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17.07.2013

Capitalist Futures: Anatole Kaletsky - 'Capitalism 4.0'

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by Yasmin Crowther

First up in our Capitalist Futures series is a book called Capitalism 4.0 by Anatole Kaletsky, published by Bloomsbury in 2010.Kaletsky is ‘Editor-at-Large’ at the Times and has also worked for The Economist and The Financial Times. 

Capitalism 4.0 places the economic meltdown of 2008 in the context of a series of upheavals that have sporadically characterised the evolution of capitalism, which Kaletsky sees as ‘an adaptive social system’.  Earlier phases of capitalism are identified as:

In all instances, Kaletsky identifies ‘the changing relationship between government and private enterprise, between political and economic forces, [as] the clearest feature of capitalism’s evolution from one phase to the next.’

He writes:

The dominant ideology from the 1980s until the 2007-09 crisis assumed that markets were always right and governments nearly always wrong. The previous phase of capitalism, from the 1930s until the 1970s, assumed that governments were always right and markets nearly always wrong. The most distinctive feature of capitalism’s next era will be a recognition that governments and markets can both be wrong and that sometimes their errors can be near fatal…

Capitalism 4.0 will recognise that governments and markets make mistakes not only because politicians are corrupt, bankers greedy, businessmen incompetent, and voters stupid, but also because the world is too complex and unpredictable for any decision-making mechanism to be consistently right, whether it is based on economic or political incentives. Experimentation and pragmatism must therefore become the watchwords in public policy, economics and business strategy … The ability to operate by trial and error, to correct mistakes before they do too much social harm, is the greatest virtue of the market system.’

Challenges and conditions for progress:

The book goes on to explore the challenges of rebalancing public and private interests as the defining feature of Capitalism 4.0.

On the one hand, Kaletsky sees governments and central banks having to continue to take responsibility for growth, employment, financial stability and inflation, but all at a time when governments will have to shrink because they cannot be supported by existing deficits or tax rises, and because government bureaucracy cannot fundamentally deliver on society’s demands – only the market can do that, as Kaletsky writes:

Complex[societal] demands, ranging from universal healthcare and energy independence to stable mortgage financing and rising wages, can be satisfied only by the profit motive acting through competitive capitalist markets. What will change, however, is the role played by governments in managing these markets and creating incentives for profit-seeking business to achieve politically favoured objectives.’

In such an environment, he envisages a key challenge for public policy will be creating the appropriate criteria for government relations with the market. 

While for business, he suggests the challenge will be to stop fighting ideological battles against the principle of active government and, over time, recognise that much of the political lobbying on which [businesses] previously spent millions was against the interest of their shareholders – [and stakeholders]– catastrophically so in some instances.’

He gives the example of the banking industry’s opposition to mortgage regulation and the compulsory clearing of derivative contracts; and also US auto manufacturers’ campaigns against government fuel economy and health care reform as ideological lobbying that is no longer tenable in the wake of the financial crisis.

Market failure and the challenges of externalities

In terms of how a different relationship between governments and business could impact energy, Kaletsky posits that: ‘prices [currently] set by financial markets often send the wrong signals about long-term energy needs, especially from the standpoint of society as a whole, … [and do] not send remotely appropriate price signals to motivate investment and innovation in energy technology on the scale required. 

He gives a variety of examples of market failure, referencing the $10 billion spent globally on alternative and nuclear energy research, against an estimated $250 billion spent annually on subsidising the extraction and burning of fossil fuels.  Because the market is failing, Kaletsky infers that research, development and deployment of non-polluting energy sources will have to command far greater levels of public support in future.

As part of this, he envisages externalities – like clean air – finally being appropriately valued, with the business lobby in opposition being defeated. He expects that it will no longer be tolerable for ‘the businesspeople who denounce carbon trading to [also] insist that the US government should go to enormous lengths to protect the Windows copyright, even though copies of Windows can be produced much more cheaply than air.

He argues that pricing previously free or undervalued resources, and working to reconcile market prices with social values, will lead to higher – not lower – economic growth.

When all else fails – Capitalism 5.0?

However, even as Kaletsky envisages the emergence of Capitalism 4.0, he anticipates the fatal flaw that may see its collapse to catalyse a further evolution of capitalism. He sees this fatal flaw or ‘internal contradiction’ arising as a result of the limited abilities of national governments to act on the global stage and / or empower global institutions to act on challenges – such as financial instability and carbon emissions – that are fundamentally global in nature.  

There is no comforting conclusion, as Kaletsky writes: ‘All we can say for certain is that global politics and economics in years ahead will be messy, confusing and full of conflicts; that there will be more international imbalances and confrontations and more financial bubbles and crashes with origins that we cannot imagine; and that the progress of democratic capitalism will proceed by fits and starts.

In summary

Kaletsky acknowledges that the line between business and government will be increasingly grey, and this seems evident everyday – not least in discussion of the rotating door of jobs in industry for ex-politicians, and vice verse.  The challenge of transparency and justice in this environment is complex, and perhaps whistle-blowers are symptomatic of a collusion between corporate and government worlds which have closed out the possibility of transparency and debates around fairness – albeit for apparent reasons of intelligence and security.

To my mind, most worrying is perhaps the subtly pervasive and inexorable reach of business agendas into the world of government and the effective corporatisation of democracies. When we look to certain non-secular states, the synthesis of religion and government can be alarming; but perhaps a religion of the market and its embeddedness within western government should be as concerning. In the UK, there is all sorts of controversy about the role of lobbyists at the very heart of government.  What seems to be at stake is more than either the market or government – but the nature of freedom and the quality and value of democratic representation itself.