. That is why much of the policy debate about development issues misses the point. A particular form of capitalism has disadvantaged millions of people in developing countries, yet poor people around the world need access to capital and markets. When the debate is characterised as being between helping the poor and free trade, whole issues of market power are ignored.
Kaletsky identifies what he believes are four main types of capitalism. The first, Capitalism 1.0, began with Adam Smith’s Wealth of Nations and the US Declaration of Independence, both in 1776. It survived and adapted to many crises (named 1.1, 1.2 etc) until the Great Depression of 1932. For Kaletsky, the ideology at the heart of Capitalism 1.0 was “a belief that the capitalist system is based on private property and the profit motive was an elemental force of nature, governed by iron laws of economics that were as immune to human manipulation as a hurricane or a tidal wave.” So began laissez faire economics.
The First World War helped destroy this view that politics and economics should be separate, even though pressures had been building beforehand. Working populations were more vociferous in expressing their anger at inequality, which exposed a failure in the system. The old ideology resumed after the war but Britain’s abandonment of the gold standard in 1931 and the election of Roosevelt in 1932 heralded a new approach. Kaletsky calls this Capitalism 2.0, characterised by “a belief that capitalism, if unguided by government, was ruinously and intrinsically unstable.” The peacetime aim of politics was therefore to elect competent governments which could protect the economy from free market chaos. This view, which was strongest in the two decades of Keynesian economic policy after the Second World War, prevailed until 1979. The election in the UK of Margaret Thatcher’s Conservative Party, and in 1980 the US election of Ronald Reagan, saw the beginning of a capitalism that would prevail until, and cause, the recent financial crisis. Kaletsky does not define Capitalism 3.0 as clearly as earlier versions. Where politics had been seen as dictating an economic agenda, now economics dictated to politics. The free market ideology was restored but now it was much more political, in contrast to Capitalism 1.0 when economic laws were seen as similar to the laws of physics. The key belief was that undisturbed by state intervention, markets would produce “efficient and rational outcomes, including economic stability and full employment.” The dominant economist was now no longer Keynes but Milton Friedman.
This economic ideology remained dominant even though central banks resorted to targeting employment rather than inflation when setting interest rates. Despite their statements about inflation, Kaletsky maintains that they were really aiming to stimulate demand. It was this that brought forth the period known as the Great Moderation with moderate economic growth and low inflation until 2007. The collapse of Lehman Brothers in 2008 ended Capitalism 3.3 (as it then was). Kaletsky argues it was not inevitable but arose from decisions taken by the then US Treasury Secretary Hank Poulson. Poulson, guided by a free market ideology, allowed Lehmans to fail, but was only a few days later forced to change tack and bail out the US banking system by taxpayer capital injections. Had Poulson not been so blinkered, Kaletsky says, there would still have been a financial crisis but there would have been time to address it. Rather than cause a deep recession it would have had a muted impact.
Kaletsky’s Capitalism 4.0 is being formed from the ruins of that disaster, in a sort of synthesis of the previous versions of capitalism. Kaletsky defines it as “probably a recognition that governments and competitive markets can both be wrong and that the world is too unpredictable and complex to be managed by any immutable institutional structure.” Mixed economies will prevail but participants will consciously adapt to new circumstances. So for example, financial regulation will be tighter but also more flexible. It will not be enough for banks to follow the rules; if regulators do not believe banks are acting prudently they will act. The world Kaletsky describes is one of uncertainty but one where this uncertainty is recognised. It will be driven less by economic theory than by a willingness to experiment.
Kaletsky could have further developed the political implications of his thesis. We have become accustomed to politicians giving up powers of regulation in many areas of life to unelected bodies operating according to well-defined rules. If the rules become less defined, and their application subject to change, we risk a democratic deficit unless we renew democratic politics itself. That requires a more engaged electorate, as well as responsible politicians. This is linked to an area that Kaletsky does not address; morality. Successful capitalism requires trust and therefore to some degree a sense of morality. In the aftermath of the Lehmans collapse, politicians and bankers began to debate how to restore moral values and a commitment to the common good to the operation of (mainly financial) markets. Less is heard of that now and the banks have returned to business as usual, with the accompanying large salaries and bonuses. Yet capitalism in the future may require a new level of responsibility from people in business and finance. This would mean more than a global ethic. It would mean a capitalism that placed a higher value on integrity. In a future now regarded as less certain, might more people seek meaning outside the pursuit of wealth? Perhaps the economic and political power of investment banks is too great to enable fundamental change to occur, until the next crisis. What prophets will emerge from the church to challenge that power and bear witness to the values of God’s kingdom?
This review was first published in Third Way magazine.
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