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Capitalism’s Futures

John Bradley

The Global Minotaur: America, Europe and the Future of the Global Economy, by Yanis Varoufakis, Zed Books, 304 pp, ISBN: 978-1783606108
PostCapitalism: A guide to Our Future, by Paul Mason, Allen Lane, 368 pp, ISBN: 978-1846147388
Capitalism: Money, Morals and Markets, by John Plender, Biteback Publishing, 320 pp, ISBN: 978-1849548687

These three books provide accessible and compelling accounts of the role played by capitalism in the causes, progression, imperfect resolution and long-term consequences of the banking crisis and global recession of the mid-2000s. They have an importance in the evolution of post-crisis narratives that deserves attention, both from the wide general audience for which they are intended as well as from policy-makers and professional economists. Many of the latter may be tempted to dismiss them as unhelpful, eccentric or ideological. But such a dismissal would be a serious mistake. Groupthink lay at the heart of the crisis. So outside views and perspectives, no matter how wide-ranging, challenging or unorthodox, need to be entertained. In addition, the radical, populist, left-wing perspectives of Varoufakis, Mason and others have become electorally attractive in the crisis-ridden EU, so it might be unwise to stand back and permit debate on the underpinnings of these developments to become detached from mainstream political discourse.

It is a curious but inescapable fact that this recent economic crisis had many similarities to the sinking of the Titanic on April 14th, 1912. The dramatic collapse of the banking system and the consequent global recession came as a dreadful shock: they were not meant to happen. Just as claims had been made for the “unsinkability” of the Titanic, the financial innovations of the pre-crisis decade had been sold to the public and to policy-makers as lowering, perhaps even eliminating, the risk of systemic financial failure. In the run-up to the collapse, optimism was unbounded; almost everyone seemed to be a winner; there was greed of an almost unimaginable scale, but there were still enough rewards to go around; doubters were dismissed as cranks and pessimists. This was to be a brave new age of prosperity. Then, without much by way of effective warning, financial and economic failure on a massive scale occurred, flying in the face of the hubris and wildly overoptimistic assurances to the contrary.

It was only natural that the early literature on the crisis and recession focused on the unfolding drama and the colourful and often venial dramatis personae. As John Plender cynically reminds us, Voltaire is said to have remarked that if you see a banker jump out of the window, jump after him ‑ there is sure to be a profit in it! And Balzac is reported to have believed that behind every great fortune there is a great crime. Such was also the case when, immediately after the Titanic slid below the icy waters of the North Atlantic, attention naturally focused on the immediate human drama and loss of life. In the case of that tragedy, obvious causes of the sinking were quickly identified in terms of the short-term failure to assess and manage the inherently risky business of ploughing at full speed through an ice field without a proper lookout, in a situation where any fears that the unfortunate captain may have entertained were brushed aside by the dangerously myopic and narrow self-interest of the liner’s owner. The time for deeper consideration of issues relating to ship design and stricter legal regulation of safety came later. In this case lessons were learned and major changes were made. Regulations regarding marine safety were tightened and enforced. Travel at sea became much safer, even if new problems continued to emerge (unknown unknowns, in the immortal words of Donald Rumsfeld). Human error and malfeasance could be reduced but never entirely eliminated. Ships continued to sink, but much less frequently.

By way of contrast with the Titanic story, none of our three authors could be described as being sanguine about the lessons learned from the banking and economic crisis, even if the books under consideration bring rather different longer-term perspectives to bear on this debacle. Yanis Varoufakis is both a serious academic economist and a policy “player”. He was the flamboyant finance minister of the Syriza government of Greece during the very recent debate about the country’s possible expulsion from the euro zone, a predicament that had its origins in the earlier global banking and economic crisis. In the light of his radical analysis of the global economy and of its conspiracies, earlier versions of which were available during the euro debate, Professor Varoufakis’s participation in the series of seemingly endless European Councils of sober and conventional finance ministers must have seemed rather like Martin Luther attending a sixteenth century Vatican Council. Paul Mason is a popular TV reporter and Guardian columnist whose breathless Channel 4 News broadcasts from the world’s economic trouble spots both inform us and enliven our evenings. His “influences” (in the Commitments sense of the term) lie deep in Marxist theory and his analysis and prescriptions for the future (which he terms postcapitalism) emerge from a curious blend of critiquing capitalism and reforming Marxism. John Plender has been a senior editorial writer and columnist at the Financial Times since 1981, writing a weekly column on economics and business. His is a quieter, more reflective view of the nature and enduring limitations of capitalism, informed by history, literature, religion and philosophy. Yet it is no less deadly than the more apocalyptic visions of Varoufakis and Mason.

The title chosen for his book by Varoufakis (The Global Minotaur) comes with an obvious built-in agenda that is hammered home relentlessly throughout. The Minotaur represents any person or thing that devours or destroys. In classical mythology it was a monster, the offspring of Pasiphaë and the Cretan bull, that had the head of a bull on the body of a man; was housed in the Cretan Labyrinth, and was fed on human flesh until Theseus, helped by Ariadne, killed it. The choice of this metaphor as a shaping agenda to represent the behaviour of the post-WWII United States economy as it related to the then ruinous state of much of the rest of the world economy, and specifically its behaviour after the demise of the Bretton Woods system of stable exchange rates in 1971, serves as a warning that Varoufakis’s analysis is going to be neither nuanced nor subtle. But he does have a nice turn of phrase. Describing the confused shambles that occurred in the USA during 2008, he writes:

When the Grand Wizard (former Fed Chairman Alan Greenspan) confesses to having based all his magic on a flawed model of the world’s ways, and the doyen of presidential economic advisers (Obama’s chief economic adviser Larry Summers) proposes that caution be thrown to the wind, the public ‘gets’ it; our ship is sailing in treacherous, uncharted waters, its crew clueless, its skipper terrified.

Perhaps the most engaging part of his book is the introductory chapter, where he writes on what he terms “The 2008 Moment”. With a sharp scalpel and a minimum of ideological baggage, he gives six compelling explanations why the crisis happened. First, a failure of the collective imagination of many bright people to understand the risks to the system as a whole. Thinking that it had successfully diffused risk using a range of complex financial innovations, the newly financialised world created so much risk that it was consumed by it. Second, regulatory capture, or the failure of the risk-assessing agencies to operate independently from the banks whose actions and products they were evaluating. In Varoufakis’s colourful style:

In that ecology of seemingly self-propagating paper wealth. it would take a heroic ‑ a reckless ‑ disposition to sound the alarm bells, to ask the awkward questions, to cast doubt on the pretence that triple-A rated CDOs carried zero risk. Even if some incurably romantic regulator, trader or senior banker were to raise the alarm, she would be well and truly trumped, ending up a tragic, crushed figure in history’s gutter.

Third, irrepressible greed, or the pessimistic view that humans are greedy creatures who feign civility but given the slightest chance will steal, plunder and bully. Fourth, deep cultural factors that initially predisposed Anglo-American economies to favour less state regulation and more risky behaviour, the consequences of which eventually spilled over to other more cautious and socially-minded cultures.

Varoufakis’s fifth factor is referred to as “toxic theory”. Although the field of economics lays claim to be scientific and its discourse is often expressed in complex and impressive mathematical language, the reality is quite different. In real physical science the evolution of theory is driven by facts. So when, in the late nineteenth century, some small anomalies were detected in the motions of planets that could not be explained by the prevailing Newtonian laws, a more encompassing theory was developed (the Special and General Theory of Relativity) that explained these anomalies and included the Newtonian Laws as a special case. Alas, economics does not operate in this way. To put it crudely, if you believe that markets operate efficiently and that people are motivated by narrow self-interest (maximum consumption for households and maximum profit for firms, everyone for themselves), then you can construct a theoretical economic theory edifice that incorporates these assumptions. And given the utter complexity of human behaviour, such simple, elegant and mathematically tractable models are impossible to falsify. Any deviations from model predictions can always be explained away in terms of the poor data available (that is, if we had more accurate data, the model would hold up) or even in terms of assertions of normative behaviour (agents had damn well better behave according to the model’s crude assumptions if they really want to maximise consumption or profits!). Varoufakis sums up pithily as follows:

Despite their highly impressive labels and technical appearance, economic models were merely mathematized versions of the touching superstition that markets know best, both at times of tranquillity and in periods of tumult.

The sixth and final explanation goes to the heart of Varoufakis’s critique of capitalism, and is labelled “systemic failure”.

What if neither human nature nor economic theory was to blame for the Crash? What if it did not come about because bankers were greedy (even if most are), or because they made use of toxic theories (even though they undoubtedly did), but because capitalism was caught in a trap of its own making? What if capitalism is not a ‘natural’ system but, rather, a particular system with a propensity to systematic failure?

If ever a book was set up to examine the pathologies of economic instability this was it. Yet rather than work through these six potential explanatory factors in greater historical detail, Varoufakis reaches instead for his Minotaur explanation, his contention being that the behaviour of the managers of the US economy after WWII brought us inevitably to our current predicaments.

Once the war began to lose its momentum and peace seemed within reach, US officials began to panic. In a majestic reaction to the fear that the Crisis (during which they had cut their teeth) might rear its ugly head again once the war ended, they got down to business. They planned for the most far-reaching socio-economic engineering human history has ever seen. I call it the Global Plan. .... The New Dealers who had been running Washington since 1932 realized that history had presented them with a remarkable opportunity to erect a post-war global order that would cast American hegemony in stainless steel.

For the remainder of his book, Varoufakis presents the evolution of the global economy through the distorting prism of his Global Plan and his Minotaur metaphor. For example, he interprets the goal of the Marshall Plan narrowly as being to dollarise Europe and rehabilitate Germany. The notion that European integration sprang out of a European urge to create a bulwark against American dominance he describes as nothing more than the European Union’s “creation myth”. Yet for the period to the breakdown of the Bretton Woods system of stable exchange rates in 1971, when the US economy ran massive trade surpluses, he still maintains that:

The simple lesson that the Global Plan can teach us today is that world capitalism’s finest hour came when the policy makers of the strongest political union on the planet decided to play a hegemonic role – a role that involved not only the exercise of military and political might, but also the kind of massive redistribution of surpluses across the globe that the market mechanism is utterly incapable of effecting.

The later chapters deal with the global changes that came about after 1971, when the war-embattled US started to run massive fiscal and trade deficits and the reconstructed economies of Germany, Japan and more recently China fed their emerging surpluses back to the US in the form of capital flows. According to Varoufakis, this provided the petrol that served to ignite the financial conflagration that eventually came to a head in 2008. This is an interesting interpretation, but perhaps not the most constructive frame of mind with which to address the tribulations of the Greek economy, a drama in which he played a leading role after the book was published. So much has been left out of his analysis of what was a complex saga of error and omission, resulting in a book that is dominated by what amounts to an unbalanced and not very credible conspiracy theory.

Both Paul Mason and Yanis Varoufakis share a common approach to seeing the economy through Marxist eyes. But while Varoufakis, the academic economist, partially balanced his favoured Marxian perspective with more orthodox mainstream economic analysis, Mason, the journalist, either cannot or will not, and this inability has a serious impact on the credibility of the story he tells of the demise of capitalism and the rise of postcapitalism. Academics try to work from facts that are broadly accepted towards interpretations of these facts, about which there can be legitimate dispute. Journalists, on the other hand, are obliged to seize on specific dramatic events and images and attempt to draw lessons about causes and effects. When writing for a newspaper, one is usually advised to put the main message in the first paragraph, because that might be all that is eventually published. When reporting on TV, one has at most a few minutes to tell a story or make a point.

For example, Mason opens his book with a description of a visit to the region of the river Dniestr in Eastern Europe. To the east of the river lies the Russian puppet state of Transnistria, which broke away from Moldova after the collapse of the USSR in 1991. To the west lies the remainder of the state of Moldova, about which he comments:

This grey world of dirt roads and grim faces was produced by capitalism, not communism. And now capitalism is already past its best. Moldova, of course, is not a typical European country. But it’s in these edge places of the world that we can watch the economic tide receding – and trace the causal links between stagnation, social crisis, armed conflict and the erosion of democracy. The economic failure of the West is eroding belief in values and institutions that we once thought were permanent.

Many alternative interpretations of the sorry plight of Moldova come to mind other than the systemic failure of capitalism! States engulfed by active or incipient civil wars seldom prosper and are singularly unattractive locations for domestic or inward investment. If such a state has the additional misfortune to be located between the capitalist EU and, in Mason’s own words: “whatever you want to call the system Vladimir Putin runs”, then perhaps we ought to look for explanations closer to home than the collapse of capitalism.

Mason is not really concerned with the short- and medium-term behaviour of economies. Rather, he is after the longer term systemic picture. In particular, having buried capitalism, he seeks an alternative, which he terms postcapitalism, a phenomenon he claims is emerging from the “old” capitalism under the influence of three impacts of new technology in the past twenty-five years. First, information technology has reduced the need for work, blurred the edges between work and free time and loosened the relationship between work and wages. Second, information goods are corroding the market’s ability to form prices correctly. Third, there is a spontaneous rise of collaborative production: goods, services and organisations are appearing that no longer respond to the dictates of the market and the managerial hierarchy. These three developments are, indeed, important drivers of change in the economy and are the subject of extensive investigation in the mainstream business and economic literature. But they affect a somewhat narrow range of goods and services associated mainly with the generation and distribution of knowledge (for exampleWikipedia) and are characterised by their “non-rival” nature (knowledge, for example, once produced, can be used simultaneously by many people, subject to patent and copyright laws; but the car you buy or the food you eat has very different characteristics). For most goods and services, markets are alive and well and show little sign of converging to zero prices.

The apocalyptic picture painted by Mason of what the present form of capitalism offers us for the future is not pretty:

Allow yourself to imagine the world of 2060 as the OECD predicts it: Los Angeles and Detroit look like Manila today – abject slums alongside guarded skyscrapers; Stockholm and Copenhagen look like the destroyed cities of the American rust belt; the middle-income job has disappeared. Capitalism will be in its fourth decade of stagnation.

But was the 2014 OECD report, Policy Challenges for the Next 50 Years (http://www.oecd.org/economy/Policy-challenges-for-the-next-fifty-years.pdf), upon which Mason’s forecast is based, as doom-laden as this quote suggests? I think not. A common approach to policy analysis takes present policies and runs them into the future, unchanged, in an effort to flush out and identify emerging problems. However, the OECD report goes on to discuss many policy proposals that are both feasible and hold out prospects for much better outturns than the apocalyptic “no change” conclusion used by Mason. These OECD proposals stop far short of writing off the “old” capitalist system and include: further trade and investment liberalisation; international coordination on mobile tax bases; international cooperation on intellectual property rights and competition law; addressing a more multi-polar global economy.

Perhaps the weakest element of Mason’s analysis is his belief in the “wave” theory of growth cycles. This theory, associated with the Soviet economist Nikolai Kondratieff working in the 1920s, claimed to detect regular patterns of growth and decline associated with significant changes in such factors as technology, demographics, land speculation and debt deflation. While such patterns do exist, there is very little agreement on characteristics and underlying causes. Theories that amount to a bald assertion of post hoc ergo propter hoc, however attractive to populist political movements, are of little use to policy-makers and analysts. And the absence of any serious, detailed analysis of how technological developments impact on economic behaviour makes it impossible to take seriously Mason’s postcapitalist world:

With the new terrain, the old path is lost. But a different path has opened up. Collaborative production, using network technology to produce goods and services that work only when they are free, or shared, defines the route beyond the market. It will need the state to create the framework, and the postcapitalist sector might coexist with the market sector for decades. But it is happening.

Buried inside Mason’s postcapitalism one detects a degree of nostalgia for the old, failed socialist project (“The one time it was tried, in Russia after 1917, it didn’t work. Whether it could have worked is a good question, but a dead one.”).

Turning to John Plender’s book (Capitalism: Money, Morals and Markets) there is a tangible change in approach and tone. Unlike Mason, he has no radically different vision of the future to sell. Unlike Varoufakis, he is not narrowly obsessed with the consequences of the conspiratorial iniquities of American post-WWII capitalist plotting. Rather he examines capitalism in a much deeper historical and cultural context than the one commonly used by economists. The term “capitalism” may have been popularised by Marx only in the nineteenth century but the broad characteristics of property ownership and market-based transactions (that is capitalism) go back to the dawn of history. However, Plender’s account is no uncritical, Panglossian tale of the virtues of capitalism. On the contrary, his twelve chapters systematically explore important pathologies of capitalism, drawing on much wider sources than economic textbooks. If war is too important to leave to the generals, then certainly capitalism is too important to leave to the economists.

Plender states clearly his approach at the very start of his book:

No one, after all, is looking to North Korea for an alternative vision of the future. Since the fall of the Berlin Wall, the only question has been about the extent of the market orientation of capitalism. What the crisis did do was provoke intense soul searching about the merits and defects of an entrenched capitalist system ... [This book] is, in effect, a discursive and opinionated probe around the grumbling bowels of the capitalist system.

This is a salutary reminder of how discussion of the modern economy has become detached from wider and deeper social aspects of our lives. It was not always so. For example, the father of modern market-based economics, Adam Smith, whose seminal 1776 text An Inquiry into the Nature and Causes of the Wealth of Nations first described the modern foundations of capitalism, had earlier written The Theory of Moral Sentiments, where he explored the contradictions between the morality of narrow self-interest and desirability of wider social relationships.

What does Plender see as the main pathologies of capitalism? Many people have concerns about the ethical basis of capitalism and the role of the money motive in driving economic growth (“The Root of All Evil”). Many regard entrepreneurs as greedy, unethical people who can be relied on to take shortcuts and break all the rules of society on the path to fortune (“Animal Spirits”). There is a deep-seated popular conviction that bankers are among capitalism’s most self-seeking, devious and unfathomable creatures (“Hijacked by Bankers”). There is an excessive faith in markets and a neglect of other disciplines such as history, literature, psychology and sociology (in Edmund Burke’s telling phrase, “Sophisters, Economists and Calculators”). There is dispute as to whether greater globalisation will restrain human passions and make war less frequent (“Trade and the Fatal Embrace”). There is worry about the danger of financial speculation as it became institutionalised in the banking system when earlier post-1929 barriers were removed between deposit-taking and investment banking (“Speculation”). The prevalence of unrestrained debt creation casts a shadow over the future (“The Dynamics of Debt”). There are difficulties in creating at the global level the kinds of equitable fiscal redistribution that commonly operates within any nation state (“Tax and the Division of Spoils”).

This final pathology, division of spoils, lies at the heart of the current dilemmas of the euro zone, and has important implications for Ireland as well as for what Plender refers to as “profligate southern Europeans”:

Northern Europeans are broadly supportive of the social democratic model of capitalism, but do not want to finance a Europe-wide version of it. They have encouraged their politicians to impose a fiscal straitjacket on supposedly profligate southern Europeans and to resist turning the monetary union into a broader transfer union where creditor countries come to the rescue of indigent sovereign debtors.

Since Plender sees the elements of capitalism as deeply embedded in human nature, and human nature is unlikely to be perfectible this side of paradise, his options for the future focus on the different mutating forms of capitalism rather than a quest for an entirely new and revolutionary system.

To the extent that systemic choices are available, they lie on a spectrum that runs from the market-driven model of capitalism in the US, via the social democratic models of Europe, to the heavily statist, authoritarian form of capitalism that prevails in China and much of the rest of the developing world – a model nonetheless characterised by extensive exposure to the global trading system ... It is, in its way, a call for us all to grow up and seek to remedy the injustices of the capitalist system while acknowledging its merits.

1/11/2015

John Bradley was for many years a research professor at the ESRI and now works as an international consultant in the area of economic and industrial strategy. He regularly advises the European Commission, the World Bank and other international organisations and governments on policy issues related to promoting long-term economic growth and development.

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