John Plender, a journalist on the Financial Times, has written a book about capitalism and whether it is a good thing – and that is taking ‘good’ in its broadest sense, to include ‘moral’ as well as ‘useful’. Now, there are those who would object that a journalist on the famously pink paper is the last person who would know anything about capitalism. But let’s not cavil and trade insults like economists: Plender’s book, Capitalism: Money, Morals and Markets is a good thing, on balance, all things considered. And that is pretty much Plender’s verdict on capitalism.
You don’t have to be a capitalist to concede that capitalism has plenty to claim on the plus side of the ledger. It has freed developed-economy societies from the economic tyranny of the landed aristocracy. It has fuelled the creation of industries and technologies that have improved the quality and duration of life of a considerable majority of mankind. In its recent globalised form it has improved living standards, massively. As recently as 1981 more than half of the people in the developing world lived on less than $1.25 a day. By 2010 that was down to 21% of the developing world population, more than halving the rate of extreme poverty. Partly as a consequence of this, global inequality has greatly declined.
On the other hand capitalism is and always has been paradoxical. For one thing it is – or so the record suggests – inherently unstable. There is a minor crisis somewhere in the financial system roughly every year, and there is a major one every ten years. In the past century there have been two systemic, worldwide economic collapses – the Great Depression that followed the financial crash of 1929, and the Great Recession which is still playing out today. Add to that the fact that while global inequality is falling, local inequality is rising, very fast. Productivity in the developed world has been falling for decades, and with it job-creation, while the off-balance-sheet environmental costs of wealth-creation in the developing economies has barely begun to be computed (this is controversial, although a weekend spent trying to breathe in Beijing is usually enough to quieten even the most virulent anti-environmentalist).
So: capitalism has made people richer, healthier, freer. It is about thrift, investment, creativity. It is also corrupt, somewhat vicious, unstable and unfair. It has a tendency to destroy itself. Or as Marx put it, ‘the end of all competition is the end of competition’.
There are many ways to approach these paradoxes, if indeed they are real, and one way is to look not at the theoretical bases of capitalism but to look at people. This is what Plender does. He takes us through the territory of capitalism by way of people who have not only practised the reality but also considered the capitalist idea. Poets and artists, philosophers and politicians are included, starting with Plato and ending with Mark Zuckerberg.
Some of these capitalists are rather surprising to find in the lists: Karl Marx for example. Some will be surprised to learn that Marx had a sideline as a ‘day-trader’, specialising in fast-growing fast-collapsing US and British stocks – what a modern asset manager would call ‘special situations’. ‘In this way I have made over £400,’ Marx confided to a pal, ‘and now that the complexity of the political situation affords greater scope, I shall begin all over again. It’s a type of operation that makes small demands on one’s time …’ Just so: a hedge-fund manager thinking of a long weekend on the grouse moors would recognise a spiritual bond.
John Maynard Keynes, the great critic of speculation, was an inveterate speculator. He started in that market where it is easiest to lose money, trading currencies on the entirely misplaced assumption that currencies will move in line with fundamental economics. Having lost a fortune, he borrowed from friends and mainly by blind luck rebuilt his position spectacularly by dealing in commodities, and at one point even convinced himself that a scheme to extract gold from volcanic ash was going to revolutionise the world economy (as well as his own finances).
It is through such case-by-case enumeration of contradictions and paradoxes that Plender builds a picture of the complexity of what today is called capitalism. He is not particularly interested in theory, or in offering recipes for reform of capitalist practice; rather, he wants the reader to experience the extent of the idea. He picks up a theme, turns it over, and moves on to the next, like a buyer riffling through a merchant’s samples of fabric. There is no finished article on offer here, but the reader gets to see many patterns and feel the weave of the cloth.
Nevertheless, themes emerge. The biggest concerns the evolution of economies from pre-capitalist concepts of fixed values and fixed morality, to the capitalist world-view based on belief in creativity and growth. Crudely speaking, before the revolutions in agriculture and then in industry, understanding of the economy was based on a zero-sum calculus. In the zero-sum world there was a fixed amount of wealth in the world, and a fixed amount of work. Wealth and authority flowed from land (which clearly was fixed). If someone acquired wealth, then someone else had to lose it.
In the zero-sum world the morality of money was also fixed. If debts were contracted they had to be founded on the trust of peers, not on interest. The moral values of this pre-capitalist world were shaped by religion and are still echoed in much of the present day language of debt and investment – the language of ‘due diligence’, ‘moral hazard’, ‘default’, ‘bond’, ‘conversion’, and ‘redemption’. The concepts of bankruptcy, write-off and debt-forgiveness were anathema.
The mechanics of the transition from zero-sum to freewheeling financial capitalism remain mysterious. All one can say is that the transition was probably accomplished because there was no choice: the capitalism of industry, applied technology, and growth in international trade requires a functioning credit system, and a system capable of processing financial failure.
Here one of the most interesting voices that Plender quotes repeatedly is that of Samuel Johnson. Dr Johnson was actually a believer in the zero-sum economy (his conversations with Boswell on trade, for example, show that). But unlike Boswell, Johnson was a moral radical. His belief that it was immoral to punish debtors shows the moment, two and a half centuries ago, when the zero-sum concept began to dissolve:
‘Those who made the laws have apparently supposed, that every deficiency of payment is the crime of the debtor. But the truth is, that the creditor always shares the act, and often more than shares the guilt, of improper trust. It seldom happens that any man imprisons another but for debts which he suffered to be contracted in hope of advantage for himself, and for bargains in which he proportioned his profit to his own opinion of the hazard; and there is no reason why one should punish the other for a contract in which both concurred.’
The transition to modern capitalism requires a financial economy. This is Plender’s other great theme: the relentless growth of the financial sector, and the threat not only to stability but also to the legitimacy of capitalism that it represents. He argues that the most important aspect of the recent financial crash is not that it was so total and so destructive, but that for the first time in modern history, there is no serious alternative to capitalism on offer. That has meant much greater scrutiny of the logic and legitimacy of capitalism – especially financial capitalism – than would otherwise be the case.
And the logic of the financial economy is clearly contradictory. Investment is notionally predicated on the assumption that markets are ‘efficient’ (a reformulation of Adam Smith’s ‘hidden hand’ of the market). Yet the entire investment industry (and arguably the whole practice of capitalism) can only function if markets are actually inefficient, if there are mispricings and gaps that financial investors can exploit. Banking is founded, notionally, on the principle of solvency. But in reality, banks that lend out most of their deposits (ie, all banks) are technically insolvent all the time, because both the savers and the borrowers have valid calls on the same asset.
But for Plender, the real problem is nothing to do with theoretical contradictions: it is to do with the financial economy’s embedded predilection for excessive risk. This, he believes, is driven by the long-term fall in productivity in the developed economies. Falling productivity in the real economy means falling profits for banking (and incidentally it is probably behind the extraordinary growth in wealth concentration in developed economies). The profits have to come from elsewhere: financially-engineered profits derived from asset bubbles, like sub-prime mortgages. The bigger the banks, the more able and the more likely they are to inflate these bubbles. It has happened before, and (Plender argues) it will happen again, soon, only worse.
Such threats are not as it were the fault of capitalism, it is argued. They are the fault of a market fundamentalism which holds that not only is government incapable of regulating capitalism effectively, it is also immoral for it even to try. Certainly, the attempts to impose effective regulation on the financial sector following the 2007 crash have been a dismal failure. Banks have actually become bigger, and more dangerous. Global debt has risen sharply. Governments have failed to write a simple and clear financial rulebook, like the US Glass-Steagall Act of 1933 (repealed in 1999) that separated deposit-taking from investment banking. Today its successor is the Dodd-Frank Act which covers just about everything that could possibly go on in banking – except the fundamentals. Glass-Steagall was 37 pages long, while Dodd-Frank (when all its elaborations are completed) will run to around 30,000 pages. That is an absolute guarantee that it cannot be effectively policed, or even implemented.
Plender is neither dogmatic nor prescriptive; if you like to read something that furnishes ideas for debate, then this book is for you. If anything what he wants to see is a capitalism that is more self-aware. It should be aware, for example, that growing wealth inequality in developed economies is being attended (and perhaps exacerbated) by the rise of new digital industries with no real connection either to their customers or to their shareholders, the Facebook model of capitalism which sees markets as merely convenient places to cash in. He would also like to revert to something like the morality that links reward to effort in a proportional way. But for that, we probably have to await a yet bigger, badder and more humbling meltdown than anything yet seen.
Meanwhile, his view is an adaptation of Winston Churchill on democracy. Capitalism is a nasty, unjust, avaricious system. It’s just that it’s better than the other systems. In defence of that view he quotes Edmund Burke, in a passage that is worth memorising:
‘The love of lucre, though sometimes carried to a ridiculous, sometimes to a vicious excess, is the grand cause of prosperity to all States. In this natural, this reasonable, this powerful, this prolifick principle, it is for the satyrist to expose the ridiculous; it is for the moralist to censure the vicious; it is for the sympathetick heart to reprobate the hard and cruel; it is for the Judge to animadvert on the fraud, the extortion, and the oppression: but it is for the Statesman to employ it as he finds it, with all its concomitant excellencies, with all its imperfections on its head.’
The key word there is ‘employ’. A good employer will set the rules of employment, make them clear, and act decisively when the rules are broken. Easier said than done, it seems.
Capitalism: Money, Morals and Markets. John Plender, Biteback Publishing, RPP £20.