“Capitalism is mutating once again”, writes Martin Wolf, the FT’s chief economics commentator.
Mr Wolf argues that the institutional scenery of two decades ago is disappearing into economic history and we are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism.
How should one evaluate this latest transformation of capitalism? Is it a “good thing”? How is unfettered finance reshaping the global economy?
Martin Wolf answers your questions on the modern mutation of capitalism below
Your piece mentions the improved allocative efficiency that comes with globalised capital markets. But this seems at odds with the fact that a lot of academic research has found it hard to detect the direct growth benefits from increased financial globalisation that one might expect if we believe this assertion. How do you square the circle?
Rupert Seggins, London
Martin Wolf: This is a good point. I think the point is not really whether one has globalised capital markets, but whether a country has a good capital market. There is some evidence that the quality of a capital market affects the efficiency of a country’s growth. But there is always so much else going on that it is hard to isolate this effect.
Companies are under pressure from shareholders to minimise tax. Yet companies are required to pay all their taxes. Inside an isolated nation state, this tension would be easy to resolve - companies pay tax in full, as required by law: no more, and no less. But tax havens allow this neat solution to unravel: companies can go offshore to cut their tax bills, legally. By helping wealthier sections of society escape taxes more easily than ordinary people can, they undermine faith in the fairness and integrity of the international financial system and they boost inequality. Growing inequality constitutes a potent political threat to globalisation itself. In short, tax havens and associated activities are giving globalisation and even business a bad name. Are you worried about this? What should we do about it?
Nicholas Shaxson, Amsterdam
Martin Wolf: Yes, I am worried about this, even though I am inclined to think that most of our governments tax too much, rather than too little. Nevertheless, I have come to the view that governments will have co-operate, to reduce the chances of excessive tax evasion. The latter is tricky to define, since there is also tax competition among perfectly normal and legitimate jurisdictions. But my thinking in this area has not gone very far. It is one I intend to look at more seriously in future.
Whatever the institutions: capitalism, socialism or even feudalism, society will only develop when there is some kind of solid connection between people, kinship, contract or something else. So my question is, in spite of international financial agencies swarming into China, could they help the soft landing of China’s high-flying but orderless capitalism?
Alan Hou, China
Martin Wolf: The fundamental link in capitalism is a system of contract. But that, in turn, must be anchored in institutions of trust, law and governance. I do not have the faintest idea how all that is going to work in China. It is among the biggest questions confronting the world.
Is there a need for a global central bank after the increased liquidity (money) in the marked? How will the relatively new instruments like CDO, CLO and CDS, manage true a bearish market, will the models that they are based on work in the real world?
Lise Andersen, Stockholm
Martin Wolf: We would need a global central bank only if we had one world currency. We do not now have such a currency and are unlikely to do so for a very long time. The answer to your question about CDOs etc is ”I have no idea”. I imagine there will be defaults on some of them. Of course, that is what happens in a sufficiently bearish market.
The technology bubble burst in the late 1960s, drove an increase in real asset prices such as property and commodities, and eventually lead to a surge in inflation, interest rates and a collapse in asset prices. In the next few years will euphoria be replaced by hysteria and a fear of the end of capitalism? Several decades ago, Kontratief attempted to explain capitalist cycles and because they are driven by human nature they have been forgotten and will the trauma of the next few years again have to be explained as a temporary hiccup in the development of global capitalism?
Mitchell Neale, Worcs
Martin Wolf: I have never understood the underlying logic of the Kondratieff cycles and find it hard to believe in them. I would not agree with your description of how we got into the mess of the 1970s: the Vietnam war and mistakes about sustainable employment levels were more important, I think. But I agree that there are risks to inflation now. A period of fear is a natural, though not inevitable, follow-up to a period of euphoria. But I hope the fear is not too great. Human beings do terrible things when they are frightened and angry: elect Adolph Hitler, for example.
I actually want to step back a fortnight to your column of June 13. I read that column with great interest, particularly since I read Richard Duncan’s book on the dollar crisis when it was published in 2003. Then I read Marc Faber’s column of June 20. While You believe that the saving-glut view is far more comforting, I think that Mr Faber believes that we are living in a money-glut world. Who is right, or what do you think about Mr Faber’s view? And are there any numbers to back up Mr Faber’s contention that the Federal Reserve was pursing an ultra-expansionary monetary policy in the late 1090s and after the 2000 peak in Nasdaq?
Richard E. Radez, Westport, CT, US
Martin Wolf: My view, as I subsequently explained more fully in the ft’s economists’ forum, is that it the savings gluts drove the monetary response. This, in other words, is the causal explanation. I understand that others disagree. But the problem with the view that the Fed is irresponsible is that it does not explain why it became so irresponsible. The answer is that it did so in response to the bursting of the stock market bubble in 2000 and the emergence of excess savings in much of the world in the 2000s. I do not think either of these events was the consequences of monetary policy . Monetary policy is not the only thing that can go wrong in the world economy. Lots of other things can - and do.
I don’t know what numbers Mr Faber would use to justify his contention. You would have to ask him. But I should stress that it is perfectly possible to believe (and I do) that we now live in a money-glut world, as a result of the response to the savings glut. It is also conceivable that we would have been better off now if the Fed (and other central banks) had not responded as it did, but accepted a big world recession in the early 2000s, instead (though I do not personally accept this). But I agree that if we now live in both a savings-glut and a money-glut world, the stability of the global financial system may be much less than we hope.
We shall see.
Recently you poured scorn on the European Council and its members for trying to adopt an amending treaty without referenda in the member states. How dare they? Arrogance you call it. So far so democratic. You are playing with fire: I submit that the conclusions in your comments from the last year concerning globalisation and free trade would be soundly rejected in most countries if they were submitted to referenda. Ricardo’s comparative advantages being even harder to understand than European treaties... Case in point: A new WTO agreement (if there is one) will not be subject to referenda. Voters would probably reject it, - the very same voters who will benefit from the economic growth it generates. Populists beware!
Soren Kruse, Copenhagen
Martin Wolf: This is a nice point. We have do decide what is constitutional and what is not. I have taken the view that the WTO is an agreement among executives whose terms and implications are quite clear, while the European treaties involve a large shift of powers to make further agreements under qualified majority voting. Thus the former represents a classic treaty, while the latter represent constitutional amendments. Obviously, I do not want all treaties to be subject to referenda. I understand that others might disagree with the distinction I have drawn.
Is the recent development of finance, financial products, hedge funds and private equity a natural consequence and driver of global capitalism? Are we witnessing the normal human euphoria and naivety that often appears at the end of long economic cycles such as the 1920s and the early 1970s? We appear to be experiencing a cycle similar to that of the late 1960s and early 1970s.
Mitchell Neale, Worcs
Martin Wolf: Yes, these are a natural consequence of global capitalism.
I worry about how all this is going to end up. I am old enough to remember the euphoria of the 1960s. Few then expected the miserable 1970s. I do not remember the 1920s. But I am told that did not end too well! We did survive the bubble of the 1990s. So maybe we will keep on going, after all.
Relative to the old capitalism, what is the potential of new capitalism to significantly shift investments towards enterprises to mitigate and adapt to climate change, conserve or sustainably use biodiversity and promote economic growth that is equitable in the distribution of benefits?
Natarajan Ishwaran, Paris, France
Martin Wolf: I think capitalism, in any form, responds to incentives. The new capitalism will deliver environmental goods only if governments create the right incentives for it to do so. The new capitalism rewards skilled people, in general, and people adept at finance, in particular. It is showing little sign of distributing the benefits equitably, as most people would define that term. Of course, equity needs to be defined.
Will this new global capitalism be subject to the same types of cycles that were typical of the previous kind?
Michael Yahuda, Washington DC
Martin Wolf: Probably, though global business cycles have been very mild for the past quarter century. So, just possibly, this capitalism will prove more stable than the previous versions.
Will China exhaust the world’s supply of natural resources - leading to war in the scramble for oil, wood, commodities, etc.
Martin Wolf: China’s economic growth will raise their prices, thereby forcing us all to use resources more sparingly and invent substitutes. That would be a good thing.
Human beings are probably stupid enough to fight wars over resources. Even so, contemplating such wars would only make sense if aggressors are willing to ignore the claims to ownership of the countries where resources are located. This would be a return to imperialism. That could lead to world war. It would be far more sensible to accept that we all have to pay the same world price for resources.
How do you see the new global financial capitalism’s ramifications in Africa, in terms of sectors/activities etc?
Charles Nsekela, Tanzania, Africa
Martin Wolf: Very little indeed, at present, but I hope that private equity, in particular, may be of real use in developing countries.
How soon will Yankee capitalism be put to an end? This winner takes all style of wealth creation/distribution model where the state wages wars on behalf of military-industrial enterprises should make way for a gentler, more people/labour serving model. As of now it is a system of, for and by the capitalists.
Jay Singh, Silicon Valley, California
Martin Wolf: This is what one calls a leading question. I suspect Yankee capitalism, as you call it, is a pretty durable animal. It does, after all, provide a high standard of living, by global standards, to a very large number of people. The flood of illegal immigration is into the US, not from it. I also don’t accept that US wars are fought on behalf of ”military industrial enterprises”, foolish though many have been. Reality is much more complex than that.
But I do suspect that some of the ”winner takes all” aspects of the system will need to be tempered. I have argued in recent columns in favour of the creation of a more complete welfare state in the US, with universal health coverage, better public education and more redistribution of income. The answer, then, is reform, not revolution. I believe the US is capable of reform, as it has been in the past.
Could the new financial situation be a result of an exceptionally long period of relative peace? Also, I remember that someone once said: ”Wollt ihr den totalen Krieg.” Today I keep somehow hearing: ”Do you want a total economy?” Has capitalism become more aggressive?
Hans Mittendorf, France
Martin Wolf: I am sure that peace is a necessary condition for an integrated global market economy. The 1914-1945 period - bookended, as it was, by two world wars - saw the destruction of the last era of globalisation. But even if one doesn’t like global capitalism, I suggest one ought to dislike world wars a great deal more, particularly in a nuclear age!
I haven’t seen the phrase ”total economy” before. So long as European governments spend close to half of gross domestic product, much of it in the form of transfers, I cannot think we live in an era of pervasive (or ”total”) markets. At least in western Europe, we also live in an era of pervasive states. Finally, has capitalism become more aggressive than before? The answer is: yes, at least in the sense that capital markets exert much greater influence on the operations of companies than they did, say, three decades ago. Moreover, capital markets are a more powerful discipline on governments than they were a few decades ago.
Is it fair to say that by sustaining the current high levels of global liquidity, the global economy can afford to more creative? Or would you agree that the ready availability of cheap capital markedly improves the conditions necessary for innovation?
Alun Bethell, Geneva
Martin Wolf: There is indeed an argument that easy finance is a necessary condition for large-scale innovation. So bubbles are good for the economic long run, if painful when they burst. I think there is a lot in that. We need ”animal spirits” - that is, irrational optimism - if the economy is to develop.
Would it not follow that individual markets around the world will become more correlated?
Robert Sadofsky, US
Martin Wolf: Yes and my (admittedly limited) reading of the evidence is that this is indeed happening. The stock market bubble in the late 1990s affected the markets of most advanced countries, for example, excluding Japan, which had a bubble of its own ten years before.
We live in interesting times. With the changing climate we face new risks, in terms of global food supply and human migration. Do you think that a world shaped by the dynamics of unregulated capital is likely to have the foresight and capacity for collective action required in order to deal with such risks well? What do you see as being the current evidence for this? Which national political-economies do you see as being sources of inspiration for how the international economy could be organised in the face of such risks and why?
Martin Wolf: Liberal capital markets are not going to halt climate change, if that is your question. That depends on government policies. But movement of capital to poor countries would, in the right circumstances, be an alternative to large-scale migration. Unfortunately, there is very limited movement of private capital to the world’s poorest countries. That is not what the present global financial system does well.
Similarly, investment in physical capital (that is, infrastructure) and associated management and pricing systems are essential for dealing with changes in the supply of water across the globe. If, for example, fresh water is not going to be locked up in glaciers, it is going to have to be held in reservoirs. But I don’t expect today’s capital markets to make investment of this kind across the globe. This is partly because the world’s poorer countries do not provide environments in which huge long-term private capital investments are at all attractive. Even in advanced countries long-term infrastructure is mostly supplied by the public sector.
This article was a masterly summary of a huge subject. Martin Wolf instances two main drivers of change - liberalisation and technology. Could the first have been mainly driven by the second, ie one rather than two? For example, the ending of stock exchange fixed commissions in the UK I think may have been the result of fears of competition, there was an electronic alternative for institutions so technology the cause there and, more significant, the risk of losing out to non-UK exchanges was also something made possible by technological change.
Martin Wolf: Thanks for the compliment.
There is always an interaction between technology and liberalisation. If technology does not allow a certain class of market transactions to occur, then the pressure to liberalise those transactions will be zero (but then so will be reasons for restricting them also). I tend to consider them separate, if interrelated, phenomena, for the following simple reason: technology has been making it ever easier to trade in financial claims for at least the last one and a half centuries or so; but the extent to which such trading actually occurred has oscillated, with a huge downturn from the 1930s to the 1950s, before liberalisation slowly took hold again.
So I would argue that regulation is an independent force, responsive to perceived failures in the financial markets. While it is surely more difficult to regulate transactions today than it was half a century ago, it is not impossible, as China shows even today.
Do you think new technologies will allow markets to continue to outpace the regulators?
Matt Napier, Longmont, CO
Martin Wolf: Yes, but the ones we have already make that easy for the markets. Of course, if there is a big disaster down the road - the failure of a whole class of risk-management models, for example - regulators will attempt to suppress the relevant activities. My view is that the solution can only be proper alignment of incentives: the costs of failure need to be fully internalised by financial decision-makers. At present, they are not. Many players, notably hedge-fund managers, are in an asymmetric position: they share far more in the gains than in the losses, the latter being borne by their outside investors.
We are living through times in which the gap, we are told, in income between those at the top and the rest is widening. The increasing complexity of financial transactions and instruments implies that, relatively speaking, only a few experts will understand and thereby profit from them. Economic forces are impersonal: someone somewhere takes a decision about money, without considering the impact on people’s lives. Economists reassure us that globalisation lifts many people out of poverty. Economists have little to say about the role of conscience as a guide to the behaviour. Is the future still rosy?
Bruce Coram, UK
Martin Wolf: You ask many different questions. Let me answer a few of them.
First, economic forces are indeed impersonal. Of course, humanity has always been subject to impersonal forces. In the old days, those forces were natural. Now they are man-made (though scientists now think we are threatened by man-made weather). One can argue that the inevitable by-product of creating an economy that made us more or less invulnerable to natural forces was to make us vulnerable to man-made ones, instead. What makes us relatively invulnerable to natural forces is the creation of a global economy with an incredibly sophisticated division of labour. Such an economy is beyond anybody’s control. The decisions that affect our lives are made by other people. If they stop buying the products we make, we will be affected. They don’t consider that. Do you consider these consequences when you decide what to buy? Why should you, after all? You couldn’t possibly know what those consequences are.
Second, I do believe that globalisation has lifted many hundreds of millions of people out of poverty, because it has enormously broadened the spread of market opportunities. But one consequence is the emergence of new competitors. That is painful for the losers.
Third, the question about conscience is not just that economists do no consider such motivations very seriously, but that it is simply not obvious what conscience says. If, for example, a business is uncompetitive as it is, is it contrary to conscience to get rid of large parts of the labour force in an effort to make it viable? I should have thought not. Is it contrary to conscience to outsource to India a service previously supplied by fellow citizens? It is, to put it mildly, not obvious that it is contrary to conscience to give Indians new opportunities.
Finally, is the future still rosy? That is up to humanity as a whole to decide. I don’t know the answer.
What is different about your ideas regarding ’the new capitalism’, when compared to the ideas expressed by Susan Strange in Casino Capitalism and Mad Money? Will Site-based politics provide a realistic platform for dealing with potential conflict over concentrations of wealth, when political parties offer only a mere ritual in rivalry, operating, with respect to the economy, under a sense of a prevailing, guiding consensus?
Phil Jarvis, Basingstoke
Martin Wolf: You ask two questions.
First, is my analysis different from that of Susan Strange? It is so long since I read her books that I cannot remember the details. But the idea of capitalism as a ”casino” is, of course, old. The term itself was used by John Maynard Keynes. After the 1930s, however, governments tried to put this ”casino” under control. These controls have now broken down completely. Furthermore, there has been enormous innovation in the financial system itself, as my article showed. So while certain elements of liberal financial capitalism remain eternal, particularly the role of speculation, both the details and the scale have altered. The system is in important ways different from what it has ever been before. In some ways, the changes are clearly for the better: risk management is an obvious example. In other ways, the overall benefits are less clear.
Second, the ability of countries to deal with what people see as unacceptable concentrations of income and wealth is limited, but it is not zero. If an advanced democracy were to elect someone like Hugo Chavez, he could certainly pursue the latter’s policies for a while. Of course, it would be ruinous to do so. The reason politics has become so consensual in the west is that the socialist economy and society proved to be ”The God that Failed”, which was the title of a famous book authored by, among others, Arthur Koestler.
If liberty of finance is capitalism, how can we justify using force in any given transaction? In other words, how can you suggest that we regulate with force actions of human beings without considering whether using force in human relations is moral (challenging implicitly subjective ethics) to begin with? Suggestion: consider your issue only from the moral perspective - re the use of coercion. Why should anyone ignore the issue of human liberty when discussing economic issues? In England past, when a merchant court gathered to provide a convenient avenue for traders, keepers of the entrance asked only that the passer agree to the terms establishing the free market within. The jurisdiction of the merchant court, established explicitly by concession from the contemporary royal, provided the foundation for the ’free market’, without which it would not be a free market. Your question asks if change in an ambiguously defined social order (capitalism) is moral (good). But your question begs the question - you are asking whether coercion is justified in this situation. Perhaps you should ask less controversial questions, or questions less likely to expose your bias toward using coercion.
Martin Wolf: Yours is a good libertarian perspective. But my answer is quite simple: coercion is necessary for the survival of the state; without a state we would live in the Hobbesian world where life is nasty, brutish and short. I am not a utopian and so do not believe in the durability of a society of free individuals co-operating purely voluntarily. That is a fantasy world. Such a society would be taken over by the first well-organised gang. To resist such a gang, one must create an effective opponent. Free-riding makes it inconceivable that such a protector would emerge without a degree of coercion. Even Robert Nozick, a great libertarian philosopher, accepted this point.
Of course, even if one accepts this, one can debate how far such coercion may go. I would happily coerce child-abusers or rapists, for example, by putting them in prison. Let me be quite clear, my position on coercion is not a ”bias”. It is my position. I consider myself a liberal, in the European sense, not a libertarian.
Derivatives, risk dispersion techniques, securitisation - it’s all about liquidity creation, right? Problem is, as Bear Stearns is proving, the liquidity’s not there, or at least not at the prices advertised. We now hear that valuation models for CDOs containing subprime collateral have routinely used much lower default assumption than the actual current default levels. Those valuations determine the fees earned by those who run the hedge fund, and they are essentially unregulated so nobody’s checking them on it. One slight problem here, using the actual (much higher) default rates, the valuation are substantially lower. I think the issue becomes fairly clear at this point. Nervous financial markets are now coupled with wide eyes at the SEC and in a Congress hungry to regulate hedge funds. How might that alter the new era of finance?
Jeffrey Caughron, Oklahoma, US
Martin Wolf: Such developments could bring a welcome and desperately needed breath of reality. I suspect we will need (and will see) bankruptcies among some big players. But, as I indicated in an answer to an earlier question, I am very concerned by the fact that the incentives confronting the decision-makers are misaligned with the risks and that it is they who also determine the risk models to be used. I have been toying for some time with the question how we could align the incentives and the risks better. It is hard to do so.
The prosperous period since world war two has created the extreme volume of financial power available today. The fall of the communist ideology gave birth to the ’one world market’. Since this was mainly possible using political/military/financial power, one wonders if the ’new world order’ will not be based on financial strategies. If so, the 11/9/01 attack could be counted to be the’ first war’ of the ’new world order’. A clash between religious and financial ideologies. If so, do you see other enemies arising of a global financial strategy?
Hans Mittendorf, France
Martin Wolf: If 9/11/2001 was a strike against the financial system, it failed spectacularly. I don’t think it is easy to make a terrorist strike against the financial system. Remember also that the internet was partly designed to eliminate such risks.