view Capitalism reset: Anatole Kaletsky

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Interview
issue 13 reprint
Capitalism reset:
Anatole Kaletsky
looks at how markets
and governments
affect our financial
future
Interview
Interview by Gene Zasadinski
Gene Zasadinski is managing editor of
View magazine.
Capitalism reset:
Anatole Kaletsky looks at how
markets and governments
affect our financial future
Anatole Kaletsky is editor-at-large and principal
economic commentator of The Times of
London. An award-winning writer and soughtafter speaker, Mr. Kaletsky is author of
Capitalism 4.0: The Birth of a New Economy
in the Aftermath of Crisis, published by
PublicAffairs.
As American humorist Mark Twain once famously quipped, “The report of my
death was an exaggeration.” The same might be said about capitalism. Through
crisis after crisis, through boom cycles and busts, capitalism manages to reinvent
itself and prevail. In this interview, economist and journalist Anatole Kaletsky
shares his unique perspective on the resilience of capitalism and on the current
state of our economy and its prospects for the future.
GZ: In your new book,
Capitalism 4.0, you argue
that three periods of capitalism
have come and gone and a
fourth is on the horizon.
Can you elaborate on that?
AK: The capitalist system
started in the middle of the
18th century. The first period
was one where economics and
politics were completely separate and government had no
economic responsibilities except
to raise a minimum amount of
taxes to wage wars. That period
came to an end in the 1930s because the system had outlived
its usefulness. Social change,
the First World War, and the
Great Depression destroyed the
economic basis of that system.
So, capitalism reinvented itself.
Capitalism 2 lasted about 40
years, going through various
sub-versions, starting with the
New Deal and continuing on
through the war economy and
the postwar Keynesian golden
age. A crisis of inflation that
began in the late ’60s, coupled
with oil shocks and the Vietnam
War, brought this phase of
capitalism to an end. But again,
the capitalist system reinvented
itself, and from 1979, with the
election of Margaret Thatcher
in Britain and then of Ronald
Reagan in America, another
version of the capitalist system,
Capitalism 3, arose.
GZ: So the differences among
these phases of capitalism were
essentially different dynamics
between government and
markets?
AK: That’s right. In the first
phase, government and markets
were completely separate. Then
from the 1930s onward, there
was a belief that the market
had failed and that government
had to be brought in to fix it.
After about 40 years, the opposite view took hold. This time
the conclusion was that government is always wrong and that
the market is always right. That
was Capitalism 3.0.
GZ: So, what does Capitalism
4.0 look like?
AK: The essential feature of this
new phase will be a much more
skeptical attitude, both toward
the market and toward the
government, and this is quite
empowering. To recognize the
fallibility of both political and
economic institutions doesn’t
mean everything is going to collapse. What it does mean is that
both these sets of institutions
have to undergo improvements.
If something’s fallible, if something’s imperfect, by definition
it can be better, but also, they
have to be balanced against one
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another. We can’t rely solely on
the market or the government.
We have to create a system of
checks and balances, where the
market prevents the government
from becoming too powerful
and the government prevents
the market from going off on a
tangent and making the sort of
catastrophic mistakes that we’ve
seen particularly over the last
ten years.
GZ: Clearly, Capitalism 4.0
sounds like a distinctive phase,
yet the laissez-faire and the
Reagan–Thatcher phases seem
pretty much the same, or are
there important differences?
AK: That’s a very interesting
point. The ideals, if you like, are
the same, but, actually, if you
look at the Capitalism 3 period,
the 35 years from the mid 1970s
until 2010, you had an infinitely
greater role and responsibility
for government than existed
when the role of government
consisted of nothing more
than running a standing army.
The 1930s taught us that it
was impossible for a capitalist
market economy to work for an
extended period without some
degree of government intervention, at least in monetary and
fiscal policy. The idea that government could just completely
get out and allow markets to
stabilize themselves was no
longer plausible. So I think even
in the most radical periods of
Thatcher and Reagan, there was
never really any pretense of going back to a market economy
that was totally unregulated
and totally without government
intervention.
I think the biggest risk to the world, not just to
America or Europe, is to continue with business
as usual.
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GZ: The previous phases of
capitalism seemed to provide the
right solution at the right time.
Will Capitalism 4.0 do the same?
AK: I think if the attempt to
reconcile politics and economics, to make them work
together rather than working
against each other, if that is
seriously attempted, then I
think it probably could work,
but I may be wrong about
that. It may be that there is
an intrinsic incompatibility, if
you like, between democratic
politics and the requirements
of the market system in the
modern world, and, more likely,
even if it could work, it may
be that people aren’t going to
try it. I think the biggest risk to
the world, not just to America
or Europe, is to continue with
business as usual. If that happens, another version of “new”
capitalism, such as state-run
capitalism, could prevail.
GZ: But aren’t there basic flaws
in state-run capitalism?
AK: Of course. There are basic
flaws in every system. It’s a
question of how big the flaws
are and how they are dealt with.
There’s no question that a totally
state-dominated market system,
where you have central planning
and a bit of markets on the side,
is doomed to failure. But there
certainly is a case to be made for
some government intervention
in private markets.
GZ: What’s that?
AK: Government intervention and private markets have
always coexisted because of private property. Private property
exists only if you have a government to protect it. So the idea
that somehow economics and
politics are completely independent has never been valid. But
new relationships between government and the private sector
are needed. In some cases this
will mean a bigger role for
government, but in other cases
it will mean a smaller role. In
other words, government is going to get bigger and smaller at
the same time, and there’s nothing contradictory about that.
The wonder of capitalism and the reason that capitalism has survived world
wars, revolutions, disease, and whatever, is that it is a very adaptable system,
unlike any other socioeconomic systems we’ve seen throughout history.
GZ: It’s a matter of adaptability?
AK: It’s all about adaptability.
The wonder of capitalism and
the reason that capitalism has
survived world wars, revolutions, disease, and whatever,
is that it is a very adaptable
system, unlike any other socioeconomic systems we’ve seen
throughout history. It is highly
adaptable, and that’s why it
continually reinvents itself.
It’s an evolutionary system.
GZ: In what areas do you think
government is likely to expand?
AK: Financial regulation is
obviously one area where we
need more government. Even
more important is the macroeconomic role of government
in stabilizing growth. The
idea that somehow the private
economy had found a way of
moderating itself and of just
stabilizing itself and avoiding
booms and busts is not valid.
Booms and busts have to be
consciously averted through
macroeconomic policy. Also,
international trade imbalances
will not be left to market forces
in the future.
GZ: In what areas will government contract?
AK: There clearly are areas
where government is going to
have to shrink. The enormous
growth of social spending that
we’ve seen all over the world,
largely on pensions and medical
care, is completely unsustainable. What the crisis did was
bring the crunch point forward
by about ten years, so instead
of becoming unsustainable
in 2025, the Medicare and
Social Security system here in
America or our National Insurance system in Britain is going
to become unsustainable within
the next few years.
GZ: If the proper steps are
taken, you’re optimistic?
AK: I am potentially optimistic.
And what I mean by that is I
think the reasons for optimism
are still valid. In other words,
we have seen that the system
can adapt, can save itself, and
can change in response to a
changing environment.
GZ: Specifically, what needed
to occur for that to happen?
AK: First, a deep depression had
to be avoided after the crisis,
and now a double-dip recession
has to be prevented. To do that
you had to guarantee the credit
system without limit. You had to
ensure that the banking system,
the financial system, did not
collapse, and it was only, ultimately, the government and the
central banks that can do that.
Second, you had to reduce interest rates to the lowest possible
level, which again, the US did
extremely quickly, getting it right
down to zero rates within three
months. And the third—and
this one is most debatable and
probably least important—was
fiscal stimulus. All three of those
actions were the right actions to
take in the aftermath of the crisis, but the real question is, How
big should they be, how long
should they go on, and what
should be the exit strategy?
That’s where the real debate is.
GZ: What about investment?
AK: We are now moving into
a phase where government
stimulus has to make way for
business spending. Businesses
have strong cash flows and
profits and should become
sufficiently confident or even
optimistic about the outlook
for demand in the next five
years to start investing some of
that money. There is some sign
that’s happening. I mean, even
the last couple of quarterly GDP
figures show that real corporate
investment in the US has been
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If we are going to have a decent rate of economic growth in the world over the
next ten years, it is going to have to be led by business investment.
growing at annualized rates
of 10 percent-plus, so there is
some sign of this coming back,
but it’s a slow process. And,
unfortunately, unemployment
is the last indicator to start improving in any economic cycle.
GZ: What would help to unleash a wave of investment?
AK: Tax cuts are a popular
prescription, and they might
be the right thing to do if there
were no other constraints. The
problem is that we’re not in a
world where everything else is
equal because we already have
enormous deficits. So, sure, if
it weren’t for the deficits, this
would be a great time for tax
cuts, but given the size of the
deficits not just in America, but
in most countries, I don’t think
large-scale tax cuts are really
feasible. However, I would
do all I could to avoid raising
taxes. I also think public
spending would help if it was
directed towards actions that
generate immediate economic
activity, like physical investment
in energy, roads, and so on and
in things like unemployment
benefits which go to people
who immediately would spend
the money because they’re living from government check to
government check. Again, the
constraint is that you already
have these enormous deficits,
and you can see them growing rather than shrinking in
the future, and we’ve already
spent so much, and government
revenues have fallen so far as a
result of the recession.
GZ: Despite the problems, if
you were a businessman, would
you be holding back or looking
for opportunities?
AK: I would be very much
looking for opportunities, but
specifically, I would be looking
for the kind of opportunities
that are ripe for exploitation
despite the generalized excess
capacity and unemployment in
the world economy. So let me
give some specific examples.
For instance, it’s clear that one
way or another, the US is not
going to have the same kind of
trade deficit over the next ten
years as it’s had over the last ten
years, because it’s unaffordable,
it’s not financeable, and the
country won’t stand for it. It is
also clear that the world will
be shifting away from fossil
fuels—not only because of
environmental pressures, but
because oil will eventually run
out. Therefore, the incremental
opportunity for American business over the next ten years is
going to be in exports rather
than in serving the domestic
market, and in developing new
energy technologies, even if
they seem uneconomic relative
to today’s prices for coal and oil.
GZ: What about consumption?
AK: House building in America
is going to be much weaker in
the next ten years than it has
been in the last ten, but the
other side of that coin is that the
opportunities to supply overseas markets from an American
production base employing
American workers are going to
be larger. Now, it may be that
will occur because the dollar will
be much cheaper. It’s already
cheaper to employ workers in
America than in almost any
other really advanced developed
country, much cheaper than
Germany, cheaper than France,
significantly cheaper than Japan.
But so far, many American
businesses have not really tried
to exploit this very large cost
advantage. So I’d be looking
at opportunities involving how
American companies can exploit
the growth of overseas markets.
Perspectives
GZ: Is this easier said
than done?
AK: Yes. There are a lot of
adjustments that have to take
place, but I would look at
which of the sectors have
grown too fast over the last
ten years and are going to
decline. I would take capital
out of these, and then I would
try to determine which sectors
are likely to develop over the
next ten years, and that’s where
I’d be putting capital.
Interest rates
I think interest rates are going to stay low for much longer than people were expecting a
few months ago. Even now, I don’t think people have quite adjusted themselves mentally
to how long interest rates are going to stay low. They won’t necessarily be at zero, but
we’re not going to see interest rates above 2 percent anywhere in the world in any major
economy at least until the second half of this decade. Interest rates are going to have to
stay very, very low over the next ten years, because huge cutbacks in government borrowing will be occurring and ultra-stimulative monetary policy will be the only way to prevent
economic slumps.
GZ: Once Capitalism 4 has run
its course, what’s Capitalism 5.0
going to look like?
AK: Sooner or later, there will
be a crisis that actually can’t be
dealt with by national decisions.
There will have to be some
kind of global governance. So,
I think Capitalism 5.0 will be
about evolving a global system
for running the world. I can’t
imagine if or how that’s going to
happen, but one way or another
it will have to happen—and
therefore I believe that it will.
Anatole Kaletsky on . . .
Economic recovery
If we are going to have a decent rate of economic growth in the world over the next ten
years, it is going to have to be led by business investment. Companies are very nervous
about whether there’s going to be another recession, about whether they’ll see another
collapse in their markets. And this is quite understandable. But if companies don’t invest
that money, you wind up with a classic Keynesian slump. So companies have got to be
encouraged to invest. And, really, there are only three things that will make that happen.
One is the growth of the market, another is low cost of capital, and the third is significant
changes in technology or market structure, which create new opportunities or new requirements for capital. Under those conditions, you could really have a corporate-led expansion
in the world economy which will surprise people with its strength.
PwC View issue 13
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