Martin Wolf has written the best thing I have seen in a very long time on the momentous transformation the world economy is undergoing.
It is capitalism, not communism, that generates what the communist Leon Trotsky once called “permanent revolution”. It is the only economic system of which that is true. Joseph Schumpeter called it “creative destruction”. Now, after the fall of its adversary, has come another revolutionary period. Capitalism is mutating once again.
Much of the institutional scenery of two decades ago – distinct national business elites, stable managerial control over companies and long-term relationships with financial institutions – is disappearing into economic history. We have, instead the triumph of the global over the local, of the speculator over the manager and of the financier over the producer. We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism.
Yes, global financial capitalism. Its defining feature is "the triumph of the trader in assets over the long-term producer" in Wolf's words.
What does Wolf make of it?
How then should one evaluate this latest transformation of capitalism? Is it a “good thing”?
Powerful arguments can be made in its favour: active financial investors swiftly identify and attack pockets of inefficiency; in doing so, they improve the efficiency of capital everywhere; they impose the disciplines of the market on incumbent management; they finance new activities and put inefficient old activities into the hands of those who can exploit them better; they create a better global ability to cope with risk; they put their capital where it will work best anywhere in the world; and, in the process, they give quite ordinary people the ability to manage their finances more successfully.
Yet it is equally obvious that the emergence of the new financial capitalism creates vast new regulatory, social and political challenges.
Pessimists would argue that monetary conditions have been so benign for so long that huge risks are being built up, unidentified and uncontrolled, within the system. They would also argue that the new global financial capitalism remains untested.
The regulatory challenges are big enough. But they are far from the only ones. Lionel Jospin’s hostility to what he called a “market society” is widely shared. Powerful political coalitions are forming to curb the impact of the new players and new markets: trade unions, incumbent managers, national politicians and hundreds of millions of ordinary people feel threatened by a profit-seeking machine viewed as remote and inhuman, if not inhumane.
Last but not least are the challenges to politics itself. Across the globe there has been a sizeable shift in income from labour to capital. Newly “incentivised” managers, free from inhibitions, feel entitled to earn vast multiples of their employees’ wages. Financial speculators earn billions of dollars, not over a lifetime but in a single year. Such outcomes raise political questions in most societies. In the US they seem to be tolerable. Elsewhere, however, they are less so. Democratic politics, which gives power to the majority, is sure to react against the new concentrations of wealth and income.
In the end, Wolf does not seem to have made his mind about what he thinks of it, and where he would like to see this new system going.
I am among those who see the future risks as being substantial. I think there is a fundamental incompatibility between unfettered global finance and a fragmented system of political sovereignty at the national level. I am also not convinced that this new international financial capitalism has actually lived up to its promise: it has on the whole not been beneficial to developing nations, and it has created great inequality in the rich countries (as Wolf acknowledges). So we need a substantial rethink.
All the potential Keynes's out there: we need your ideas!
UPDATE: Here is the comment I submitted to the FT website as a member of the FT's expert panel.
This is a great article and I think Martin is spot on. He
has identified the nature of the transformation we are undergoing better than I
have seen done anywhere else. But the piece ends on an inconclusive note, and
Martin is uncharacteristically glib about the bottom line in all of this. It’s
all “on the one hand, on the other hand” at the end. Come on, Martin, we are
used to stronger stuff from you!
Perhaps the glibness is because Martin sees where his
argument is leading, but he is too worried about putting it in words. The fact
is that it is pretty easy to identify all the risks that this new global
financial capitalism has created (and Martin lists them all), and quite difficult
to identify the benefits it has generated. Martin makes a valiant effort on the
latter score, but it rings hollow. As Martin acknowledges, the new financial
capitalism has had a first order impact on worsening inequality in the rich
countries, while the beneficial effects on productivity and growth are
speculative (and even if they exist, they have obviously made a difference only
to those at the very top of the income distribution). The disappointments in
poor and middle income countries are if anything even greater. Capital is
flowing in the wrong direction (from poor to rich nations) and there is scant
evidence that the increasing sophistication of financial markets has allowed
these countries to smooth consumption and reduce volatility. If anything, the
opposite is the case.
The problem, at its root, is the incompatibility between
global finance and fragmentation of political sovereignty at the national
level. Domestic finance could be tamed in the previous century through national
institutions (regulation, legislation, central banks, and so on). Global
finance, to work well and safely, requires institutions similarly global in
scope. The chance that these global
institutions can be created is, well, nil—at least in our time.
So those who like and want to live global financial capitalism owe the rest of us an explanation: how exactly will this new global regulatory order be created to take care of global finance?
UPDATE2: Martin Wolf responds on the FT site:
Martin Wolf: The reason that this piece does not come to a stronger conclusion is that it is supposed to be a piece of analysis, not a column, and so is not supposed to express my personal opinions too strongly. I agree that the questions these developments raise are huge ones. Dani's comment spurs me on to address them. Wait for my column next week!
I look forward to it.