[Pen-l] Read the big four to know capital’s fate

[Louis Proyect <lnp3@xxxxxxxxx>]

http://www.ft.com/cms/s/0/5e61e20c-0f44-11de-ba10-0000779fd2ac.html
Read the big four to know capital’s fate
By Paul Kennedy

US presidents, in confronting crises, have often let it be known that 
they are serious students of history and biography. George W. Bush, an 
unusually voracious late-night reader, devours books on the lives of 
Great Men, including his hero Winston Churchill, (who in turn liked to 
read about his illustrious ancestor, Marlborough). Barack Obama looks to 
biographies of Abraham Lincoln for inspiration.

Given the enormity of the banking, credit and trade crisis, might it be 
worth suggesting to Mr Obama and his fellow leaders that they study the 
writings of the greatest of the world’s political economists, instead? 
After all, we may be in such a grim economic condition that the clever 
direction of budgets is a greater attribute of leadership than the stout 
direction of battleships.

Since today’s leaders cannot possibly read all the major works of 
political economy, let us help them by selecting four of the greatest 
names from Robert Heilbroner’s classic collection The Worldly 
Philosophers : The Lives, Times, and Ideas of the Great Economic 
Thinkers: Adam Smith, the virtual founder of the discipline and early 
apostle of free trade; Karl Marx, that penetrating critic of the foibles 
of capitalism, and less reliable predictor of its “inevit-able” 
collapse; Joseph Schumpeter, the brilliant and unorthodox Austrian who 
was certainly no foe of the capitalist system but warned of its inherent 
volatilities (its “perennial gale of creative destruction”); and that 
great brain, John Maynard Keynes, who spent the second half of his 
astonishing career seeking to find policies to rescue the same 
temperamental free-market order from crashing to the ground.

Perhaps the supremely gifted playwright Tom Stoppard could put those 
four savants on stage and offer an imaginary weekend-long quadrilateral 
discourse among them about the future of capitalism. Failing such a 
creative work, what might we imagine the four great political economists 
would say about our present economic crisis?

Smith, one imagines, would claim that he had never advocated total 
laissez faire, was appalled at how sub-prime loans to fiscally insecure 
people contradicted his devotion to moral economy, and was concerned at 
the deficit spending proposed by many governments. Marx would still be 
badly bruised by learning of Lenin and Stalin’s perversion of his 
communistic theories, and by the post-1989 withering-away of most of the 
world’s socialist economies; yet he might still feel pleasure at modern 
financial capitalism foundering on its contradictions. The austere 
Schumpeter, by contrast, might be lecturing us to swallow another decade 
of serious depression before a newer, leaner form of capitalism emerged 
again, though with lots of evidence of severe gale-damage (the end of 
the US car industry, the decline of the City of London, perhaps) in its 
wake.

And Keynes? My own guess is that he would not be very happy at today’s 
state of affairs. He might (only might) regard it as fine that he was 
quoted or misquoted millions of times in today’s media, but one suspects 
that he would be uneasy at parts of Mr Obama’s deficit-spending scheme: 
at the US Treasury’s proposal to allocate more money to buying bad debts 
and rescuing bad banks than investing in job creation; at a Washington 
spending spree that seems unco-ordinated with those of Britain, Japan, 
China and the rest; and, most unsettling of all, at the fact that no one 
is asking who will purchase the $1,750bn of US Treasuries to be offered 
to the market this year – will it be the east Asian quartet, China, 
Japan, Taiwan and South Korea (all with their own catastrophic collapses 
in production), the uneasy Arab states (yes, but to perhaps one-tenth of 
what is needed), or the near-bankrupt European and South American 
states? Good luck! If that colossal amount of paper is bought this year, 
who will have ready funds to purchase the Treasury flotations of 2010, 
then 2011, as the US plunges into levels of indebtedness that could make 
Philip II of Spain’s record seem austere by comparison?

In the larger sense, of course, all four of our philosophers would be 
correct. Capitalism – our ability to buy and sell, move money around as 
we wish, and to turn a profit by doing so – is in deep trouble. No doubt 
Smith, as he watches the collapse of Iceland and the Irish travails, is 
reconsidering his aphorism that little else is needed to create a 
prosperous state than “peace, easy taxes and tolerable administration of 
justice” – that did not work this time. By contrast, rumbles of 
satisfaction might be heard coming from Marx’s grave in Highgate 
cemetery, causing excitement for the still-considerable numbers of 
Chinese visitors. Meanwhile, Schumpeter will have due cause to mutter: 
“This is not a surprise, really.” As for Keynes, we might imagine him 
sipping tea with Wittgenstein at Grantchester meadows, pursing his lips 
at the incapacity of merely normal human beings to get things right: at 
our tendency to excessive optimism, our blindness to the signs of 
economic over-heating, our proneness to panic – and our need, every so 
often, to turn to clever men like himself to put the shattered 
Humpty-Dumpty of international capitalism back together again.

All these political economists instinctively recognised that the triumph 
of free-market forces – with the consequent elimination of older social 
contracts, the downgrading of the state over the individual, the end of 
restraints upon usury – would not only bring greater wealth to many but 
could also produce significant, possibly unintended consequences that 
would ripple through entire societies. Laissez faire, laissez aller was 
not only a call to those chafing under medieval, hierarchical 
constraints; it was also a call to unbind Prometheus. Logically, it both 
freed you from the chains of a pre-market age, and freed you to the 
risks of financial and social disaster. In the place of Augustinian 
rules came Bernie Madoff opportunities.

By the same instinctive reasoning, most sensible governments since 
Smith’s time have taken precautions against citizens’ totally 
unrestricted pursuit of private advantage. States have invoked the needs 
of national security (therefore you must protect certain industries, 
even if that is uneconomic), the desire for social stability (therefore 
do not allow 1 per cent of the population to own 99 per cent of its 
wealth and thus provoke civil riot), and the common sense of spending 
upon public goods (therefore invest in highways, schools and 
fire-brigades). In fact, with the exception of the few absurdly 
communist states such as North Korea, all of today’s many political 
economies lie along a recognisable spectrum of more-free-market versus 
less-free-market arrangements.

But what has happened over the past decade or more is that many 
governments let down their guard and allowed nimble, profit-seeking 
individuals, banks, insurance companies and hedge funds much greater 
scope to create new investment schemes, leverage more and more capital 
on the basis of increasingly thin real resources and widen dramatically 
the pool of gullible victims (silly, under-earning individuals, hopeful 
not-for-profits, Jewish charities, friends of a friend of an investment 
manager, the list is long), thereby creating our own era’s spectacular 
equivalent of the South Sea Bubble. As in all such gigantic credit 
“busts”, many millions more people – the innocent as well as the foolish 
– will be hurt than the snake-oil salesmen and loan managers who 
perpetrated these so-called “wealth creation” schemes.

What, then, is capitalism’s future? Our current, damaged system is not, 
despite Marx’s hopes, to be replaced by a totally egalitarian, communist 
society (such arrangements might be there in life after death). Our 
future political economy will probably not be one in which Smith or his 
present-day disciples could find much comfort: there will be a 
higher-than-welcome degree of government interference in “the market”, 
somewhat larger taxes and heavy public disapprobation of the profit 
principle in general. Schumpeter and Keynes, one suspects, will feel 
rather more at home with our new post-excess neocapitalist political 
economy. It will be a system where the animal spirits of the market will 
be closely watched (and tamed) by a variety of national and 
international zookeepers – a taming of which the great bulk of the 
spectators will heartily approve – but there will be no ritual murder of 
the free-enterprise principle, even if we have to plunge further into 
depression for the next years. Homus Economicus will take a horrible 
beating. But capitalism, in modified form, will not disappear. Like 
democracy, it has serious flaws – but, just as one find faults with 
democracy, the critics of capitalism will discover that all other 
systems are worse. Political economy tells us so.

The writer is professor of history and director of International 
Security Studies at Yale University, is the author/editor of 19 books, 
including The Rise and Fall of the Great Powers (Vintage). He is writing 
an operational history of the second world war. To join the debate go to 
www.ft.com/capitalismblog
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