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Wednesday, 28 May 2014

Capitalism in Crisis Again (Not)

Beans

I imagine we all think that what the world needs is a conference on the topic of Inclusive Capitalism, a jolly beanfest of the world’s great and the good dedicated to discussing how to renew trust in capitalism.  Even better to hold it in London, where the dreadful consequences and devastating effects of the last financial crisis are plain for all to see in the proliferation of designer retail outlets, the high rise growth of iconic skyscrapers and the influx of the world’s billionaire elite seeking democratic boltholes. 

But let’s face it, you couldn't get the world’s top brains to attend a conference in downtown Mogadishu could you? Although, frankly, that might provide them with a better perspective on the pros and cons of capitalism.

Worthy

In its own words Inclusive Capitalism is a:
“Movement that seeks to respond to the serious dislocations caused by developments in the capitalism of the last 30 years:  worldwide increases in income inequality, large-scale corporate and financial scandals and the fraying of public trust in business, historically high and persistent unemployment and short-term approaches to managing and owning companies.”
All of which is undoubtedly worthy, although perhaps it rather misses the point that the growth of inequality may not be a function of capitalism going wrong but a side-effect of adding the odd billion or so highly educated people to the global workforce. However, let’s ignore that and consider the point at hand. 

Elevator

Inclusive Capitalism takes as its central metaphor economist Larry Katz’s elevator from The Crisis of Middle Class America:
“Think of the American economy as a large apartment block … A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.”
Behind Katz’s metaphor is a nasty reality, one we've touched on before in Repellent: The Magical Law of Attraction, that social mobility in America and Britain is less a dream than a credit-induced delusion.  If you’re born poor you’ll almost certainly die poor.  Katz’s own research backs this up, and hints at the underlying cause of the problem:
“Since 1980, however, a sharp decline in skill supply growth driven by a slowdown in the rise of educational attainment of successive U.S. born cohorts has been a major factor in the surge in educational wage differentials. Polarization set in during the late 1980s with employment shifts into high- and low-wage jobs at the expense of the middle leading to rapidly rising upper tail wage inequality but modestly falling lower tail wage inequality.”

Globalization

So, just at the point at which India and China started modernizing, and computerization made higher skilled, and higher paid, jobs transferable to any location, U.S. educational attainment moderated, and the result is the hollowing out of the middle, as all those new jobs fled offshore, leaving an under-educated cohort floundering around in a rapidly shrinking pool of jobs. Perhaps a general decline in living standards has been attenuated by the downward pressure that globalization has placed on the price of consumer goods, but in the end the whole thing risks becoming a gigantic Ponzi scheme; if the middle classes in the developed world collapse then who will buy the manufactured goods from the developing nations? 

This is an inconvenient truth for politician and talking heads of all kinds, who’d far rather blame some nebulous “capitalist” entity for the world's woes and declining living standards of their citizens than do something practical, such as pointing out to their electorates that if they don’t take it upon themselves to get a decent education they’re simply flotsam in the whirlpool that is the global economy. Living standards in developed nations can be sustained for a long time by our deep reserves of capital of all kinds: democratic institutions are hard to replicate, as we saw in History's Financial Shadow, and as many hard-pressed oligarchs would concede as they flee to London and New York from various troubled global economic hot spots; but even so there's a limit to the size of the social security safety net.

Not Broken

What this all misses is that capitalism isn't broken. It’s exactly the same rapacious, self-interested machine it’s always been, and the fact that a bunch of bad bankers and reckless regulators brought the world to the point of financial catastrophe, and that the financial elite are a greedy bunch of selfish bastards who'd rather live behind barbed wire in a fortress than share their spoils with the masses on the streets, is nothing new, as I outlined in The Zeitgeist Investor. History tells us that this is the nature of capitalism, it's how people behave when they become rich, it's not an emergent property of our particular time and place - see Born Rich, Born Greedy, for example.

Nor can we fix our financial system by exporting the morals and values of other cultures.  Suggesting, for instance, that other countries should adopt the German model of participatory capitalism is wrong-headed - it's a product of German culture, not a gold standard we should even attempt to adhere to globally.  You'd have thought the European Union was already example enough of what can go wrong when you yoke different cultures together (see: Fear and Loathing in the Eurozone).

And the inherent short-termist nature of businesses and shareholders isn't anything new either: much though I dislike it the truth is that most long-term planning fails.  Unpredictability is inherent in the world.  At best we should have long-term goals, at least that way we know which general direction to head in, but five-year plans died with Stalin and Mao, and never delivered much other than abject misery, mass extermination and economic collapse anyway. In comparison the crisis of capitalism is small beer, indeed.

Point Missed

Of course, this type of conference isn't really expecting to fix any of these things.  It’s a way of focusing attention on these issues, but the reality is that the attendees could make more of a difference by donating their salaries and expenses for the day to a charity dedicated to truly improving the world.  They could talk forever and never come to a conclusion while providing mosquito nets and educating women in poor nations will make the world a measurably better place (see: Economic Parasites).

There’s nothing fundamentally wrong with capitalism that reforming the funding of political parties won’t fix.  But until we’re willing and able to do that we ought to spend our time doing things that make a real difference, not holding conferences that allow the great and the good to talk to each other as though they were going to change anything for anyone.  They’re not. 

    

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