FT.com | Clive Crook’s blog | Two readings on “the end of capitalism”

Two readings on “the end of capitalism”

October 15, 2008

My column for the FT this week (mentioned here two posts ago) states my own view on the implications of the financial crisis for the future of capitalism–namely, that the effects outside finance will be limited, and this is not the end of capitalism as we know it. Here are two other interesting and forcefully expressed opinions.

Harold Meyerson in the Washington Post thinks the game is up for “unregulated capitalism”:

In 1949, a number of famous writers, among them Arthur Koestler, André Gide, Richard Wright, Stephen Spender and Ignazio Silone, wrote essays explaining why they were no longer communists. The essays were collected in a volume entitled “The God That Failed.”

Today, conservative intellectuals might want to consider writing a tome on the failure of their own beloved deity, unregulated capitalism. The fall of the financial system has been so fast and far-reaching that there’s been no time to fully consider its implications for the reigning economic theology of the past 30 years. But with the most right-wing administration in modern American history scurrying to nationalize the banks, the question cannot be elided indefinitely.

What exactly do economic conservatives believe now that their god is dead? What’s become of the glories of privatized Social Security? Of the merits of 401(k)s vs. defined-benefit pensions?

No wonder we’ve seen a disoriented John McCain wandering the moors howling about Bill Ayers. What’s he supposed to do? Admit that the Reagan-Thatcher faith in unregulated capitalism, to which every GOP presidential candidate was pledging allegiance just last winter, has collapsed?

Interesting to see this dismiss the Clinton and Blair administrations as mere extensions of the Reagan-Thatcher order. Actually I agree with Meyerson about that: they were. But I thought that the Democratic narrative upholds the 1990s as an example of how good things can be when intelligent, well-meaning people are in charge. In other words, good government is more a question of competence and good faith than ideology. To abandon that line, you have to consign Clinton and Blair to the trash.

I was also a bit puzzled by this:

McCain and Barack Obama disagree sharply on the government’s role in bolstering the economy. Obama favors public outlays on alternative energy and education, which would not only create jobs but also make us more competitive globally.

What is this, “make us more competitive globally”? Surely that is the old, dead paradigm. Even as the piece reads its last rites, that Reagan-Thatcher way of thinking is stirring back to life. If you are going to dispense with market forces, I don’t think you can afford to care very much about staying competitive globally.

The other piece, much more to my own way of thinking, is by Simon Jenkins. For many years (outside the specialist domain of economic commentary) he has been my favourite British pundit, and one of the two or three best I have come across anywhere. Rigorous, liberal (in the old-fashioned sense), open-minded and surprising. See what you think:

So this is to be Brown’s Falklands. Victory on Mount All-fall-down. Bonfire of the bonuses. Service in St Paul’s. March-past by the Royal Troop of Derivatives Traders. Anthem to the Bankers’ Brigade. Tomb of the Unknown Arbitrageur.

A fortnight is clearly a long time in ideology. What fun historians will have with October 2008. Do you remember the hoary old days when they let Lehmans go bankrupt and refused to guarantee bank deposits? Where were you when a governor of the Bank of England worried about inflation and something called moral hazard? How tables turn. Socialism is now cock of the walk, capitalism mugged by reality.

It is rubbish, total rubbish. Market failure has been compounded by brain failure of the discredited profession of economics, overwhelmed by journalistic wish-fulfilment and glee.

The banks have not been “nationalised”, just deluged with money. They remain pluralist and competitive institutions, with independent boards. Their workers are not civil servants. Investors retain their shares. The bonus culture will revive. The impresarios of greed have been punished, or at least a few of them. But this is not socialism in our time, just public money hurled at the face of capitalism.

October 15th, 2008 in Economics, US politics | Permalink

27 Responses to “Two readings on “the end of capitalism””

Comments

<<Socialism is now cock of the walk, capitalism mugged by reality.<<

I do wish that the FT would recognize that the most successful economy in the Eurozone, that of Germany, is a SOCIAL MARKET economy, i.e. wealth is created by the “market” but there is considerable “social” content in the distribution of that wealth. The same applies to the Swiss economy.

The starting point for anyone interested in this topic is to google “social market economy”. You will find that the “father” of the German social market economy model was Ludwig Erhard, Germany’s post-WW2 economics minister. He will always be remembered as the man responsible for the reconstruction of the Germany economy when it lay in ruins in 1945. Since the US economy may well deteriorate and fall into a long recession, if not a depression, it may be worth
reading some postwar European economic history about how Germany got out of the depths of economic misery.
Posted by: J.J. | October 15th, 2008 at 7:50 pm | Report this comment
Why would Meyerson think that Bush is right wing?

Bush imposed steel tariffs, nationalized the airlines by fiat and has spent like mad on hapless social programs, none of which are particularly right-wing policies.

JBP
Posted by: John Powers | October 15th, 2008 at 9:52 pm | Report this comment
J.J.,

When you claim that the German and Swiss economies are the most successful in Europe, you fail to consider how interdependent they are with American capitalism. The latter is the most successful model there is for the continuous production of innovation. If all the world’s economies were to copy the German and Swiss model, we would be living in a vastly poorer world without, for example, the benefits stemming from the IT revolution of the 1990s. Your mistake is known ‘The Fallacy of Addition’: if a crowd is watching a parade and one person steps on a stool, then that person will be able to see better and will be better off; however, if everybody else does the same, no one will be better off.

Clive,

Simon Jenkins is correct that 1960s-style socialism is not the answer, and the world is unlikely to be heading in that direction. However, we should still be weary of signs of creeping statism, now that control of the banks has passed to the governments’ hands (especially with a control-freak such as Gordon Brown in charge; I recommend reading Willem Buiter’s latest post: ‘Time to plan a swift return of the People’s Banks to private ownership and control’).
Posted by: RCS | October 15th, 2008 at 10:02 pm | Report this comment
As I have argued elsewhere, it is more than a little simplistic to draw a black and white distinction between capitalism and socialism. It would be very hard to find an economy anywhere that is not some combination of both, whether one is talking about J.J.’s description of the “Social Market” economy, the avowedly mixed economies in South and East Asia, or, now unmistakeably, the US.

I have also argued that the question is not whether a country has a partly state directed economy, but rather which class the power and resources of the state are being used to benefit. In the US, this has been the main difference between the Democrats and the Republicans since the time of Reagan, if not Franklin Roosevelt. This difference has become acute under the Bush/Cheney “ancien regime” and it is the only real issue in next month’s election.

The wealthy corporate - military elite in this country regards the likelihood of an Obama victory with about as much eagerness as Marie Antoinette did the storming of the Bastille.

Despite this, however, Barack Obama is no revolutionary; if elected, he is more likely to turn out to be a Clinton-style centrist. But even the smallest diminution of the power and privileges of the wealthy elite are anathema to our ruling class, who have had it so good during the last eight years of corporate welfare for those at the top and laissez-faire for everyone else.

This is why the Republicans, who are the faithful servants of the big business-corporate elite, are panicked at the thought of an Obama presidency. This is why they are resorting to one of the most desperate smear campaigns in the history of US presidential politics.
Posted by: algasema | October 15th, 2008 at 10:44 pm | Report this comment
Roger,

What signs do we have of Sen. Obama’s centrism? His plan to tax plumbers to “spread the wealth”?

Quite a few people view the Wall Street selloff as a capital flight from President Obama clutches. What has he done to reassure small business, big business, investors etc that he is not out to share their wealth with his political supporters?

JBP
Posted by: John Powers | October 15th, 2008 at 11:30 pm | Report this comment
John, can we dispense with the fantasies, please? Michelle Malkin thinks that the Wall Street meltdown was caused by the fact that we didn’t deport Spanish-speaking immigrants quickly enough. Now you come along and suggest that the world’s financial system is in what everyone seems to agree is the worst danger since the 1930’s because people are afraid that Barack Obama might be elected president.

All this goes to show that we are getting closer and closer to election day, that the Republicans are clearly behind, and that their supporters are so desperate that they will grasp at any kind of absurd argument to attempt to bolster their losing cause.

As I write these words, Barack Obama has just handily disposed of John McCain once again in their final debate. John, I am afraid that you will have to come up with something better if you still want your posts to be taken seriously.
Posted by: algasema | October 16th, 2008 at 3:36 am | Report this comment
We have in this country a long history of spreading the wealth…..although it is spread among the men of “best quality” . It is only when the rabble peruse what Aristotle called a fair share of life’s blessings , it becomes an unacceptable behavior . The stock market is just another function of this ideal which is what we see in the 1 trillion in bailout money .
250 years of struggle to have a glossier version of feudalism .
Posted by: Bryan Burch | October 16th, 2008 at 5:37 am | Report this comment
RCS. Yours of 15th 10.01h

Basically, it is the credo of the creative destruction of capital that has brought the US economy to its knees. That was Alois Schumpeter’s theory; he was a Harvard professor and a former bankrupt in his home land Austria. He described how the the Business Cycle worked, and foresaw that capital would self-destruct and that socialism would follow. Dead right (he died in 1951 afa I remember).

The “creative destruction of capital” has been the convenient excuse offered by Wall Street and its accomplices each time there has been a boom (in which they made billions) and a bust after which they had to make their excuses to THE AMERICAN PEOPLE since it was the latter that had seen their savings/money disappear. Scams have played a prominent part in US economic history, e.g. every new wave of immigrants coming of the boats in NY got fleeced. I did Economic History at univ. so I know.

As far as innovation is concerned, yes - Bill Gates is a genius, but the Internet was created by Tim ?? at CERN on the border of France/Switzerland. The US auto industry stopped innovating and that’s why it’s in such bad shape now.

The Swiss watch industry is a good example of how to keep an industry going AND expanding over hundreds of years - by continually fine-tuning, improving, advancing the technology, keeping up with consumers’ changing tastes in changing economic environments. There was a dangerous period in the 1980s (digital watches from Japan on the market), but the Swatch competed with them and now the watch industry is stronger than ever and jobs seem secure even in this difficult time.

The USA should have been in the forefront of alternative energy but that doesn’t suit Big Oil. The greedy and evil ruling plutocracy in the USA has a stranglehold on the economy. That HAS TO END on 4th November.

P.S: JBP. The Big Sell-off on Wall Street? Many reasons, inc the fact that people are going to need CASH more than ever now, to survive the coming months/years.
Posted by: J.J. | October 16th, 2008 at 9:08 am | Report this comment
1) J.J., let us not forget that not too long ago European-style ‘market socialism’ was perceived as too rigid, especially the labour market, and indeed many reforms were enacted in Germany, Sweden and elsewhere. ‘Market socialism’ had also divided the populace into insiders with secured jobs, who were enjoying all the benefits of the system, and perennially excluded outsiders.

2) This is not too dissimilar from the much criticised division between haves and have-nots of the free-wheeling American style of capitalism. You could say that the benefits accrued to American ‘haves’ were much greater than those achieved by any European ‘insider’, however the opportunity was theoretically there for any person to try and join the party.

3) The usual characterisation of the models is as follows: American capitalism provides a greater upside, it is like an investment in equity, whilst European ‘market socialism’ provides greater security, it is like an investment in debt. However, if the American model fails to provide a Gaussian distribution of opportunity — the chances of fianncial success equally distributed in the populace, then the model is breaking down, so the benefits might not outweigh the disadvantages — the expected value of utility over the probability distributions less than the alternative European model (and we must weigh in a human aversion for risk in the individual utility functions). Similarly, if the European model fails to provide a Gaussian distribution of actual incomes, then it too is breaking down.

4) That is the static picture: a continuum of policy choices between market-oriented and socialist-oriented models — and they are utility-equivalent as long as the expected utility over the various distributions, taking in a human aversion for risk, is similar in both models.

5) However the dynamics of these two models differs, as the market-oriented model has a greater propensity for innovation and economic growth. Small differences in growth rates accumulate to large differences in GDP at an accelerating pace. This makes for a crucial difference between the models, one which does not show up in the static analysis.

6) The policy designer must analyse whether the actual economy is working efficiently as described above. If there is a gain to be made in terms of the present value over all periods of growth of the expected utility over all distributions of income, then a move towards a more socialist or a more market oriented policy mix is warranted. Of coursde, the real world does not act that way, invested interests and cultural differences both act to limit policy mobility.
Posted by: RCS | October 16th, 2008 at 9:09 am | Report this comment
J.J.: “The USA should have been in the forefront of alternative energy but that doesn’t suit Big Oil.”

J.J. you are correct. The effective policy of any Republican government starting after Reconstruction in the late 19th Century has been to provide subsidies or “protection” in one form or another to private, wealthy interests at the expense of the masses.

Virtually all Bush Administration policy has been to do this in every industrial sector. The oil and gas industry has been given a blank check by the Bush Administration in particular primarily because both President Bush and Vice-President Cheney have gone out of their way to favor that industry in which the bulk of their private industry experience resides.

My take on the so-called debates between the two Presidential candidates is the appallingly limited range within which issues are permitted to be discussed.

Given that my current area of industry knowledge is in healthcare, I cite one of the few snippets of the “debate” that I watched in which Senator McCain make one of his usual outrageously offensive remarks about healthcare policy. He disparaged a single payer/insurer payment model to fund medical services, even though that scheme in one form or another is used by virtually all countries in the world outside the USA to great benefit of patients and the average citizen and to a lesser extent to the benefit of medical service providers.

He also specifically said that with a single payer/insurer system in USA “we would have Canada or the UK”. Would that that were true! Better health outcomes at half the current USA cost!

This kind of literally stupid (in the sense of making disparaging remarks that reflect the exact opposite of the facts) remark is the hallmark of current USA politics - all ultimately dictated by the extreme right-wing.

That right-wing is composed of the plutocracy (I refer to that group as the “country-club set”) and the Christian right fundamentalists.
Posted by: Wendell Murray | October 16th, 2008 at 10:19 am | Report this comment
The US Economy grew for rich and poor alike for 7 years under President Bush. Only when it has become clear that there is a real possibility of a Left Wing Democrat as President has it tanked.

Financial journalist Charles Gasparino asks a legitimate question about the market fearing higher taxes and regulation that Sen. Obama promises:

http://www.cdobs.com/archive/local-media-feeds/an-obama-panic,1870

I don’t assign 100% of the drop to a market fear of Left/Democrats running the show, as mis-regulation certainly plays a role, but it is perfectly legitimate for people to move their money to escape taxes.
Posted by: John Powers | October 16th, 2008 at 1:41 pm | Report this comment
Does “social market” mean that the extortionists to be paid off include not only senior executives but also trades unions and politicians? If so, how does it differ from Detroit?
Posted by: dearieme | October 16th, 2008 at 3:43 pm | Report this comment
How unfortunate, that instead of constructive discourse on the reform of capitalism, if such reform is possible, the old capitalism-socialism dichotomy frames the thinking and distorts communication. The “free- market capitalism” and “socialism” labels are hurled at their respective proponents in lieu of attempts at understanding i) what are the strong points of either system, ii) what are the weak points, iii) whether it is possible to mix the two, etc.

As much as it is inconvenient for rigid ideologies, people live in societies, where individual actions have repercussions for other members, and at the same time the best way to harness the inherent creativity of people is to let them exercise initiative, and not hobble them excesively with government regulations. From the first part of the statement, it follows that the society should be able to exercise some control over the activities of the individual (laws are a perfect example of that). From the second part, it follows that this control should be well-intentioned and well thought out.

The extremes of laissez-faire and socialism are thus untenable. But claiming government interference means socialism will only serve reactionary forces that do not want a constructive debate. Without it we’ll all be worse off in the long run.
Posted by: NNN | October 16th, 2008 at 4:55 pm | Report this comment
Is this the first major economic crisis of the service economy which employs the majority in OECD countries? Housing finance loans in service economies are, in reality, impossible to secure. This is because they depend upon the credibility of the promise made by people, who produce something you can’t see or touch, that they will repay them. If that credibility goes, so does the value of the promise and the balance sheet asset.
Every service transaction requires a promise: either you promise to pay for a service you will get or you promise a service for a payment you will get. With tangibles, in contrast, no promises are necessary. You can exchange an apple simultaneously for the money equivalent of that apple at the agreed price.
The idea that a promise made by one party to a second party can be made less risky by selling it to a third party that neither of the original two know is surely wrong. The answer lies in helping to ensure the promise is genuinely made and genuinely accepted. If this line of thinking is correct, then the right response to the banking crisis is neither more regulation/state control (which is based on the idea that people are mainly dishonest) nor less regulation/state control (which is based on the idea that people are mainly honest). It is for the original parties to develop a relationship in which promises are accepted and kept. Governments can’t do much to make that happen. But neither can profit-maximising firms because of their inherent tendency to develop monopolistic relationships with their customers so that they can secure “above average” rates of return.
Posted by: Edmund O'Sullivan | October 16th, 2008 at 8:53 pm | Report this comment
The cultural differences between American capitalism and European capitalism, as exemplified by — theoretical physics.

Neil Turok, professor of mathematical physics at Cambridge University writes: “In the United Kingdom, theoretical physicists tended to specialize in narrow topics and pursue rather well-defined paths. But in the United States, I discovered, the spirit was much more freewheeling…in which the whole point of doing theoretical physics is to figure out everything for yourself, in your own way, from scratch.” — excerpt from ‘Endless Universe’, p. 111.

Let us pray that Obama, if elected, does little to damage the American way of doing economics as well as physics — a veritable fount of innovation from which the whole world has benefitted.
Posted by: RCS | October 16th, 2008 at 10:47 pm | Report this comment
John Powers, two questions:

1. How does George Bush’s virtual nationalization of our financial system differ from what the “left wing Democrat” who you think might be terrifying the markets of the world would have done?

2. How much further would the markets have fallen if George Bush had not behaved like a “left wing Democrat”.
Posted by: algasema | October 17th, 2008 at 1:29 am | Report this comment
Good comment, NNN. Clearly, you know more than I do about economics, and therefore you have explained ideas that I have also been trying to express more clearly than I could have done.
Posted by: algasema | October 17th, 2008 at 1:42 am | Report this comment
Roger,

Pres. Bush and Sec. Paulson have behaved like authoritarians here. Not much difference between Left and Right Wing central planners, save the 20% that Sen. Obama wanted to give to ACORN that the Republicans rejected.

The market probably would have survived quite well if the Feds had backed off some numskull regulation about the time Countrywide failed, but they didn’t and we are stuck with a massive centralized planning authority where the only hope is that the central planning authority dies a quick death.

On the other hand employment is up, and inflation is 0%. Things are not all that bad for the average American, though most of the investment bankers are thoroughly ruined.

JBP
Posted by: John Powers | October 17th, 2008 at 2:22 am | Report this comment
John Powers seems not be in-touch with the reality of current financial or economic condition of the world. He obviously has a faith-based approach to financial theory. Should he be making comments on what is supposedly a venue for rational discourse?
Posted by: David Sheegog | October 17th, 2008 at 8:35 am | Report this comment
RCS. You write comparing US capitalism and European capitalism as exmplified by theoretical physicists. Then you quote Turok whose comparison is between the UK and the USA.

Geht nicht, RCS. The UK is not Europe, it’s a US protectorate, like Georgia (Sakaashvili’s Georgia. Gosh, have I forgotten how to spell his name already
Posted by: J.J. | October 17th, 2008 at 1:14 pm | Report this comment
J.J.,

The UK is culturally a mid-way house between the US and continental Europe. It strides both worlds, which has played to its advantage as the financial emporium of the North Atlantic. London is the North Atlantic’s centre of gravity.

Similarly, the Netherlands is culturally a mid-way house between the UK and the rest of continental Europe. So the Netherlands is closest to the UK on the continent, just as the UK itself is closest to the US in Europe. That is why so many Dutch speak fluent English and is also why there are so many anglo-dutch corporate partnerships such as: Royal Dutch Shell, Unilever, Reed-Elsevier and many others. France strides both the Northern European and Mediterranean world…I could go on and on. Mapping cultural influences on politics and economics is a fascinating pursuit (for some).

J.J., are Swatches better than M-watches?
Posted by: RCS | October 17th, 2008 at 3:06 pm | Report this comment
J.J. and algasema: Off-topic but you both might want to check out the clips of Senator McCain’s and Senator Obama’s humor at the Al Smith dinner in NYC.

Hilarious, particularly those by Senator Obama which were directed mostly at himself, his fellow Democratic politicians and the lunacy of the campaign than anything or anyone else.

Also a delight to see the reactions of the various politicians in the audience. I laughed out loud continually while listening.

Given that algasema is represented by Senator Schumer, the comment about “Senator Schumer’s family and friends with notebooks and cameras in the back of the room” (i.e. the press) was on target. The camera panned to Schumer who I am sure has full self-knowledge and who clearly thought the comment hilarious even though a “dig” at him.

Likewise the dig at Mayor Bloomberg now seeking to change the rules to run for a third term, also directed at President Clinton, in which Senator Obama’s quip was “President Clinton’s response was ‘You can do that?’”.

Repeating them not all that funny, but within the context, very amusing, and a relief from the the nonstop nastiness of the campaign.
Posted by: Wendell Murray | October 17th, 2008 at 3:14 pm | Report this comment
“especially the labour market”

Traditionally the expense of employing labor in European countries due to social security laws unquestionably makes labor significantly more expensive than in the USA where labor laws “protecting” workers have been in many ways dismantled since the heyday of post-Depression pro-labor legislation.

Consequence is higher structural unemployment in Europe than in the USA. Still a major problem, so far as I know. I think President Sarkozy is correct in reducing the legislated rigidities in France at least.

From my perspective any labor market is rigid due to its very nature (as opposed to money markets for example or markets for goods and services), so anything that makes is more fluid or “liquid” is good for labor itself. More funds can flow to workers as wages as opposed to the costs of or imposed by regulation that may in fact not benefit workers despite its (i.e. the regulation’s) intention.
Posted by: Wendell Murray | October 17th, 2008 at 3:29 pm | Report this comment
RCS. You always make good points, however much we differ.

Can you get Migros products in your part of the world?
Swatches are for kids really, pop-watches.
I had one once and the face fell out of the case one day, somewhere, when I was shopping. Since then I wear an M-watch on a daily basis, but I have a Rolex Cellini and a Patek-Philippe as well.

WM. Saw part of that dinner on German TV news - yes, good humour, McCain was glad to see Hillary there. Re the Clintons, some members of my family (inc. small daugher aged ca. 8 years?) were having lunch at a small country resto near Geneva one Sunday some years ago, when Bill and Sophia Loren plus bodyguards came in.

The 8 y.o. desperately wanted to have her photo taken with them, and BC and Ms Loren posed with her, so that she could do a “Show and Tell” at her school.
Said Bill “Just tell your friends we’re your grandparents”.
Posted by: J.J. | October 17th, 2008 at 3:42 pm | Report this comment
J.J.,

M-watch is a product of Mondaine. AFIK they are not sold in Israel (but of course there are Swatch shops everywhere). I was very pleased with the M-watch my girlfriend bought me in Zürich, but unfortunately the strap did not last longer than your Swatch…the Swiss social market model must not be as good as it used to be
Posted by: RCS | October 17th, 2008 at 4:33 pm | Report this comment
Wendell, I missed watching most of last night, but it sounds as if America needs many more Al Smith dinners and quite a bit fewer Sarah Palin rallies.
Posted by: algasema | October 17th, 2008 at 4:34 pm | Report this comment
RCS. In that case, your girlfriend will have to spend a bit more on you, i.e. on a new, better watch for you
Posted by: J.J. | October 17th, 2008 at 4:48 pm | Report this comment