Tag Archives: capitalism

Moral cultures of capitalism

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Smitten over the past week by a winter bug that has kept me tucked up on the sofa like a delicate Victorian lady, I’ve been reading Tony Judt’s [amazon_link id=”0434023086″ target=”_blank” ]When the Facts Change[/amazon_link]. This posthumously published collection of essays he wrote over 25 years has been edited by his wife Jennifer Homans, author herself of the terrific ballet history, [amazon_link id=”1862079501″ target=”_blank” ]Apollo’s Angels[/amazon_link]. I’ve long been a Judt admirer and this collection – only a few of which I’d read before – lives up to expectations. (And anyway, essays are about the right length for a convalescent.) An untimely and unimaginable death anyway (he suffered from Lou Gehrig’s Disease), the current state of Europe particularly makes one wish such a thoughtful historian of the continent were still alive to comment on Greece and the EU, on the long term effects of the financial crisis on the European ‘project’, on Russia and Ukraine.

[amazon_image id=”0434023086″ link=”true” target=”_blank” size=”medium” ]When the Facts Change: Essays 1995 – 2010[/amazon_image]

Judt’s perspective was political rather than economic but his observations on the economy are always interesting. I liked this observation about globalization triumphalism, written in 2002:

“It is a cardinal tenet of the prophets of globalization that the logic of economic efficiency must sweep all before it (a characteristics 19th century fallacy they share with Marxists). But that was how it seemed at the peak of the last great era of globalization, on the eve of World War I, when many observers likewise foresaw the decline of the nation-state and a coming age of international economic integration.

” What happened, of course, was something rather different.”

He continued:

“The contingencies of domestic politics trumped the ‘laws’ of international economic behaviour, and they may do so again. Capitalism is indeed global in its reach, but its local forms have always been richly variable and they still are. This is because economic practices shape national institutions and legal norms and are shaped by them in their turn; they are deeply embedded in very different national and moral cultures.”

It has taken the centre of gravity in the economics profession a decade to get to the same perspective, and many economists are naturally prone to economic determinism.

Rogues and capitalists

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“The whole life I place before myself is money, money, money and what money can make of life,” says Bella in Dickens’ [amazon_link id=”B00ES25UCY” target=”_blank” ]Our Mutual Friend[/amazon_link]. The Victorian novelists wrote a lot about money, not just Dickens, but Mrs Gaskell (remember the bank failure in [amazon_link id=”0199558302″ target=”_blank” ]Cranford[/amazon_link], the exigencies of factory life in [amazon_link id=”0141199725″ target=”_blank” ]Mary Barton[/amazon_link]), George Gissing ([amazon_link id=”0141199938″ target=”_blank” ]New Grub Street[/amazon_link], [amazon_link id=”1491261005″ target=”_blank” ]The Whirlpool[/amazon_link]), Trollope ([amazon_link id=”1853262552″ target=”_blank” ]The Way We Live Now[/amazon_link]) and, across the Channel, [amazon_link id=”0140440178″ target=”_blank” ]Balzac[/amazon_link] (famously referred to by Thomas [amazon_link id=”B00I2WNYJW” target=”_blank” ]Piketty[/amazon_link]), [amazon_link id=”0140444300″ target=”_blank” ]Hugo[/amazon_link], [amazon_link id=”0199538697″ target=”_blank” ]Zola[/amazon_link].

Bella’s line is quoted in Ian Klaus’s [amazon_link id=”0300181949″ target=”_blank” ]Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Capitalism[/amazon_link]. An irresistible title. The book gives an account of the essential role played by trust as capitalist markets developed through the century:

“Here is a fundamental point about free market capitalism and trust within it: without social exclusion or extensive processes of verification, trust is hard to come by. Whereas other risks could be hedged or managed through new assets or new types of insurance, the risk of fraud became more prevalent as the market expanded. Simply put, trust was sometimes a market inadequacy but always a market necessity.”

[amazon_image id=”0300181949″ link=”true” target=”_blank” size=”medium” ]Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Finance (Yale Series in Economic and Financial History)[/amazon_image]

This central argument is illustrated through a series of brilliant stories about both the evolution of new assets and commercial relationships but also about a series of colourful rogues and swindlers. They played on the importance of reputation to pull off their confidence tricks; in a kind of arms race, new methods of verifying information were devised, such as audits, or detailed prospectuses –  and new audacities were developed by the rogue fraternity. We ended with the modern system of ‘a series of overlapping institutions’ authenticating transactions.

The book starts with Adam Smith’s [amazon_link id=”0140432086″ target=”_blank” ]Wealth of Nations[/amazon_link], noting its pairing with the [amazon_link id=”0143105922″ target=”_blank” ]Theory of Moral Sentiments[/amazon_link]. It ends with Friedrich Hayek’s [amazon_link id=”0415253896″ target=”_blank” ]The Road to Serfdom[/amazon_link], a hymn of praise to markets, arguing that it has to be read alongside [amazon_link id=”041540424X” target=”_blank” ]The Constitution of Liberty[/amazon_link]. Klaus writes: “The greatest intellectual salesmen of free market capitalism all supposed the market would be buttressed by morality. You could not possibly unleash the power of the one without the support of the other.” Unfortunately, of course, that’s just what happened in every period of turbulence in capitalism’s history, including our most recent. Now, just as in the early Victorian era, reputation is everything – because morality and institutions have let us down.

[amazon_image id=”0140432086″ link=”true” target=”_blank” size=”medium” ]The Wealth of Nations: Books I-III[/amazon_image]  [amazon_image id=”0143105922″ link=”true” target=”_blank” size=”medium” ]The Theory of Moral Sentiments (Penguin Classics)[/amazon_image]  [amazon_image id=”0415253896″ link=”true” target=”_blank” size=”medium” ]The Road to Serfdom (Routledge Classics)[/amazon_image]  [amazon_image id=”041540424X” link=”true” target=”_blank” size=”medium” ]The Constitution of Liberty (Routledge Classics)[/amazon_image]

One final thought: will new technologies help bridge the gap? Dave Birch’s [amazon_link id=”1907994122″ target=”_blank” ]Identity is the New Money[/amazon_link] suggests the combination of ubiquitous mobile and social media means they might. Social connection, perhaps asset ownership and provenance, can in principle be verified now in a way the Victorians couldn’t have dreamed of.

[amazon_image id=”1907994122″ link=”true” target=”_blank” size=”medium” ]Identity Is the New Money (Perspectives)[/amazon_image]

Monday morning market fundamentalism

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Easing myself into the week with a bit of browsing, this review by Michael McCarthy in The Boston Review of a new book about Karl Polanyi piqued my interest. The book is [amazon_link id=”0674050711″ target=”_blank” ]The Power of Market Fundamentalism: Karl Polanyi’s Critique[/amazon_link] by Fred Block and Margaret Somers.

[amazon_image id=”0674050711″ link=”true” target=”_blank” size=”medium” ]The Power of Market Fundamentalism: Karl Polanyi’s Critique[/amazon_image]

As stated in the review, I wholeheartedly agree with the Polanyi perspective on markets: “Polanyi’s key work, [amazon_link id=”080705643X” target=”_blank” ]The Great Transformation[/amazon_link], demonstrates that markets and states are not separate entities, which each have their own unique and endogenous dynamics, but instead are inescapably intertwined and mutually constitutive.” Yet when I first read[amazon_link id=”080705643X” target=”_blank” ]The Great Transformation[/amazon_link] – some time in the mid-1980s – it irritated me enormously. I can’t remember why, and my brief notes on the book give no clue, but I do remember the emotion. So I’ve hauled it off my bookshelf and will have to re-read it, to find out why and whether it still has the same effect.

The review of the Block and Somers book, alluding to Albert Hirschman’s [amazon_link id=”067476868X” target=”_blank” ]The Rhetoric of Reaction[/amazon_link], makes it sound as though they are in effect arguing that there is a performative aspect to ‘free markets’: “Block and Somers’s unique contribution is to argue that these public narratives about the economy are key drivers of regulatory policy…. markets are not only embedded socially and politically; markets are also embedded in ideas.” Again, something I would agree with. One of the quotations I jotted down in my brief notes from [amazon_link id=”080705643X” target=”_blank” ]The Great Transformation[/amazon_link] is: “The introduction of free markets, far from doing away with the need for control, regulation and intervention, enormously increased their range.”

[amazon_image id=”080705643X” link=”true” target=”_blank” size=”medium” ]The Great Transformation: The Political and Economic Origins of Our Time[/amazon_image]   [amazon_image id=”067476868X” link=”true” target=”_blank” size=”medium” ]The Rhetoric of Reaction: Perversity, Futility, Jeopardy[/amazon_image]

Orthodoxy, radicalism and sanity

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Fans of his columns in the Financial Times will know there’s no danger of finishing reading a whole book by Martin Wolf in an optimistic frame of mind. So it is with his new book, [amazon_link id=”1846146976″ target=”_blank” ]The Shifts and The Shocks[/amazon_link]. The subtitle is ‘What we’ve learned – and still have to learn – from the financial crisis’, and the message of the book is that there is more still needing to be done than sorted out already.

[amazon_image id=”1846146976″ link=”true” target=”_blank” size=”medium” ]The Shifts and the Shocks: What we’ve learned – and have still to learn – from the financial crisis[/amazon_image]

The main thing the book argues has been learned (by some people) since the crisis is that pre-crisis ‘official’ macroeconomics comprehensively failed. To echo the title of the relevant chapter, orthodoxy has been overthrown. Props to Wolf for acknowledging his own change of mind in the light of events (after all, he wrote an earlier book called [amazon_link id=”0300102526″ target=”_blank” ]Why Globalization Works[/amazon_link].) He points out that the features of the global economy that turned out to matter in real life – the accumulation of debt and the growth of shadow banking – had been assumed to be unimportant or irrelevant. Wolf has become a wholehearted [amazon_link id=”0071592997″ target=”_blank” ]Minskian[/amazon_link], but you obviously don’t need to jump into any new camp to agree that pre-crisis dynamic stochastic general equilibrium models were a nonsense. What’s rather depressing is that some macroeconomists still seem to think these DSGE models just need a bit of tinkering, a little bit of financial ‘friction’ adding in. As the book’s introduction forcefully points out, a theory in which something that did happen is impossible is a rubbish theory.

The first chunk of the book is a high-level description and an analysis of the origins and unfolding of the financial crisis, with particular emphasis on the Eurozone. He has long been writing in his Financial Times columns about the problem global imbalances, particularly between the US and China. This book focuses more on Europe. Much of the description is familiar territory, but seen this time through Wolf’s new spectacles of the Minsky convert.This section culminates in the ‘orthodoxy overthrown’ chapter, which includes a quick rundown of the various alternatives, in a nice, brief summary of the history of macroeconomic thought including those turned into renegades by the DSGE triumphalists of the 1990s and 2000s. Wolf ends by concluding that in a system in which the state is the ultimate supplier of money but most money and credit in use is created by the private sector is a ‘pact with the devil’. “Moreover, the liberalization of finance seems to lead to crises almost automatically. Surely this suggests the need for a new kind of system.”

So what might a new system look like? To fix finance, he advocates – following Anat Admati and Martin Hellwig’s outstanding [amazon_link id=”0691162387″ target=”_blank” ]The Bankers’ New Clothes[/amazon_link] – a much higher equity ratio for banks, maybe 20%, and serious macro-prudential tools. These seem such no-brainers that the real question is why regulators are so hesitant about them – but this takes us into the analysis of power in the western economies. A chapter on the Eurozone concludes that it isn’t working but it isn’t clear either how to turn it into a ‘good marriage’. This chapter is surprisingly diffident – Wolf writes: “Germany’s insistence on retaining its huge external surplus, on keeping inflation so low, on national responsibility for bank debts and on ever tighter fiscal discipline will not work. The Eurozone needs to become something different.” I would have expected him to predict the unlikeliness of this happening – although he does also acknowledge how messy a divorce would be.

The final chapter has a key point: “Unless regulation and the supply of fiscal backstops is to be much more global, finance should be far less so.” Little would be lost by decreasing the global integration of banking, he argues. Wolf is more radical than what he describes as the ‘new orthodoxy’, which aims to preserve the globally integrated financial system through incremental reform – and, I would say, keeping fingers tightly crossed.This section echoes the chapter in Ian Goldin’s [amazon_link id=”0691154708″ target=”_blank” ]The Butterfly Defect[/amazon_link], which underlines the inherent risks in the complex, integrated financial network.

Wolf argues that western elites are continuing to let people down, to a dangerous degree. He accuses them of ‘three huge failures’ – misunderstanding the consequences of financial liberalization and fantasizing about the self-stabilizing features of finance; ignoring the consequences of the emergence of a plutocratic global elite for the civic glue that enables democracy to function; and turning what should have remained a mundane common currency or currency management plan in the EU into a German currency administered by unaccountable ECB and Commission officials without channels of accountability to other Eurozone countries and citizens.

If we cannot implement radical changes – more radical than most people recognize, Wolf says – then, well he doesn’t explicitly spell it out, but implies, economic and political disaster.

By and large, I agree. There’s no point just tinkering with a fundamentally broken system. There are some questions not covered in the book that would only add to the gloom. For example, the extent of outstanding debt left over from the crisis is ginormous. Without a growth miracle – no sign of that on the horizon – the options are explicit or implicit default. How will that happen? The large international banks have returned to pre-crisis behaviours with only marginally more capital – and are still being allowed to judge their own riskiness! What happens when a modest decline in some market somewhere sets us off on the downward spiral of liquidity and solvency we saw in 2008, but this time without any fiscal or monetary firepower left? And by the way, what about demographic and environmental challenges?

[amazon_link id=”1846146976″ target=”_blank” ]The Shifts and the Shocks[/amazon_link] is a dense and chunky book about economics, not a manifesto for the Occupy movement. I can’t quite picture Martin Wolf in a Guy Fawkes mask outside the ECB. Still, he makes a good case that the ‘new orthodoxy’ of minor reforms favoured by global finance is madness. Radicalism is the only sanity.

The eclipse of capitalism – or maybe not

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Jeremy Rifkin’s new book, [amazon_link id=”1137278463″ target=”_blank” ]The Zero Marginal Cost Society[/amazon_link], covers lots of interesting territory but isn’t my cup of tea. One reason for that is apparent in the subtitle: “The internet of things, the collaborative commons and the collapse of capitalism” – wide-ranging is good, but ranging wide over such a disparate set of topics is a bit of a stretch.

[amazon_image id=”1137278463″ link=”true” target=”_blank” size=”medium” ]The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism[/amazon_image]

Another reason is that near the start of the book there is an anti-economics rant, economics being characterised by “unquestioning acceptance, and refusal to envision alternative explanations, lead[ing] to a festering of inconsistencies that pile up.” While I certainly agree that economics too often sets environmental constraints to one side – which is what Rifkin’s rant builds up to – I always check the references and bibliography at this point to see how much modern economics the ranter has read. And as is always the case with such critics, Rifkin cites next to no work done in the past 25 years.

The main argument of this book is that near-zero marginal cost activities make up a growing proportion of economic activity, and this signals the inevitable decline of capitalism. Capitalist markets are not an efficient way to organize a society in which most things are free, because the socially efficient price is zero when marginal costs are zero. Rifkin draws on his last book [amazon_link id=”0230341977″ target=”_blank” ]The Third Industrial Revolution[/amazon_link] and adds in the effects of the Internet of Things and smart grids in optimising energy use to apply this argument to energy prices. He cites also MOOCs and 3D printing. It is not a new observation to point out that many activities involve high fixed costs and low marginal costs. Digital or digitally-enabled activities are adding to the roster of industries with this structure, shaking up business models in music, publishing, newspapers and – soon – education; but other industries from aerospace to pharma to broadcasting have long experienced increasing returns. These too challenge the model of small, perfectly competitive firms delivering efficient outcomes through the magic of the price mechanism and the market.

Rifkin does not, for my taste, adequately address the question of how the high fixed costs are to be covered in his post-capitalist world. “Within 10 years every building in America and Europe, as well as other countries around the world, will be equipped with smart meters,” he writes. He predicts huge cost as well as energy savings, citing a Cisco forecast that the Internet of Everything will generate $14.4 trillion in cost savings and revenues. So that’s selling smart meters plus the cost savings from using less energy once they are installed, I guess – and wouldn’t Cisco, purveyor of smart devices, say that anyway? The smart meter installation programme in the UK alone is estimated to have a: “positive net present benefit of £6.7 billion over the period to 2030, by delivering total benefits of around £18.8 billion and costs of around £12.1 billion.” (House of Commons Energy Select Committee estimates.) These order of magnitude smaller estimates for a longer period predate the actual existence of technical standards and operational meters, needing to be installed in every home and business in the country. I’m sure it’s worthwhile, but I’m sceptical about this happening within 10 years, all around the world.

The most interesting chapters in the book cover collaborative efforts and the switch “from ownership to access.” There have been interesting articles and stirrings around just this past week on the sharing economy – from The Economist, from Public CEO, this New York petition, John Kay in the FT. (HT to @johnfingleton1 for the links.) Parts 3 and 4 of Rifkin’s book provide an overview of this territory. By this stage, I had gone into irreversibly sceptical mode, and concluded that it is too early to say that none of the new digital businesses will find a viable business model.

This book would be a good airport read. Rifkin is a clever and widely-read writer. I don’t like the way he opts for polemic over analysis, but that’s me. Others might enjoy this high-level canter over a wide territory – but I’d caution you to take the claims with more than a pinch of salt.