The Saturday Essay: The real problem with capitalism is the markets

Will the new globalism have an even shorter life than the old globalism that perished in the dole queues of the Thirties?

IN RECENT weeks the newspapers have been full of the world financial crisis. Experts have seriously wondered whether it will lead to a global recession, even another Great Depression. Underlying that question is an even deeper one: will the new globalism that arose from the ruins of Communism and statism in the Eighties have an even shorter life than the old globalism that perished in the First World War and the dole queues of the Thirties?

The idea that the last two decades of the 20th century have reconnected our century with its first decades is natural, but also tantalising. The century starts and ends - here I quote from a recent book by Daniel Yergin and Joseph Stanislaw, "with markets ascendant and an expanding global economy, buttressed by a spirit of optimism". In between, the world economy, under the impact of war and depression, is fractured into economic and ideological blocs, with a consequent shrinkage of the area of political and economic freedom.

The conjoining thesis rests on two inescapable facts. For the first time since 1914 it is not absurd to talk about a single world economy. The huge reconnecting event was, of course, the collapse of Communism. But the world of what is called the "emerging markets" embraces not just the former Communist countries, but large slices of Latin America and sub- Saharan Africa as well.

The second reconnecting fact is the lack of ideological conflict. Of the ideologies that have torn this century apart, only capitalism is left, if it can be called an ideology. There are, of course, many different varieties, and much talk of Third Ways; but classic socialism is a busted flush.

We can argue about whether the world today is more or less global than it was, say, in 1914. Different indicators give different results. We would not, in any case, expect a literal going back.

Contemporary crystal-ball-gazers divide into two camps - optimists and pessimists. Francis Fukuyama is the best known of the former. His thesis, first proclaimed in The End of History in 1989, is that our age is unique in having actualised universal markets and universal democracy. This, to him, is a guarantee that the future will transcend the past. It is a peculiarly American vision. However, in his most recent writings he has been arguing that America itself is in the throes of social crisis, largely owing to the breakdown of the family. So his optimism is, to that extent, becoming increasingly qualified.

The pessimists are legion, but perhaps the best known - or at least closest to home - is John Gray. Gray's central argument is that the free market order is bound to destroy society, and will therefore produce catastrophe. His specific target is globalisation. Global bond markets have knocked out the possibility of social market economies, committed to full employment, welfare provision and social cohesion. "All social democratic theories of justice," he writes, "presuppose a closed economy."

There is nothing new about either the optimistic or the pessimistic script. The optimists of the 19th century looked to free trade to unite the world and - in Prince Albert's words - to "make an end of war after Christianity had tried and failed"; while according to Karl Marx the interdependence of nations would bring about "uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation". Both scripts involve the fundamentally problematic relationship between market capitalism and society. For Fukuyama, the commercial interdependence of nations is humanising and pacifying; whereas Gray articulates the widespread feeling that the relentlessly dislocating demands of a market-driven order are inimical to human well-being. This is a far more fundamental criticism of a free market system than that it is unjust - the socialist point.

Karl Polanyi expressed the essence of this thought in his book The Great Transformation (1944): "To expect that a community would remain indifferent to the scourge of unemployment, the shifting of industries and occupations and... the moral and psychological torture accompanying them, merely because the economic effects in the long run might be beneficial, was to assume an absurdity."

The point is that capitalism is still at it. The revolutionising, dislocating process, with the social strains it brings in its train - as early as 1848 Marx noted its tendency to dissolve all family and religious ties, to "strip of its halo every occupation hitherto honoured" - is in full swing today.

What 20th-century history has shown is that this process does not pauperise the worker, as Marx thought it would, but constantly enlarges the numbers of the affluent as more and more people and countries move up the income scale. So Marx's own solution, the revolution, has been cut off, leaving his problem unsolved.

The latter-day pessimist, who rejects the delusive promise of the globalist Utopia, but is denied the consolations of the socialist one, is left bereft of hope. John Gray concludes, logically enough from his point of view: "We stand on the brink not of an era of plenty that free-marketeers project, but a tragic epoch, in which anarchic market forces and shrinking natural resources drag sovereign states into ever more dangerous rivalries. A deepening international anarchy is the human prospect".

However, before preparing ourselves for doomsday, we need to ask a basic question: was it the stresses and strains of capitalist civilisation that brought about the wars, revolutions and economic breakdowns of the 20th century, or something else? It is important to remember that the pacifist, progressive perspective of the 19th century was underpinned by the spread of responsible government. In this world view, the spread of commerce and the spread of democracy were as closely yoked together as were war and autocracy on the other side.

From this perspective, the First World War, which started the 20th-century rot, had little to do with the dislocating effects of capitalist civilisation, and a great deal to do with the persistence of autocratic rule in central and eastern Europe.

Marx's idea - taken up by Gray and the new communitarians - that the market destroys society, is also highly overwrought. The United States has been the most capitalist nation in the world. But it has also been one of the most religious and family- and community-minded. Contemporary east Asia also refutes the idea that capitalism destroys social cohesion.

A sensible conclusion from the 20th-century record is that it's not the stresses and strains of capitalist civilisation that produce a flight from the market, but economic instability. We are currently experiencing the truth of this. If the instability is too great, political support for free exchange ebbs away, and societies can become renationalised and remilitarised - as happened in the Thirties. The trick today is, as it has long been, to combine the restlessness of capitalism with a modicum of stability. Specifically, we need to avoid the economic equivalent of earthquakes.

This is where Keynes comes in - or rather, comes back. Keynes developed a logical theory of economic earthquakes in terms of shocks to confidence that cause wealth owners to hoard money rather than invest it. The heart of the instability lay in the financial institutions of advanced capitalist civilisation - that nexus of banks, stock markets and money markets that supplied industry with its investment funds, but that could be "shocked" into withholding them.

If the financial system as a whole did a "bear" on the economy, production could run down to a very low level and stay there until something happened to revive investors' confidence - which might take a long time. The government's job was to prevent such a meltdown; to lean against any tendency to hoard by pumping money into the economy, like pumping air into a deflating balloon.

This insight by Keynes into the causes and consequences of financial crises remains supremely valuable. But the policy implications of it are not as simple as they seemed in the aftermath of the Great Depression of the Thirties.

In the Sixties and early Seventies governments pumped up balloons that were already too full of air, unleashing world-wide inflation and many associated disorders that discredited the system of Keynesian economic management. The result was to bring the "hard money" men back into power. Governments embarked on a necessary, but costly, course of disinflation - letting the air out of the balloon. At the same time the view gained ground that the sole source of the problem of instability lay with governments. Markets themselves were efficient; it was governments that were inefficient. Therefore let markets - and particularly financial markets - rip, and everything would be all right.

Since this doctrine took hold in the Eighties we have lived in a boom and bust world tempered by large and expensive rescue packages, with the experts repeating like parrots that markets were efficient and that it was governments that were to blame. Even today the predominant mood is to blame the governments of east Asia and Russia for the calamities that have befallen their countries, rather than the international speculators who pulled the rug from under their economies.

The answer is that governments can, and do, make all kinds of mistakes, through corruption or ignorance, but that financial markets can be equally wayward, for the same reasons. In particular, they suffer from the herd instinct brilliantly analysed by Keynes, not just because they are slaves to fashion, like most of us, but because when financial assets start haemorrhaging in one market, it is very hard to stop the blood spilling out across the whole system. When this happened in the Thirties, the leading powers broke up the global economy to protect themselves.

The emerging wisdom is that reasonable stability in a decentralised economic system requires two sets of rules of good behaviour - for governments and for financial markets. The governments of most countries are already pretty well hedged in with both monetary and fiscal rules, which they accept as entry tickets to the world economic game. (Such rules are subject to override provisions for emergencies, as they always have been.) With the unique, and tragic, exception of Russia it is hard to blame the current crisis on state mismanagement of fiscal or monetary policy. The banking and financial sector, though, is completely out of control, and this is where the danger now lies, because it is here that crises of confidence have their source.

When Keynes and his colleagues devised a financial architecture for the post-war world at Bretton Woods in 1944 they insisted on two sets of rules: rules governing changes in exchange rates, and rules governing the international movement of capital. They considered that the main currencies should normally be fixed in relation to each other, with changes subject to the approval of the International Monetary Fund. They also urged retention of the wartime machinery of capital controls, the aim being not to discourage foreign investment, but to distinguish between foreign investment and speculation. They thought that both (together with the adjustment facility provided by the IMF itself) were necessary conditions for restoring a liberal trading system.

The IMF remains, but the other two conditions have long since disappeared. Their absence lies at the root of the succession of financial crises that has plagued the world since the Eighties. The east Asian financial meltdown illustrates most dramatically the cost of the present hotchpotch of floating and pegged currencies that make up today's non-system, and especially the connection between speculation and currency volatility. Writing in 1941, Keynes called floating exchange rates a "failed experiment". This failure has been doubly confirmed. He was equally prescient about capital movements. Contrasting the flow of investment capital in the late 19th century with the speculative flows of the inter-war years, he wrote: "We have no security against the repetition of this after the present war... The whereabouts of `the better 'ole' will shift with the speed of a magic carpet. Loose funds may sweep round the world, disorganising all steady business." Even George Soros would say "amen" to that.

Today the academic case for floating exchange rates and unregulated capital movements is seriously undermined. The obstacle to setting up new rules covering both lies less in their desirability than in the feasibility of doing so and - it must be admitted - in disagreement about the rules required. Yet to continue without rules is to risk the destruction of the free market over much of the world - and a 21st century that will resemble the worst of our own rather than the best of the 19th.

Lord Skidelsky, professor of political economy at Warwick University, is the biographer of John Maynard Keynes

Arts and Entertainment
The Rolling Stones at the Roundhouse in London in 1971: from the left, Keys, Charlie Watts, Mick Taylor and Mick Jagger

Music ...featuring Eric Clapton no less
Arts and Entertainment
In the dock: Dot Branning (June Brown); Union boss claims EastEnders writers are paid less than minimum wage

TV

Arts and Entertainment
Roger Christian wrote and directed the 1980 Black Angel original, which was lost until 2011

film
Arts and Entertainment
Professor Green (Hand out press photograph provided by Camilla Gould)

TV
Arts and Entertainment

Game of Thrones reviewWarning: Spoilers aplenty
Arts and Entertainment
Matthew Healy of The 1975 performing on the Pyramid Stage at the Glastonbury Festival, at Worthy Farm in Somerset

music
Arts and Entertainment
booksThe Withnail and I creator, has a new theory about killer's identity
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment

ebooksNow available in paperback
Arts and Entertainment

ebooks
Arts and Entertainment
tvDick Clement and Ian La Frenais are back for the first time in a decade
Arts and Entertainment
The Clangers: 1969-1974
tv
Arts and Entertainment
Rocky road: Dwayne Johnson and Carla Gugino play an estranged husband and wife in 'San Andreas'
film review
Arts and Entertainment
Nicole Kidman plays Grace Kelly in the film, which was criticised by Monaco’s royal family

film
Arts and Entertainment
Emilia Clarke could have been Anastasia Steele in Fifty Shades of Grey but passed it up because of the nude scenes

film
Arts and Entertainment
A$AP Rocky and Rita Ora pictured together in 2012

music
Arts and Entertainment
A case for Mulder and Scully? David Duchovny and Gillian Anderson in ‘The X-Files’

TV
Arts and Entertainment
Impressions of the Creative Community Courtyard within d3. The development is designed to 'inspire emerging designers and artists, and attract visitors'

architecture
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010

GlastonburyWI to make debut appearance at Somerset festival

Arts and Entertainment
Lena Headey as Cersei Lannister

TV reviewIt has taken seven episodes for Game of Thrones season five to hit its stride

Arts and Entertainment
Jesuthasan Antonythasan as Dheepan

FilmPalme d'Or goes to radical and astonishing film that turns conventional thinking about immigrants on its head

Arts and Entertainment
Måns Zelmerlöw performing

Eurovision
Arts and Entertainment
Graham Norton was back in the commentating seat for Eurovision 2015

Eurovision
Arts and Entertainment
Richard Hammond, Jeremy Clarkson and James May on stage

TV
Arts and Entertainment
The light stuff: Britt Robertson and George Clooney in ‘Tomorrowland: a World Beyond’
film review
Arts and Entertainment
Reawakening: can Jon Hamm’s Don Draper find enlightenment in the final ‘Mad Men’?
tv reviewNot quite, but it's an enlightening finale for Don Draper spoiler alert
Arts and Entertainment
Breakfast Show’s Nick Grimshaw

Radio
Arts and Entertainment

Eurovision
Arts and Entertainment
'Youth' cast members Paul Dano, Jane Fonda, Harvey Keitel, Rachel Weisz, and Michael Caine pose for photographers at Cannes Film Festival
film
Arts and Entertainment
Adam West as Batman and Burt Ward and Robin in the 1960s Batman TV show

Comics
Latest stories from i100
Have you tried new the Independent Digital Edition apps?

ES Rentals

    Independent Dating
    and  

    By clicking 'Search' you
    are agreeing to our
    Terms of Use.

    Sepp Blatter resignation: The beginning of Fifa's long road to reform?

    Does Blatter's departure mean Fifa will automatically clean up its act?

    Don't bet on it, says Tom Peck
    Charles Kennedy: The baby of the House who grew into a Lib Dem giant

    The baby of the House who grew into a Lib Dem giant

    Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
    Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

    The harrowing testament of a five-year-old victim of Syria's endless civil war

    Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
    The future of songwriting: How streaming is changing everything we know about making music

    The future of songwriting

    How streaming is changing everything we know about making music
    William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

    Recognition at long last

    Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
    Beating obesity: The new pacemaker which helps over-eaters

    Beating obesity

    The new pacemaker which helps over-eaters
    9 best women's festival waterproofs

    Ready for rain: 9 best women's festival waterproofs

    These are the macs to keep your denim dry and your hair frizz-free(ish)
    Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

    Wiggins worried

    Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
    Liverpool close in on Milner signing

    Liverpool close in on Milner signing

    Reds baulk at Christian Benteke £32.5m release clause
    On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

    On your feet!

    Spending half the day standing 'reduces risk of heart attacks and cancer'
    With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

    The big NHS question

    Why are there so few new GPs when so many want to study medicine?
    Big knickers are back: Thongs ain't what they used to be

    Thongs ain't what they used to be

    Big knickers are back
    Thurston Moore interview

    Thurston Moore interview

    On living in London, Sonic Youth and musical memoirs
    In full bloom

    In full bloom

    Floral print womenswear
    From leading man to Elephant Man, Bradley Cooper is terrific

    From leading man to Elephant Man

    Bradley Cooper is terrific