The New Capitalism
I remember at college reading the New Anatomy of Britain by Anthony Sampson. In the present climate, how he would have smirked. And that weird background noise you can hear is the rumbling as those old, unreconstructed, communists and command economy enthusiasts spin in their graves.
This current global economic crisis is far more significant than just being a “structural correction”, “re-adjustment” or a “bigger blip than usual” in the normal economic cycle of boom and bust. It’s far more important than that. Far more significant even than the “so called” collapse of communism. It’s the death of casino style capitalism and not before time.
The truth is we’ve been borrowing too much in the developed world and the processes of paying it back is creating falling living standards and shaking the foundations of world capitalism. Households have borrowed too much. Big companies borrowed too much. In fact the only companies who didn’t fall into that trap are SMEs. The total savings of smaller companies still exceeds their aggregated debt, yet it’s apparently for the benefit of small companies that the government is pushing the banks to extend or maintain lines of credit - a target audience that generally speaking doesn’t want or need it.
The sheer complexity of half the financial services products wasn’t understood by the public – and it’s now clear that those in the financial services industry selling the stuff didn’t really have much of clue either! The massive and unsustainable growth in the City of London may have maintained its reputation as one of the world’s premier markets, but at what cost? The City is shrinking with massive job losses and a permanent loss of Exchequer income of around £40 billion.
The gross foreign liabilities of the high street banks is about £4,400 billion – roughly three times the size of the UK’s annual economic output. All that debt is basically the regurgitated savings of other, usually Asian, economies. For the past ten years, millions of Chinese have slaved away on near subsistence wages yet they still managed to save at a prodigious rate. They’ve worked hard making the consumer goods that we westerners wanted to buy, and the bankers took those Chinese workers’ savings and effectively lent it to us so we could buy all that consumer stuff they were making in the first place. At some point, it was inevitable that those Chinese and Indians and Japanese and Koreans would decide that they might like some of that same “standard of living stuff” they were making, so we’ll have to do with a bit less.
Our illusion of prosperity was based on their labour (and their thrift) and was handled in a cavalier fashion by so-called “experts” who actually didn’t know what they were talking about. And in the irrational, emotional, illogical, short-termist, rumour fuelled melee that is free enterprise capitalism, no one can ever “know” what they’re talking about – just as no-one can “know” what the lottery numbers are going to be. So it’s evident that global economic (and shortly thereafter political and military) power has shifted more of less permanently East.
And the most telling example of just how this economic power balance has shifted? Zhou Xiaochuan, governor of the Chinese Central Bank, telling US Treasury Secretary Hank Paluson where he went wrong. How overconsumption and high reliance on credit was the cause of the US financial crisis. Why they should get their act together to raise savings ratios and reduce trade and fiscal deficits. Significant advice when it’s the nation that has fuelled your excesses giving it!
So the nature of the capitalism is bound to change because arguably the most important player in the global economy now is China – more important even than the USA. And China has a completely different take on how capitalism should work, underpinned by the founding philosophy of the communist party and a centralised government. And that’s increasingly true all over the world. The survival of several financial institutions now entirely depends on the goodwill of governments and taxpayers – worldwide they are now being propped up to the tune of £9,000 billion – equivalent to almost a quarter of global GDP.
Reconciling political traditions with the imperative of making a globalised economy secure will be difficult, but I suspect the most influential political tradition in that task will be the loose command economy/ regulated and controlled free market model that the Chinese have adopted. And compared with what we’ve seen of the alternative, I can’t see too much wrong with that.
Tags: capitalism, global economy, Recession