Capitalism at the tipping point

Twenty years ago, we gloated over the collapse of Soviet communism and the "centrally planned economy". Capitalism - with all its freedom and democracy - was "victorious". Assuredly, it would remain dominant and secure, not just now, but for ever more. One analyst saw it as the "end of history”. Multitudes concurred.

That conviction about capitalism - and freedom and what we have been conditioned to call democracy - lasted until quite recently. It was still there when the "sub-prime crisis" reared its ugly head around July 2007. It became less a conviction and more a nervous expectation when Bear Stearns and its troubles became public about March 2008.

Stock markets, money markets, Over-The-Counter (OTC) trades have tended to move with unprecedented volatility in a 2008: a year distinguished for its widespread financial gyrations and gathering trauma.

If so many financial "institutions" have fallen off a cliff so suddenly, then so are attitudes to the system which nourished them so splendidly. That system was capitalism in the raw, or "extreme capitalism" as some now call it.

This is not the first time capitalism has been threatened.

When a more modest, less obsessive addiction to debt and speculation ended in the Great Crash of the New York Stock Exchange in 1929, the ensuing collapse threatened that the whole capitalist system - with idle factories, foreclosed properties and massive unemployment - would grind to a halt. The collapse nourished many alternatives of right and left, reinforcing fascism, Nazism and a whole range of socialist, communist and other left-wing refuges. Extreme right movements came close to defeating our "capitalist democracies" in World War II. The leftist alternatives came to flourish in a “socialist sixth of the world" before World War II and even more, with the communist victory in China, after the war.

It was a close-run thing but, with just enough and just in time, a New Deal, a catastrophic war and an unusually brilliant economist managed to rescue a capitalist system elsewhere.

John Maynard Keynes saw his mission as rescuing a capitalism worth preserving: not capitalism’s demise. That rescue could be effected only if capitalism became more disciplined, better managed and more wisely regulated. Left to its irresponsible self, it would inevitably self-destruct.

Between 1945 and 1969, variations of Keynesian capitalism in a variety of countries yielded high and stable rates of growth and employment. That sort of stability did not encourage speculation. The cowboy capitalists were in retreat. A primary element in Keynes' rescue plan was thereby realised: speculation belonged at most at the margin; it must not inhabit the economic mainstream.

We ignored that warning, especially from the early 1980s onwards.

We did not blatantly campaign in favour of speculation to convert the world economy into a gigantic gaming parlour. Rather the greatest, most widespread and most "sophisticated" casino of all time emerged from such "motherhood" concepts as "small government", freedom and democracy. Adam Smith’s "invisible hand", free markets, free trade, deregulation, privatisation and globalisation determined mainstream policies so that they were elevated to religious-style mania with their basic dogmas virtually uncontested.

The inherent dangers revealed themselves in junk bonds, cowboy takeovers and Michael Milken in the 1980s; but most of those I then called adventurers, marauders and buccaneers were prosecuted or were, anyway, not accepted into the respectable capitalist mainstream.

That changed especially after the communist collapse around 1989. More and more, what was increasingly called the “industry” of "finance capitalism" gathered respectability and moved to centre stage.

Let me interpose that especially the latter half of the 1990s provided what should be a memorable lesson: capitalism clothes itself in its most splendid regalia when it embraces innovative enterprise with real investment, enhancement of productivity and growth of actual production of real goods and services. It is then at its best and most secure as the economic and financial system of choice. In the 1990s, it enabled a clutch of real revolutions and set off a burst of real, especially high-tech economic progress.

The United States saw its chronic external trade and payments deficit decline, the Federal budget deficit changed into surplus and the growth of debt that had persisted for the previous two or three decades began to look as though it could be contained.

A lesson too flows from the fact that the blossoming transformation did not last. Allowed too much freedom and nourishment, the high-tech boom itself ended in bust. It did so because when capitalism is obsessively "free", the system - not just individuals within it - descends inevitably into licence; and even during the high-tech boom, deregulation continued to be ratcheted higher, "finance capitalism" wined and dined, and the capitalist cowboys were encouraged in their bronco-busting ventures.

This wasn't really capitalism at all. It was deep, addictive gambling. In 2006, I wrote:

Markets were now huge, modern and, in a very real sense, globalised. No longer were they local cattle or other commodity markets or even stock markets of the kind that had existed in New York at the time of the Great Crash of 1929. Now there was speculation in the domestic markets and across the national frontiers in a dazzling variety of forms, using an equally dazzling array of financial and trading devices. Almost anything could be “hedged” and, if it hadn’t been “hedged” before, then as with credit derivatives in the past decade, there were plenty of inventive young financial operators ready and waiting to bring it within the scope of global markets without too much delay.

In what was quite a rapid evolution - over two decades or so - these huge, varied and complex markets became so massive that they swamped normal trade and long-term investment transactions and converted a variety of exchanges into vast, twenty-four hours-a-day casinos. The funds involved in the markets weren’t counted just in billions; in aggregate, they were counted in trillions of dollars and going ever upwards. The evolution - or revolution - has not slowed or stalled and, in the middle of 2006, is racing ahead more rapidly and powerfully than ever.

The result was that, from the mid-1980s, economies bolted off on a wild bucking-bronco ride that, although stimulating as compared with the prudent regulation of the period between 1945 and 1970 and although bringing advantage to some, mostly in the short-term, was more than either private banks or official regulators could competently control. For some years now, most operators and regulators have been out of their depth, except - perhaps - in the very short-term trading day or week, with no idea what they should do, either in their own self-interest or that of the society, beyond - perhaps - the period immediately ahead.

The characters have changed to some extent. The adventurers, marauders and buccaneers of the 1980s, associated with such devices as junk bonds, have been thrown unceremoniously to earth after their exhilarating ride. But others have taken their place. Speculation has continued to thrive. Not only has it become entrenched on a massive scale, but it is now much more, and more honourably, institutionalised. It is no longer at the margin. It moves in the very best of circles: it has become part of the mainstream way of economic and financial life.

It is not just the high life of the successors to the adventurers, marauders and buccaneers but staple nourishment for ordinary, everyday, formerly cautious and often nervous citizens, including of course the fabled widows and orphans, representing the most vulnerable in the society. They may not know it but they're in there - right in the middle of the gambling parlour, sitting at the blackjack and roulette tables - with everyone else, their future dependent on a speculative frenzy whose outcome none of their advisers can, if they’re honest, predict or control. In other words, speculation is now - whether they know it or not - much more a feature of everyone’s normal, everyday economic life than in the 1980s or, indeed, than it ever was in the history of any human civilisation, however dissolute, in the past.

Now that the financial mania is seen to have fatally infected the whole economic system, the reaction has been, as one analyst puts it, “to throw the kitchen sink at it.” The policies of the Fed, the Treasury and the Bush Administration have been to reflate the system by adding still more government sponsored debt and new money. In the last four months, the US Treasury has borrowed $1 trillion and rising, mostly for the Fed to expand its loans and bailouts to the financial sector. That massive borrowing, allied with an unprecedented credit crunch, has probably harmed more than mended. We still cannot be sure whether the helicopter squadrons of Bernanke and others around the globe will deepen the debt-deflation process or provoke record-breaking hyperinflation - perhaps both, one pursuing the other.

On one hand, the helicopters may drop too much money to avoid a massive monetary bubble. On the other, their “drops” may be too trivial to moderate the debt-deflation engulfing the real economy. What foreigners will do is also uncertain. Will they slow their loans to the US - and Australia? And shift their buying to something like or nearly as good as gold? Have they any alternative?

Certainly, we need, as John Gelles, a wise American, puts it, "not socialism or mindless marketism". Instead he advocates “responsible, minimum taxation, green, mixed-economy growthism”.

Assuredly, we need to return to a more rational understanding of where real wealth and income come from. The United States should return to what it does best: real and often highly innovative investment, yielding persistent acceleration of real productivity and enabling the United States to exercise its unrivalled capacity to produce goods and services that global markets and communities need.

Neither the outgoing Bush nor incoming Obama Administration should continue to act in ways that cause the United States Government to become, as one observer puts it, “no more solvent than the financial zombies it is keeping on walking-dead support. We're not going to get over this disease until we stop generating additional zombie money out of no productive activity whatsoever.”

As joblessness grows, those words should translate into programs to get millions of Americans and others into productive work quickly. Public investment will stimulate private investment, with the multiplier effect securely though slowly restoring high levels of employment, advancing productivity and producing enough to meet the essential needs of the people.

The overriding challenge will be of course to reverse fundamentally American-style policies which have governed so much of the global economy during recent decades. Those policies have gutted American - and Australian - industry, especially manufacturing; but the flip side is that they have achieved unprecedented growth in the economies of China, India and other countries of East and South Asia.

These latter gains cannot - and will not - be abandoned lightly. To reverse policies abruptly would provoke highly disturbing social, political and perhaps strategic fallouts. So a wisely calculated return to sane global economic management will take time, as well as care, patience and understanding.

In 1949, when we feared a serious downturn in the American economy, the United Nations appointed an expert group chaired by a distinguished Australian economist, Dr E. Ronald Walker, with whom, as a young diplomat, I was then working in Paris and Geneva. Expeditiously, the group produced a brilliant report on National and International Measures for Full Employment. It still remains a valuable work of reference.

Australians - and others - might well consider advocating much the same multilateral process now. We would be on firmer ground in our financial and economic policies if we did. We might even help to create a more disciplined, sustainable capitalism - and a more acceptable liberal democracy. If, on the contrary, we leave a perhaps mortally battered capitalism - and anything else we value - in the hands of those who have led us into this pickle - we might suffer the devastating denouement which some might say we richly deserve.