Capitalism 4.0 The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky, London: Bloomsbury, 2010, pp. 448, €11.99 pb. ISBN 978 1 4088 0973 0
Reviewer: Patrick Howard*
- Former Civil Servant
Capitalism 4.0 is the new system which Kaletsky envisages as a successor to the one which, in the author’s words, suffered the ‘near fatal‘crisis of 2007/09. Originally published in 2010, the book was reissued in paperback in 2011 and contains a preface and epilogue which deal with the intervening period.
The author’s central thesis is that capitalism is not a static set of institutions but an evolutionary system which reinvents and reinvigorates itself through crisis. It is always in the process of destruction because it is continuously mutating. Each new system eventually gives rise to new problems and the need for self-correction. Having an inner dynamic, capitalism can adapt and refine itself in response to a changing environment with the author emphasising that it does not break because it bends. He feels that, if the capitalist system can hold together for long enough, it will adapt and survive and that democracy usually offers it a breathing space which allows the system and institutions to evolve.
The book charts capitalism as having three previous phases. The first continued from the end of the Napoleonic wars to the Great Depression and consisted of ‘laissez-faire’ capitalism with no government involvement. At that time, politics and economics were seen as occupying two distinct spheres. The emergence of Keynesianism and the expansion of politics into the economic sphere represented the second phase which continued until the late 1970s. The expansion of the state into welfare and the labour unrest which followed ultimately created stagflation. The second phase gave way to the new phase of Thatcher/Reagan economics in which the role of the state was pulled back and deregulation became the order of the day.
These phases involved a change in the relationship between government and private enterprise. In the second phase we had what the author called a ‘benign and all-knowing government’ combining with distrust of markets while the Reagan/Thatcher period reflected a distrust of government and faith in markets. The period 1980-2008 he describes as ‘free market fundamentalism’ which took the later position to extremes with Government demonised, public administration treated with contempt and regulation ridiculed. The change to Keynesianism had followed on unprecedented threats from communism, fascism and the consequences of the Great Depression. Keynesianism ultimately created its own problems to the extent that Thatcher and Reagan reversed the thrust entirely. While they in turn resolved the problems of stagflation of the 1970s, the author maintains that they triggered what eventually took place in 2008.
Kaletsky argues that things were improving when the Lehman financial crisis supervened. The crisis was not caused by the stupidity of regulators, the greed of bankers or the improvidence of speculators in low-income real estate but by a series of misjudgements made by Henry Paulson, US Treasury Secretary – a man whose reputation was so intimidating that no one questioned his judgement. “Henry Paulson, despite having been the chairman and CEO of Goldman Sachs – or perhaps because of it – turned out to be the most incompetent economic policy maker in US history, with the possible exception of Andrew Mellon, his predecessor at the Treasury from 1931 to 1932” (p.129). Using a practical example, he illustrates how a single mortgage transaction can create a borrowing chain which results in total financial debt of five times the original amount (p.134). An orderly unwinding of these chains requires all participants to honour their contracts but the collapse of one link in the chain such as Lehman’s would, and did, cause chaos, resulting in a worldwide crisis of confidence in the financial system, resulting in bank runs. Bank guarantees on the lines of those introduced in Ireland, Greece and Denmark, and later in the United Kingdom, France and Germany, should have been introduced but, when the US did adopt such a strategy, the damage had already been done. The author attributes the blame to the refusal of the US Treasury to acknowledge the indispensable role of government in stabilising financial markets.
The new system of capitalism will transform economics, politics and business in the years ahead but it will be different because the world is more complex. There should be more intellectual humility and self-doubt especially on the part of economists and politicians. Kaletsky maintains that the role of central banks will have to be expanded beyond the narrow remit of inflation control. At minimum he favours nominal GDP which takes account of both inflation and real economic growth. Employment and credit growth should also be included and there should be collaboration with other central banks to ensure that ‘exchange rates and trade imbalances do not go too far out of line’.
Governments will have to accept new-found responsibilities for comprehensive economic management while reducing public spending and borrowing. The simultaneous need for more government and for smaller government will demand an assessment of political priorities on a scale not seen since the 1980s. Because bank finance is so inherently unpredictable, yet so indispensable to any modern economy, the financial system will always require implicit government guarantees. Closer convergence between the American and European models, as Europe adopts more Keynesian macroeconomic policies, will make a reformed version of democratic capitalism more ideologically attractive to emerging countries, especially Asian countries with traditions of social cohesion and respect for state power. ‘Commercial competition between US and Europe will intensify but the ideological convergence, juxtaposed against the rivalry with China, will bring Europe and America politically closer together’ (pp. 310-311).
The author concludes by saying that the only certainty is that global politics in the years ahead will be ‘messy, confusing, and full of conflicts …the new system will leave many unanswered questions and will contain some fatal contradictions…the future will be unpredictable and ambiguous and inconsistent (p. 333-334)
This book is not a ‘quick read’ yet it presents an interesting challenge. The organisation of the book and its chapters is somewhat confusing and the digressions into specific economic theories tend to deflect the reader from the author’s precise message at different points. Nevertheless, it can be recommended as a thought-provoking text for students of economics or of politics.