As we have all learned from the graveyard of failed forecasts, economics is an unerringly inaccurate as well as a dismal science, inextricably bound to the whims of irrational human behaviour. All too frequently it follows that economies develop haphazardly and tend to reflect a nation’s collective ability (or otherwise) to innovate and provide conditions in which the experience and aspiration of its people can flourish.
One of capitalism’s enormous strengths is its accommodation of human nature by the creation of broadly stable environments that liberate and incentivise people to pursue new ideas whilst casting aside defunct thinking. Yet those encamped outside St Paul’s Cathedral in my constituency argue that capitalism is now itself a defunct idea, fundamentally discredited by the global financial crisis. It is a view that is beginning to have greater traction amongst a wider group of middle class, thoughtful, responsible Britons, uncomfortable with and anxious about recent economic developments.
My counterclaim to them is that capitalism continues to offer us the best system of delivering prosperity and liberty to the greatest number of people – but it was never meant to be a static framework. Capitalism works because it adapts and adjusts through crisis. The real problem is that we in the West are now subverting its natural processes of correction by clinging to outdated, discredited ideas and institutions.
The US is stuck in political deadlock, seemingly too caught up in partisan wrangling over its budget deficit to provide the global leadership we have expected from it over the past century. Europe has proved incapable of finding a credible solution to its own single currency crisis. Historically low interest rates in the UK reflect an economy still firmly on a life support machine. Across the Western world, continued political compromise and a desperate hope that ‘something will turn up’ are favoured over taking the immediate term pain of radical restructuring. As a result, the challenges we face appear simply too great to articulate for contemporary politicians at the mercy of short electoral cycles and restricted by conventional thinking.
I suspect this state of affairs will continue for so long as the main beneficiaries of the status quo remain more powerful than its losers. But while we appear to have avoided financial disaster turning into economic catastrophe, there will be also long term costs to be borne largely by future generations.
Firstly, ‘Who are you to lecture us?’ is a sentiment on the rise, the West’s financial woes having led to a comparative loss of global credibility. Undoubtedly, developed nations will find it increasingly difficult to maintain their role as directors of the world economy, as the composition and governance of international institutions no longer reflect reality. The G20, the ‘permanent five’ of the UN Security Council and the IMF may soon seem quaintly dated.
But my greatest concern is this: that the West will no longer seem the place where the world’s brightest and best see their future. When societies cling to conventional ideas which disproportionately benefit established generations, inevitably the number of losers begins to increase over time. The largest contingent of these must surely be amongst our young. As we are already witnessing across the European continent, youth unemployment is regarded as a price worth paying if it avoids unstitching the patchwork of entitlements and way of life that the post-war generations of citizens have taken for granted. As power shifts eastwards, the Asian economic powerhouses will not be immune from their own demographic problems. Nevertheless, unlike the West, they have an enormous advantage in being able to construct from scratch a welfare state fit for the twenty-first century without the need to battle against a morass of vested interest.
Eighteen months ago, in his book, Capitalism 4.0, Times journalist, Anatole Kaletsky, argued that we are witnessing the fourth transformation of the global capitalist system. After liberal free trade capitalism in the early 19th century, the Keynesian welfare state of the 1930s and beyond and the free market monetarism of the Thatcher and Reagan era, we are likely now to see a change in the relationship between markets and governments.
Writing since about his promotion of the book, he has noted that it is in Asia that it has captured the most imaginations. It has become a surprise best seller in South Korea, where the implications of Capitalism 4.0 have become a subject of national debate and Kaletsky’s transformative message has been most enthusiastically embraced in Singapore, China and Hong Kong.
As I suggested in a recent ConHome article, many Asians have perceived since 2008 not a global financial crisis but a ‘North Atlantic recession’. Yet Kaletsky’s experience suggests that it may not just be in hard economics that Asia is overtaking the Western world, but less expectedly in new ideas too. He observes, ‘the crisis blew away, at least in Asian thinking, the simplistic belief that the market automatically produces the best possible outcomes and that societies must always accept whatever social consequences market forces dictate. [As a result] they can engage in a potentially inspiring debate about the role of politics, as well as of markets, in creating a fairer, more stable and sustainable capitalism’.
If it comes to pass that Asia flourishes most economically and becomes the region that most welcomes fresh thinking, the contrast will be stark with a Western world that complacently harks back to historical dominance and fudges the important economic and political choices we now face.
Naturally the magnitude of the West’s difficulties is intimidating, and it would be naive for me to imply we face easy answers. After all, a crucial part of our future involves unravelling the past. Nevertheless, for a capitalist system to be successful and enjoy popular electoral support, it must ensure that it creates societies which liberate and incentivise people to pursue new ideas and cast aside defunct ones, not where the group of disaffected losers expands.
As such, it strikes me as essential that alongside the tackling of our structural problems, we begin to articulate and embrace a fresh and positive vision of the future. This will involve a painful acceptance of marked, rapid decline in relative Western influence. However, unless we face up to the challenge, we risk undermining the very compact upon which our capitalist economies are based.