Back away from the tipping point

It wouldn’t have been out of place if Anatole Kaletsky’s Capitalism 4.0 was called “The Moral Obligation To Be Financially Intelligent” and I say so knowing I risk lining Kaletsky’s pockets. At a time when US President Barack Obama is urging his countrymen to improve their financial knowledge, this improvement on a famous Lionel Trilling essay is fitting enough. If you aren’t piqued yet, the book’s subtitle might get you interested, “The Birth Of A New Economy”.

Kaletsky, a senior journalist, says that the world has already been through three financial epochs. The first one started in 1776 when the US Declaration of Independence happened right up till 1932 when capitalism came closer to genuine collapse. Capitalism 2.0 saw its genesis in Roosevelt’s New Deal experimentation of 1933 and ended in 1979 owing to breakdown of the postwar gold-backed currency system. Capitalism 3.0, a 30-year epoch, started with Thatcherism in 1979 and ended with the crisis of 2007-09.

Relying on the writings of great economists as well as on a drawerful of articles from various magazines and policy documents, Kaletsky’s diagnosis of the past three “Capitalisms” is as enlightening as his 4.0 is. He concludes that boom-bubble-bust cycle grows ever swifter and more calamitous. Without placing the blame of recent financial collapse entirely on the bankers’ shoulders, Kaletsky rightly indicts the political establishment too. “The Bush administration’s failure to recognise the essential role of government in stabilising and underpinning the modern financial system brought every bank in the world to the brink of failure and threatened the global economy with an unprecedented depression.” Mr Kaletsky, how do you say touché in Russian?

The book takes a Sophoclean turn in its 10th chapter titled “The Economic Consequences of Mr Paulson”, a swipe at former US Treasury Secretary Henry Paulson, who took tough decisions when the world was on the brink of the financial equivalent of bungee jumping. With the possible exception of Andre Mellon, Paulson’s predecessor at the Treasury from 1921 to 1932, Kaletsky says that “this disaster was not the stupidity of regulators, the greed of bankers or the improvidence of speculators in low-income real estate but a series of misjudgments by one man: Paulson”. This particular chapter makes one wonder if the $767 billion Troubled Asset Relief Programme was the right thing to do at that time. Kaletsky says no private business would like to depend on the milk from government’s tits. Little wonder if the same businesses are trying to wean themselves off the milk. General Motors is raring to shed the “Government Motors” tag.

4.0 promises to be a different beast though, a benign one at that. Kaletsky predicts an overriding trend of “a view that politicians could be held accountable for wars but not for financial crises was a typically market fundamentalist confusion of the kind that is likely to be swept away by Capitalism 4.0”. Kaletsky is one of those rare economists who can tell his Bukharin from Bakunin and that apparently stood him in good stead while writing this book. He says that conservative parties tend to do better when societies are under stress because “as voters see their incomes and wealth eroding… the generalised demands for change escalate but the willingness to embrace any specific changes tends to disappear”. With the Tories winning in England and Republicans’ bright prospects at the coming US Senate elections only confirm Kaletsky’s theories.

Kaletsky says health-care reform will be an important issue in 4.0. Referring to Obama’s recent health-care reform Bill, Kaletsky says, “Had President Obama focused more attention in the health care debate on costs and less on coverage of the uninsured, he might have managed to convince Americans that their present health-care system was unsustainable and threatened bankruptcy not only for the government and individual businesses but for the entire nation.” He makes a few dire observations too: “Facing up to the inevitable choice between significantly higher taxes and major reductions in health and pension entitlements will be the greatest political challenge of the post-crisis years.”

However, Kaletsky paints the finance and banking structure in 4.0 in broad strokes. “Managements and investors will need to discover new ways to reconcile financial and political investors” and many such are the kind of statements that make the reader wonder if Kaletsky read his own book. While he exhorts the Americans to increase their savings, he thinks that those savings will be “lent to businesses for investment and expansion” and that they would also cut the Americans’ demand for consumer goods. However, he fails to factor in the fact that the rich don’t necessarily invest their earnings and savings in the American economy; they send them around the globe where they’ll get the highest returns. Kaletsky laments that the rich are better off with a smaller percentage of a fast-growing economy than a larger share of an economy that’s barely moving.

Kaletsky’s lucid prose is his strength but still he wouldn’t be everyone’s cup of tea. For a casual reader, reading the whole book feels like a marathon unfairly imposed on a jogger. Having said that, invest your time in this tour de force of information and speculation, and you’ll be richly rewarded. That’s capitalism of a sort too, which I am sure Kaletsky would approve of.