Coming soon to a theater near you: capitalism 3.0

Capitalism is in the throes of its most severe crisis in many decades. A combination of deep recession, global economic dislocations, and effective nationalization of large swathes of the financial sector in the world’s advanced economies has deeply unsettled the balance between markets and states.

But don't fret about the future of capitalism, which after all has an almost unlimited capacity to reinvent itself. The real question is not whether capitalism can survive — it can — but whether world leaders will demonstrate the leadership needed to take it to its next phase as we emerge from our current predicament.

Read the rest of my latest Project Syndicate column here.

Comments

[KAL]

Was it my truly who was saw the future in "How Far Will International Economic Integration Go?"

[lark]

I think your proposal is like the new Treasury plan: without details, and therefore without merit.

We've had decades of 1st world wage stagnation, currency manipulation, outsourcing, deindustrialization, huge increases in inequality, and all you can do is wave your magic wand and say, it will all be better under a regime of even more globalization?

No, no, no, no.

Enough of this!!

[Toby]

The real question is not whether or not capitalism can survive. The question is why would anyone want it to survive?

[robertdfeinman]

"That is why all prosperous societies are capitalistic in the broad sense of the term: they are organized around private property and allow markets to play a large role in allocating resources and determining economic rewards."

I don't see this as the defining feature of capitalism. The defining feature is - capital. The ability to attract capital to new enterprises by offering interest in return. That the enterprise is "owned" by private individuals or the state is a detail. We have had for-profit, state-owned, enterprises and they behave just the same as the privately owned ones.

Capitalism is now becoming obsolete because the secret sauce was the ability to harness natural resources without paying for them. Oil is priced at the cost of extraction, not factored in is the fact that it is irreplaceable.

It's all about externalities which have been ignored.

We live on a finite planet and an economic system which is predicated on continual growth cannot survive.

We need to start designing a steady-state economy, not a growth-based one. Who owns the means of production is irrelevant.

[Greg Ransom]

Let's talk straight.

_Macroeconomics_ is in the throes of its most severe crisis in many decades.

The Keynesian / New Deal conception of government is in the throes of its most severe crisis in many decades.

"Capitalism" is in trouble because of the massive scientific failures of the macroeconomists, because of the massive scientific errors of the members of the Federal Reserve, because of the corrupt and irresponsible actions of the members of Congress and of the last Administration, and because of a truly screwed up regulatory regime.

The problem isn't with "capitalism". The problem is with the macroeconomists who fail to explain the operation of the market in a non-pseudoscientific fashion.

The problem is with the politicians and the government bankers and the regulators who fail to provide the market with the sound institutions and limited government with will allow it to function in a non-pathological manner.

Blame. The. Economists.

Blame. The. Fed. Bankers.

Blame. The. Politicians.

Don't blame "capitalism".

[Zach]

For myself, I find it much more useful to use the term "market", as in the different models of market (oriented, or friendly) economies. Using that language, you're absolutely correct...in that we are not going to revert to either command & control, or communalism based on tribes, ethnicity, religon, or any other past economic structure.

However, when people in America use the term "capitalism", they are referring to the US and UK model of the market, and that I do believe is on its way out.

I am keenly interested in the social market economies of continental Europe, Germany in particular.

So if I were to write your column, I would probably have intend a similar meaning, but I think usage of the word "capitalism" will lead to misinterpretation by the general public, many who don't even know there are different forms of market-based economies.

[Richard Hoogesteger]

I would like to support the position of the previous commentator. Capitalism is a word which was made popular by Karl Marx. What he meant by it was the idea that in market economies unregulated markets would eventually self-destruct into a giant depression. The word itself implies that markets are inconsistent with democracy: that in a market economy ultimately all power winds up in the hands of those who own the capital or businesses. Money is power, unregulated markets lead to the concentration of money and power in a small social class who rule over the rest of us. The ideas of John Stuart Mill on social democracy, Thorsten Veblen on regulation of financial markets and of course Keynes on business cycle theory were, along with those of various other economists, the basis for the policies of the new deal in America and the social market in europe. These policies which are related in many ways became the foundation for the middle class societies of North America and Europe after world war two. Unregulated international markets are undoing the effects of these great social reform movements. While unregulated international trade can increase efficiency it allows many ancient evils to return from slavery to massive financial fraud and environmental destruction. Sadly few economists today are willing to take on the challenge faced by Mill, Veblen and Keynes to make market economies moral just and humane.

[BMH]

re Robert Feinman
I liked your term "steady state economy" that coins it.
Best BMH

[T. P. Uschanov]

"Capitalism is a word which was made popular by Karl Marx."

Actually he never used the word one time in all of his writings. The closest he ever came was "the capitalist mode of production". Which of course is not quite the same as capitalism - the current "crisis of capitalism" came precisely because finance overpowered production.

[Per Kurowski]

Dani Rodrik says “This model became frayed from the 1980s on, and now appears to have broken down. The reason can be expressed in one word: globalization.”

Wrong, the model broke down because:

1. The financial regulators allowed the multiplication of the financial leverage of the banks based on the silly concept that perceived high risks gives way to a more risky behaviour than what is perceived to be of a lower risk and which, in relative terms, we know is absolutely false.

2. Financial regulators told for instance banks in Germany that they could count on Credit Rating Agencies being able to inform them accurately about the credit risk of securities backed by mortgages in California, and these risk-adverse German banks were stupid enough to believe the regulators.

[NPTO]

Could you explain the following idea in more detail?

"When Chinese-style capitalism met American-style capitalism, with few safety valves in place, it gave rise to an explosive mix."

By the way, Greg: are you saying that capitalism is a system where private property and market regulation deliever excellent results, as long as economists and government officials do an excellent job?

It sounds a bit like some socialist friends I had, who said that Cuba would be paradise if only capitalists stopped boycotting it. I always thought: "Oh. They were supposed to help?"

[arvid]

This is the most mealy-mouthed, tautological defense of "capitalism" that I have seen. Just when even mainstream economists can see "systemic" problems, of all people it is Dani Rodrik who mounts this rearguard counter-attack!

[Jalal Alamgir]

I think Greg Ransom's note above as a point: the crisis is also a crisis of macroeconomics. WWI, similarly, brought into question the failure of philosphy, political scientists, and social sciences in general - all that we know about human behavior could not prevent the scale of devastation. Yes, economics should be implicated. To be fair though, how much could macroeconomics do when there is so much imperfection in the information that came out of Wall Street, due partly to the super-quant methodologies as well as in ego combined with lack of simple forthrightness.

[BobbyG]

What productive, socioeconomically beneficial role might the venture capital industry play in the upcoming economic stimulus/recovery efforts?

http://bgladd.blogspot.com/2009/02/what-now.html

[Thorstein Veblen]

Dani, I'm just curious what your views are on the stimulus, and whether it is big enough? And what you think on the Obama administrations hesitancy to nationalize the banks? Thanks.

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[xl]

I am wondering that since one of the biggest problems of Capitalism 2.0 was under appreciation of risk and lack of oversight, perhaps this is a great time to attach some sort of metric to these things. For example, hundreds, if not thousands, of defaulted derivatives contracts are now in and will be in bankruptcy courts. Monolines are also getting government support to stay afloat. Seems that at least how much, and some indications of how, risks were under perceived in the past can be approximated. And this is all information that isn't public normally. And these instruments represent in dollar terms the price people paid for risk. And its good ammunition for debates soon to come if the data added up to something.

[Phillip Huggan]

There are many unemployed finance sector employees who can very easily be retrained "bargain living" personal finance basics.

A free federal programme to offer personal financial planning (I'm thinking more how to live at 1/2 one's previously middle class income more than I'm thinking portfolio management) should kill a two birds with one stone

[Joel]

I don't think it's Great Depression, I don't think it's Armageddon but I think that it's purely wishful thinking for people to be forecasting a sharp V-shaped recovery in the second half of the year

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I don't think it's Great Depression, I don't think it's Armageddon but I think that it's purely wishful thinking for people to be forecasting a sharp V-shaped recovery in the second half of the year. There is no way that is going to happen. Unemployment is still climbing

[bankruptcy records]

On the contrary; it is Great Depression II forthcoming. You must be kidding if you think that all this capitol generation (that was poured into the economy like motor oil into a blown engine that's still running), is not going to have a detrimental effect. There's no way that we can continue on in deficit like we are. Somewhere someone's going to pull the plug on our borrowing... and it won't be pretty.

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The reason we want capitalism to survive is because (when it works properly, and is not abused) it is the most functional way to benefit the consumer. The issue is that we're not prosecuting those who are cheating.

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Venture Capital has all but dried up at this point. Probably won't poke its head out of the shell for quite some time.

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Competition - capitalist style - breeds an environment where the greatest victor... is the consumer. We run a business, and compeition drives us to perform our best, and do so at the most reasonable price we can. That's America Folks!! Let's get back to the standard!

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