John Plender - Capitalism: Money, Morals and Markets

T he great financial crisis that began in 2008 with the collapse of Lehman Brothers, the US investment bank, has been the worst since the Wall Street Crash of 1929. Unlike that earlier crisis, it has not put the survival of the capitalist system in doubt. Indeed, the Great Recession that began shortly before the Lehman debacle was the first modern crisis in which no systemic alternative to capitalism was on offer. No one, after all, is looking to North Korea for an alternative vision of the future. Since the fall of the Berlin Wall, the only question has been about the extent of the market orientation of capitalism. What the crisis did do was provoke intense soul searching about the merits and defects of an entrenched capitalist system.

The merits are clear enough. Capitalism, by which I mean a market-based system where private ownership of industry and commerce is supported by property rights, has lifted millions out of poverty. Since the start of the industrial revolution in the eighteenth century, living standards in the West have been transformed. And since the mid-twentieth century, the process of industrialisation and urbanisation that holds the key to raising rates of economic growth has spread to the developing world. The trail blazed first by Japan, then by the Asian Tiger economies such as South Korea, Taiwan, Hong Kong, Thailand and Singapore, has been followed by other emerging market countries across the globe. As they go through one industrial revolution after another, these countries growth rates have accelerated to levels far beyond anything achieved through industrialisation in Europe and North America most spectacularly so in the case of China, where the Communist Chinese leader Deng Xiaoping signalled a milestone in capitalisms slow march towards respectability by declaring that to get rich is glorious.

Chinas economy grew at 10 per cent per annum on average during the 1990s and 2000s, while the three decades to 2010 saw an eightfold increase in per capita gross domestic product. That rate of growth is not exceptional by recent Asian standards. What is exceptional is the breathtaking scale on which poverty has been reduced. According to the World Bank, the number of people living at or below $1.25 a day, after adjusting for the purchasing power of the dollar in different countries, has fallen from 52 per cent in 1981 to 21 per cent in 2010 a transformation in living standards without precedent in human history. Small wonder that, while globalisation ensures that the developed and the developing countries are increasingly interdependent, the balance of economic power is shifting towards the latter. A further consequence of this series of industrialisations is that global inequality has lessened.

As Karl Marx rightly perceived, industrial capitalism has always been inherently unstable, which is the first and most palpable defect of the system. The cycle of profit, speculation, irrational exuberance, stock market panic and recession has been an endemic feature of capitalism since the industrial revolution began. Creative destruction, the process identified by the Austrian-American economist Joseph Schumpeter as the essential dynamic of capitalism, has long been troublesome for those thrown out of work as a result of increasing competition and technological innovation. It also subverts the sense of community. And today, not only is the business cycle made worse by ill-judged monetary policies and manic bankers there have been more than 100 major banking crises worldwide in the past three decades but globalisation and economic interdependence have caused basic manufacturing industries to evacuate wholesale from the developed to the developing world, at a high cost in lost jobs. Some jobs have been repatriated since the financial crisis as business leaders discovered that their supply chains were over-extended. Yet it remains an open question whether capitalist innovation can continue to generate new jobs in the way it has done over the past two centuries.

At the same time, globalisation and increased concentration in the banking system since the crisis mean that the scale of any future global financial crisis and subsequent recession will be greater than ever before. Moreover, the environmental cost of bringing emerging market countries up to the per capita income levels of the advanced countries is rising all the time and is hazardous for the planet in a way that the fallout from early industrialisation was not. It follows from all this that the rising living standards for which capitalism deserves credit are accompanied by a high degree of insecurity an insecurity that is exacerbated at the time of writing by tight fiscal policies in the US and Europe. These were designed to address the government deficits and debt burdens incurred to finance the welfare safety nets that were installed to mitigate that insecurity.

The other key discontent about capitalism concerns its ethical basis. The centrality of the money motive in driving the market economy has long been a worry for many. In the aftermath of the financial crisis, that concern has been heightened by extreme levels of inequality within both developed and developing countries. A particular focus is boardroom pay. Few can see any justification, economic or moral, for the enormous widening of the gap between boardroom and workplace rewards, which is why the Occupy Wall Street movement and comparable protests around the world attracted such sympathy in 201112. Most feel absolutely sure that the pay awarded to bankers is wildly excessive. While global inequality has decreased, inequality in many countries of the developed world has soared, partly as a result of the explosion in boardroom pay. There is also a clear sense of unease in the English-speaking world at the increasing financialisation not only of the economy, but of everything from public services to the arts.

These discontents have been a source of fascination to me since the outset of my career. When I left Oxford University in 1966, I embarked on what I confidently expected to be the great twentieth-century novel. With about a third of it written, it dawned on me that it was horrendously devoid of literary merit. When I binned the incomplete manuscript, I had no Plan B and thus succumbed to parental pressure to join one of the big firms of chartered accountants in the City of London, where a great uncle of mine had been the dominant figure through most of the first half of the century. Three years there left me with a profound distaste for accountancy and a qualification that I did not expect to be of much use. Yet I acquired a growing interest in the workings of the global economy and an enduring concern about the ethical basis of capitalism. These are subjects that I pursued in my subsequent career in journalism, which was later to be informed by practical experience as, among other things, a non-executive director and chairman of a quoted company, and pro bono work on corporate governance around the globe for the World Bank Group and the Organisation for Economic Cooperation and Development.