London Seminar: Wednesday, March 29 — with Charles Gave, Will Denyer, Tom Miller and Anatole Kaletsky

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Gavekal Research

Things Fall Apart

All over the world today we sense the end of an era, a deep foreboding about the disintegration of previously stable societies. In the immortal lines of W.B. Yeats’s poem, The Second Coming:

Things fall apart; the center cannot hold;
Mere anarchy is loosed upon the world…
The best lack all conviction, while the worst
Are full of passionate intensity…
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

Yeats wrote those lines in January 1919, just two months after the armistice that ended the First World War. This brief interlude of peace, as Yeats instinctively felt, would soon give way to even greater horrors.

Almost 50 years later, in 1967, the American essayist Joan Didion chose Slouching Towards Bethlehem as the title of her collection of essays on the social breakdowns of the late 1960s. In the 12 months following the book’s publication, Martin Luther King, Jr. and Robert Kennedy were assassinated, inner cities across the United States exploded in riots and French student protesters began the rebellion that toppled President Charles de Gaulle a year later.

Laughing stock

By the mid-1970s, America had lost the Vietnam war. The Red Brigade, the Weather Underground, the Irish Republican Army, and Italian neo-Fascist terrorists were staging attacks across the US and Europe. And President Richard Nixon’s impeachment had turned Western democracy into a laughing stock.

Another 50 years have now passed, and the world is again haunted by fears about the failure of democracy. Can we draw some lessons from those earlier periods of existential self-doubt?

In the 1920s and 1930s, as in the late 1960s and 1970s, and again today, despair about politics was linked to disillusion with a failed economic system. In the inter-war period, capitalism seemed doomed by intolerable inequalities, deflation, and mass unemployment. In the 1960s and 1970s, capitalism appeared to be collapsing for the opposite reasons: inflation and a backlash by taxpayers and business interests against the redistributive policies of “big government”. Looking back into the 19th century, we find another 20-year period—from 1848, when Europe’s “Year of Revolutions” inspired the Communist Manifesto to the suppression of the end of the US civil war and the suppression of the 1871 Paris Commune—when capitalism and what Marx described contemptuously as “bourgeois democracy” seemed to face existential threats.

To note this pattern of recurring crises is not to claim that some law of nature dictates a near-collapse of global capitalism every 50 or 60 years. It is, however, to recognize that democratic capitalism is an evolving system that responds to crises by radically transforming both economic relations and political institutions.

So we should see today’s turmoil as a predictable response to the breakdown of one specific model of global capitalism in 2008. Judging by past experience, a likely outcome could be a decade or more of soul-searching and instability, leading eventually to a new settlement in both politics and economics.

This is what happened when the elections of Margaret Thatcher and Ronald Reagan followed the great inflation of the early 1970s, and when the American New Deal and the “rough beast” of European rearmament emerged from the Great Depression, and when “bourgeois democracy” prevailed over the wave of revolutions against the first wave of capitalist globalization which the Communist Manifesto so eloquently described.

New economic thinking

Each of these post-crisis settlements was marked by transformations in economic thinking as well as politics. The sweeping away of agrarian semi-feudal economies described by the Communist Manifesto produced both free-trade liberalism and the “marginalist revolution” of William Jevons and Léon Walras in economics. The Great Depression led to the Keynesian revolution in economics, and the New Deal in politics. The inflationary crises of the 1960s and 1970s provoked Milton Friedman’s monetarist counter-revolution, which inspired Thatcher and Reagan.

So it seemed reasonable to expect the breakdown of deregulated financial capitalism to trigger a fourth seismic change in both politics and economic thinking, which is why I wrote a book called Capitalism 4.0 in 2010.

If global capitalism really is entering a new evolutionary phase, what are its likely characteristics?

The defining feature of each successive stage of global capitalism has been a shift in the boundary between economics and politics. In classical nineteenth-century capitalism, politics and economics were idealized as distinct spheres, with interactions between government and business confined to the (necessary) raising of taxes for military adventures and the (harmful) protection of powerful vested interests.

In the second, Keynesian version of capitalism, markets were viewed with suspicion, while government intervention was assumed to be correct. In the third phase, dominated by Thatcher and Reagan, these assumptions were reversed: government was usually wrong and the market always right. The fourth phase may come to be defined by the recognition that governments and markets can both be catastrophically wrong.

Acknowledging such thoroughgoing fallibility may seem paralyzing—and the current political mood certainly seems to reflect this. But recognizing fallibility can actually be empowering, because it implies the possibility of improvement in both economics and politics.

If the world is too complex and unpredictable for either markets or governments to achieve social objectives, then new systems of checks and balances must be designed so that political decision-making can constrain economic incentives and vice versa. If the world is characterized by ambiguity and unpredictability, then the economic theories of the pre-crisis period—rational expectations, efficient markets, and the neutrality of money—must be revised.

Moreover, politicians must reconsider much of the ideological super-structure erected on market fundamentalist assumptions. This includes not only financial deregulation, but also central bank independence, the separation of monetary and fiscal policies, and the assumption that competitive markets require no government intervention to produce an acceptable income distribution, drive innovation, provide necessary infrastructure, and deliver public goods.

Up in arms

Looking around the world today, it is obvious that new technology and the integration of billions of additional workers into global markets have created opportunities that should mean greater prosperity in the decades ahead than before the crisis. Yet “responsible” politicians everywhere warn citizens about a “new normal” of stagnant growth. No wonder voters are up in arms.

People sense that their leaders have powerful economic tools that could boost living standards. Money could be printed and distributed directly to citizens. Minimum wages could be increased to reduce inequality. Governments could invest more in infrastructure and innovation at zero cost. Bank regulation could encourage lending, instead of restricting it.

But deploying such radical policies would mean rejecting the market fundamentalist theories that have dominated economics since the 1980s and also the institutional arrangements based upon them, such as Europe’s Maastricht Treaty. Few “responsible” policy makers are yet willing to challenge such pre-crisis economic orthodoxy.

As Keynes wrote in 1936: “The ideas of economists, both when they are right and when they are wrong, are more powerful than is commonly understood. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority who hear voices in the air, are distilling their frenzy from some academic scribbler a few years back.”

The message of today’s populist revolts is that politicians must tear up their pre-crisis rulebooks and encourage a revolution in economic thinking. If responsible politicians refuse, “some rough beast, its hour come at last” will do it for them.

A version of this article first appeared on Project Syndicate.

12 Comments

  • >Anonymous

    Anonymous

    01/04/16

    Hello, do you advocate helicopter money? Best regards, Jan Sand

    Reply
    • Yes. I have been saying since 2011 that helicopter money would be much more effective - and also less inequitable and distorting - than "conventional " QE. 

      Reply
  • >Anonymous

    Anonymous

    01/04/16

    great piece Anatole. how do you discount the odds of a populist revolt on the central bankers?

    Reply
  • >Anonymous

    Anonymous

    02/04/16

    Time for governments to take advantage of markets' willingness to fund them for nothing to initiate 21st century new deals, either by infrastructure spending or guarantees and funding for the private sector to do the same. Controlling the return on "investment", or achieving one, will be the challenge! If conservative governments don't adopt measured fiscal expansion the risk is wayward left awning governments will be elected - the wrong people using the right tools?

    Reply
  • >Anonymous

    Anonymous

    02/04/16

    Very interesting and thought-provoking, although I wonder if some of the economic tools to which you allude will merely cause other unintended problems.  In any event, you and Charles seem to be in full agreement that the days of Davos Man are numbered!

    Reply
  • >Anonymous

    Anonymous

    02/04/16

    Hi Anatole,

    I loved this piece.  I rarely see such histoical context in the hundreds of pieces per week that I read analyzing "what's going on" in the world.  Your piece is profound.  You must be fabulously educated!  Best.

    Steve

     

    Reply
    • >akaletsky

      akaletsky

      04/04/16

      Dear Steve - Thanks for the comment on "fabulous" education, which I assume refers to our time together at King's College, Cambridge. All we now need to do is persuade my partner Charles (along with Angela Merkel, Shinazo Abe and Paul Ryan) about the even more fabulous education of our fellow Kingsman John Maynard Keynes. 

      Reply
      • >Anonymous

        Anonymous

        27/04/16

        You left out Weidmann and Schauble. ;)

        Reply
  • >Anonymous

    Anonymous

    03/04/16

    Very good and thoughtful. The rise of the many forms of social investing may be indicative of a change in the roles of social and economic missions.

    Bob

    Reply
  • >Anonymous

    Anonymous

    04/04/16

    why not submit to WSJ for publication?   Bob again

    Reply
    • >akaletsky

      akaletsky

      04/04/16

      Dear Bob - Thanks for this flattering suggestion, but a slightly shortened version of this article is already being published by quite a few newspapers around the world (in ten languages) through the Project Syndicate network. 

      Reply
  • >Anonymous

    Anonymous

    13/04/16

    Anatole : great thinking and writing indeed as U always offer us. I'v read and re-read U also the excellent shorter version  in Project Syndicate ....which explain the late comment.

    2 question though on yr own words : helicopter money/QE & inequality

    1) as U write, how to convince Angela, Paul Ryan and the Austrians, what makes them so blind- debt averse...

    2) Seneca was already writing that inequality was a Roman curse in his time, U really think we have the "remedy/solutions" now ? And what about those saying Jobs, Buffet, Gates, Page/Brin stimulate the USA creativity and ongoing industrial success. ?

    Reply