From the archives: 15 months on, has anything changed in global economics?

I posted this piece on May 23rd 2010. In the light of yesterday’s stream of banalities from Ben Bernanke, I have seen and heard nothing in the interim to change my mind.

Tomorrow, I’ll be offering an analysis of Ben in the Wyoming Hole. But in the meantime, you might find this interesting reading.


ANALYSIS: The last thing capitalism needs is a new orthodoxy.

Capitalism has lost touch with its consumers.
The only way it will solve this is by getting bourses
out of the way.

Pimco’s Bill Gross tried to sum up capitalism’s problem recently at a New York meeting of Mammon’s biggest brains. He said:

“The Republican orthodoxy of lowering taxes is broken. The Keynesian orthodoxy of government spending is broken. What we really need is some new kind of orthodoxy.”

Mr Gross is a little late in asking for this (some of us have been doing it since 2004, and better folks than me for much longer). But nevertheless, his honesty is a refreshing change from the mix of compulsive mantras and third-grade insults one normally gets from corporate America – or most other places for that matter – whenever you dare to suggest reform.

I’m not sure we need an orthodoxy at all. The trouble with orthodoxies is, they’re fine until something or somebody unorthodox comes along. Creativity thrives on unorthodox thinking – and if there’s one thing capitalism hasn’t had for nearly forty years now, it’s creativity. Capitalist thinking keeps on revisiting old ideas, and burning creative people at the stake. In this sense, it is very little different to the Spanish Inquisition – in which an unorthodox, anti-cruelty religion thought it could advance its cause through the cruel enforcement of orthodoxy. There’s a gag about orthodoxymoron in there, but I can’t be bothered: it’s Saturday and I’ve just been mowing the lawn in 32 degrees of heat.

I’ve felt for a few years now that linear thinking about ‘the next stage of capitalism’ isn’t going to cut it. I’m also double-dog certain that no politician is likely to come up with the answer, because they’ve all convinced themselves that philosophy is dead. People who spout that sort of piffle really mean, “I’m bereft of ideas”.

If I were one of those captains of the big league meetings organised in the Algonquin twice a year to shoot the breeze on this sort of stuff, I hope I’d have the nerve to suggest two things: first, enumerate what the problems of capitalism are; and second, look at what’s changed since capitalism was invented. Then you might understand why you’ve lost the plot.

I’d list its truly serious problems in question form as follows:

1. How can capitalism be made to work without the need for everyone and everything to be in debt all the time?
2. How can capitalism get itself some new methods of raising money that don’t involve all of us having to deal with vulgar barrow-boys and gentleman safecrackers?
3. Is capitalism capable of seeing that committed, onboard shareholders are likely to make better partners than investment banks, hedge funds, neurotic assurance providers and governments?
4. Can capitalism think up some more planetarily safe goals than materials rape, atmospheric muck, mass production and private profit?
5. How can capitalism thrive in a balanced, happy society and vibrant culture – without causing people, marriages, banking systems and computers to have breakdowns?

You may detect some doubts about capitalism per se in all that, but if so you shouldn’t mistake that for my membership of other clubs ranging from dictatorial command economies through to tree-dwelling communes that recycle their farts for the common weal. I’m trying to look forward here – hence my second point about what’s changed since capitalism got off the ground, and began to walk on all fours.

The system which inspired the one we have now started as a servant of agrarian needs. People had sheep, and the wool had to be knitted into clothing. They had wheat that needed to be gathered. They had horses needing carts. And as the population grew, all these things had to become more efficient. So other people made spinning machines, mechanical harvesters and traps for ponies. They built places called manufactories, they employed people there, and they moved from subsistence to surplus -that is, making lots of capital. With this achieved, they used the capital to improve and expand.

The key thing to note here is that while the population was growing, there was no overpopulation. There were also no consumer goods sectors, cars, retail parks, hedge funds, welfare systems, housing markets, international banks or insurance providers. There was a small stock market, and one or two investment banks usually run by people called Rothschild. And there was no tradition of We Must All Have Loads of Money.

This epoch (from the mid eighteenth century onwards in the brand-new United Kingdom) also had many things we don’t have. These included a vicious penal system, grinding poverty, aristocrats with the money to back up their power, almost universal marriage, a house in the country because that was where they lived, and a religion that preached salvation in the next world rather than great wealth in this one.

The Sun headline is that finance existed for the system (not the other way round), most people were in touch with the land, there were no populatory or ecological problems….and the vast majority of citizens were content with their lot. None of these rules apply today, but – after several failed attempts to replace it – capitalism is still around.

What I’m suggesting is that the five searching questions I enumerated earlier show that capitalism has made the fatal mistake of those who fail to succeed under that very system: it has lost sight of its market, and its competitors’ innovations.

It hasn’t noticed that its consumers can no longer afford to consume. That excuses about dysfunction financial institutions will no longer wash. That small businesses and staff-owned concerns produce higher productivity, lower employee churn and clearer leadership cultures. That water is scarce, and can’t be left in private hands if those private hands are usually in the till. That carbon economies don’t seem to be a good idea. That there’s a hole in the ozone layer bigger than Australia. And that Mammon’s materialism has helped produce a society where abuse of booze, obesity, divorce, feckless fatherhood, confused children, dying communities and credit cards can no longer be dismissed as a bit of letting off steam plus a naughty knee-trembler away from home come Friday night.

To be equable for a minute, it’s worth pointing out that the Labour Party, most of the political class and pretty well all the media (with one or two admirable exceptions) haven’t worked this out either. But that observation isn’t going to put butter on the parsnips: the fact remains that free-market capitalism, under which we sell more and more to people with less and less, is a system doomed to failure, likely to evoke the very social unrest it avoids, and in need of some very seriously unorthodox thinking.

Ironically, the good news is that contemporary capitalist structures are mutually interdependent. This has also been the bad news since 2007, but for serious reformers it is in my view a blessing: remove the core daft idea, and a lot of other stupid practices will disappear with it.

A good example of this is the principle of remote shareholders in plc’s, whose aims are often antithetical to those of the company. Discourage them, and you almost immediately remove the need for analysts, demands for 25% year-on-year growth, bullying employer practices, and the existence of insurance providers as major players on the world’s bourses.

I believe that public quotation – and the spurious ‘services’ that go with it – are at the heart of capitalism’s disease as a system: the existence of risk is replaced by the demand for reward. The sensible approach to marketing in an ecologically dangerous environment is replaced by the desire to flood the market with crap that breaks down within a year, and thus requires replacement and recycling. Take public quotation out of the equation – or better, give it a far smaller share of the money-raising market – and the mass production/higher profit obsession goes with it.

The system’s internal illogic centres chiefly on debt-fuelled consumption, but this too stems from the need to give the bourse men targets. In a sane world, if you have a recession, the management takes a profit holiday, looks closely at its employee/product line configuration, and waits until people have money again – by which time (hopefully) the marketing folks have studied what this changed consumer needs, rather than just what he or she say they want.

Perhaps the one thing most out of step with human and planetary needs is globalism. The very fact that we are told daily it must be the future is the best guarantee that it won’t be. But without a system based hugely on bourse-raised finance (and the inbred, intrabank trading lunacy that goes with it) the globalist argument – flimsy as it is anyway – implodes.

There is no bottom line in this analysis; but there is a starting point, and it’s this: look at more diverse, community-based and motivating models of company ownership. Get the workforce into a new capitalist form that offers them reward for hard work and ingenuity. Rely less on bourses. And stop the crazy domino-globalism in the banking system.

The world is not a community – any more (as we’re seeing right now) than Europe is a Union. People relate to manageable pack-sizes, and the communities they crave are dying because retailers got into a City-fuelled pissing contest. Move on from bourse-dominated capitalism, and a whole raft of other problems will start to get solved along the way.