The global crisis is about to usher in a new era in which the state intervenes more in finance and macro-economics, but less in the new “commanding heights” of education, health and pensionsby Anatole Kaletsky / July 21, 2010 / Leave a comment
As the world moves from the life-threatening to the convalescent phase of the financial crisis it is becoming clear that, although it wasn’t destroyed by the near-death experience of 2008-09, global capitalism will have been permanently transformed.
The crisis marked the fourth systemic transformation of the global capitalist system, comparable to the upheavals that followed the great inflation of the 1970s, the great depression of the 1930s and the period of geopolitical turmoil that culminated with Wellington’s victory over Napoleon in 1815. The new politico-economic system emerging from the crisis can therefore be described as the fourth distinctive version of capitalism—hence the title of my new book, Capitalism 4.0.
The defining feature of each previous systemic transformation has been a change in the relationship between government and markets, and especially in what might be called the fundamental question of political economy: the balance between political decisions based on one-man-one-vote and economic decisions based on one-pound-one-vote.
In classical 19th-century capitalism, politics and economics were in essence distinct spheres with interactions between government and private enterprise largely confined to raising military revenues and protecting powerful vested interests—landowners or craft guilds, for instance. The second version of capitalism, from the 1930s onwards, was characterised by a distrust of markets and a faith in benign, omniscient leadership—the new deal, wartime faith in “heroic government” and the postwar paternalism of “Whitehall knows best.” The third phase, defined by the Thatcher-Reagan revolution, exactly reversed these prejudices. Now the markets were always right and governments were universally distrusted. So what will be the character of the fourth phase?
The crisis revealed that governments and markets can both be catastrophically wrong. This may seem a depressing conclusion, but acknowledging the fallibility of both markets and political institutions, far from being paralysing, can be empowering. Fallibility implies a capacity for improvement. It also implies an effort to synthesise politics and economics, instead of assuming an inherent opposition between capitalist market incentives and democratic demands for social justice.
Capitalism 4.0 will be marked by a new recognition that market economies cannot function without competent and active government. This is now obvious in the financial sector, but another essential economic function of government has been demonstrated just as clearly by the crisis. Governments and central banks must now actively manage economic cycles, because inflation targets—the main tool of macro-economic management in recent decades—are not enough.
The dominant economic theories of the…