naked capitalism

By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).

Anatole Kaletsky (2010) Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis; Public Affairs, New York

In their song Lola, Ray Davies and the Kinks sang: “Girls will be boys and boys will be girls/It’s a mixed up muddled up, shook up world/ Except for Lola, L-L-Lola”. A similar cross dressing phase is evident in modern political economy.

While the Chinese have adopted Capitalism Chinese style, the West now flirts with Socialism Western style. Political positions are increasingly fluid, as evident from the fact that many public intellectuals, darling Libertarians and Conservatives, seem enthusiastic about the rise of China and its systems. The flux has been marked by the return of old fashioned political pamphlets, calls to arms for particular ideologies. Most are delivered via Internet blogs, T.V., chat shows, and the occasional tome, the soapbox and Hyde Park’s Speaker’s Corner now being otiose.

In Capitalism 4.0, Anatole Kaletsky, an editor at the Times, former journalist at The Economist, and an economic consultant, argues that the global financial crisis is transforming capitalism. Capitalism 1.0 (the classical era of laissez-faire), Capitalism 2.0 (the Depression and the rise of government intervention) and Capitalism 3.0 (the stagflation of the 1970s and the rise of free-markets) will evolve into Capitalism 4.0. There are a few “X.1″ and “X.2″ interspersed in between. The new release entails a redefined relationship between markets and governments. Mr. Kaletsky argues, perhaps blandly, that this is due to capitalism’s innate ability to adapt and evolve.

According to the Kaletsky code, Capitalism 4.0 will require competent and active governments to create the framework for a viable market. It will require governments to manage demand and recognise the imperfections and errors of markets. There is a lengthy list of things that will need to be changed at the political and economic levels to bring the new Xanadu into being. The new order will be characterised by “experimentation”, where government intervention increases in some parts of the economy, financial markets, but decreases in others, such as education and health. Mr. Kaletsky preaches that if governments use their tools properly a rapid and robust recovery will occur.

The arguments and proposals are not novel or original. Many are in active discussion, having been put forward earlier by other authors. The most surprising thing about Capitalism 4.0 is the optimism about policy makers having the ability to make decisions that will improve the system. The policy makers are the same ones that the author vivisects as having failed in the lead up to the current crisis.

Capitalism 4.0 is founded on the bedrock of Joseph Schumpeter’s idea of “creative destruction”. It also sounds ominously like the mixed economy nostrums that all political persuasions have embraced with slight and minor variations in the post World War 2 era. Unfortunately, most people like the creative part of Schumpeter’s formulation, rather than the second less joyful part of the aphorism. Everyone also agrees on a mixed economy, provided that in the mix they are left to make money without interference in good times and bailed out in others.

The written form chosen or the size of the work (just over 300 pages) seems insufficient for the breadth of Mr. Kaletsky’s ambitions and unbounded enthusiasms. Capitalism 4.0 lurches uneasily at times from superficiality to excessive detail. The readers will find potions and remedies for everything from correcting deficits, trade imbalances to running the Chinese economy.

The author embraces futurism, unafraid to make predictions where others dare not predict. There are forecasts on currencies (the dollar), finance, energy (oil), healthcare, housing, tax and the environment. There is even career advice – business and financial institutions will stop employing economists, trained in traditional rational and efficient markets.

The potted history is standard. The author’s interpretation of it will undoubtedly have supporters and detractors depending on the political colour of the critic.

The tone lurches from earnest econo-speak to polemic, branching off occasionally into vituperative attack. Mr. Kaletsky believes that the magnitude of the crisis is largely attributable to George Bush’s Treasury Secretary – Henry “Hank’ Paulson. An entire chapter “The Economic Consequences of Mr Paulson” (around 8% of the book) consists of an ad hominem attack of Paulson, in particular his decision to allow Lehman Brothers to file for bankruptcy.

Despite hyperbole, Mr. Kaletsky claims that Paulson came “closer to destroying capitalism than Marx, Lenin, Stalin and Mao Zedong combined”, the chapter does not match Keynes’ 1925 “The Economic Consequences of Mr Churchill”, a critique of Sir Winston’s defence of the gold standard. The chapter is self consciously titled after Keynes’ piece, a note drawing this to reader’s attention.

Mr. Kaletsky sees no inherent contradiction in espousing capitalism’s self renewal process and avoiding periodically violent and destructive failures to impose necessary market discipline. Puzzlingly, he chooses to believe that voters realise that banks are always government supported and will merely now demand that all banks should pay in advance for government insurance.

Crises are generally useful in forcing decisions. Crises can be also extremely useful in creating a market, whether needed or superfluous, for big ideas about resolving the “crisis”, whether real or manufactured. Capitalism 4.0 is one of a glut of these crisis solution works, searching for the next “big idea”, that will make it onto the best seller list even if it doesn’t change the world or make a difference.

The truth of political economy may be simpler. Capitalism simply survives not on its merits but because it avoids the failure of command economies such as Russia, described once as “Upper Volta with rockets and nuclear weapons”. It also plays to the base instincts of the biological drivers of competition between human animals. It might also be as George Soros observed that at a point in cycle “people continue to play the game although they no longer believe in it.”

Politicians are rarely ideological. The process dictates pragmatism and spin in equal measures. The aim is to attain and retain power for as long as possible. In Rome, this meant ensuring the people had food, drink, employment and games. Surprisingly, little has changed in those political dynamics. The chattering classes and commentators may believe that political economy matters. Unfortunately, the only use that politicians have for theory is to either elucidate decisions already made or discredit opponents.

Other than North Korea, no country has adopted a pure form of political economy in recent history and that fact is unlikely to change soon. Keynes wanted economics to become a better respected profession on a par with dentistry. We remain some way short of that objective.