Capitalism 3.0?

Apr 19, 2009 Features / Columnists, Ravi Dev

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Even Marx, its greatest critic had to concede that Capitalism as a system was the greatest producer of wealth the world had ever experienced. As we wrote earlier, however, in addition to its distributional inequities, its tendency to be subjected to periodic crashes made even its supporters wonder if it could survive indefinitely. The present turmoil in the global economy has once again precipitated such musings.

Those like Marx, who felt that its internal contradiction set the seeds of its inevitable destruction, proposed alternative pathways to a more benign but yet effective economic arrangement. Socialism and communism were proposed as alternatives that would do away, root and branch, with the purported fatal premises of capitalism – private ownership of the means of production and market coordination –but they failed. Even capitalist-oriented thinkers despaired.

After the Great Depression of the 1930’s, one of the great economists of the twentieth century, Peter Schumpeter introduced the notion of “creative destructive” as one of the causes of the busts of capitalism – but also of its subsequent boom. Yet in 1942, he predicted flatly, “Can capitalism survive? No. I do not think it can.” But if history is any guide, capitalism will survive. The question is, “In what form?”

Capitalism’s longevity has been due primarily through state intervention in the economic processes – to varying degrees depending on what were believed to be the flaws that created the periodic crises. In a macro sense, Marx’s criticisms had a very profound impact, because of the almost universal focus by governments on the economy as the key determinant of what would lead to greater “well being” of their constituencies. But that focus has not been identically operationalised in every country, and after each crisis, so there are opportunities to evaluate the relative efficacy of the several “innovations”.

We can call the original system that arose in Europe Capitalism I. But even early in the day, there were variations in its development between Britain that led the way, and Europe – where Germany and France has a more “dirigeste” approach – i.e. one in which the government played a greater facilitative role in the development of industries. This first phase ended with the Great Depression of the 1930’s.

After WWII, the victorious nations met at Bretton Woods in the US just before the war ended to deal with what were perceived to be the causes of the “Great Crash”. Capitalism II was unveiled.
The Gold Standard, backed by the US dollar, the IMF/World Bank and GATT were established, but unfortunately a world financial regulatory body was vetoed by the US. Japan and the Far Eastern economies were the success stories of this phase with their governments playing an even more interventionary role in “facilitating” markets.

In Europe, the Scandinavian countries experimented with a “socialized” approach to mitigate the more iniquitous effects of the capitalist order. After 1980 an Anglo-American hyper market fundamentalism pushed as the Washington Consensus prevailed as the essence of Capitalism II and lasted until last year.
This crash forced President Bush to summon the leaders of the countries controlling 90% of world production – the G-20 – to a meeting last November to address the crisis. It was billed as a potential Bretton Woods II in view of the conceded deep-seated systemic factors – not just policy mistakes – that precipitated the collapse.

The G-20 cogitated and finally pronounced on the latter’s “root causes”: “During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.”

In other words, the leaders saw the problem as essentially a technical one that can be solved by tweaking the identified parts of the system. Then, and again in their recently concluded second meeting, they reiterated the fundamental principles that would guide their actions: “We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.”

They reiterated the policies outlined in their first meeting – even though they did nothing to fulfill pledges on key components such as DOHA, and confidently concluded: “By acting together to fulfill these pledges we will bring the world economy out of recession and prevent a crisis like this from recurring in the future.” That is, they are asserting that their nips and tucks will be the silver bullet to prevent any future crashes. Capitalism would now be one uninterrupted upward movement.
There is going to be no Capitalism 3.0. Capitalism II which has failed most ignominiously is supposed to still lead us to the Promised Land. (To be continued)

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