Wednesday, April 1, 2009

Waiting for someone to explain it

The global financial crisis: life imitating art? It’s hard to see the connection, but as with any great work of music or literature, we could be smack in the development section, when themes or characters, introduced in an earlier time, are permanently changed and emerge as something very different. This period in the financial crisis is being played out with the dissonance of a Shostakovich, or the absurdity of postmodern literature. As Eugene Ionesco wrote in the program notes for his play The Chairs, “as the world is incomprehensible to me, I am waiting for someone to explain it.” Perhaps we all feel the same way about the global financial crisis. It would indeed be an absurdity to conclude that after these convulsions, it will be business as usual.

But the day-to-day machinations of the market, bailouts, and politics obfuscate the possible outcomes. Are the capitalistic underpinnings of the new world economy at an inflection point, to be changed for better or worse after this economic turmoil has passed? For some insight into a speculative, but well argued bigger picture I give a hat tip to my friend Bruce who put me onto the article After capitalism written by Geoff Mulgan and published in the UK Prospect Magazine.

Capitalism, in spite of several boom and bust cycles has survived, although the US economy has changed drastically, abandoning some of its manufacturing capabilities to cheaper overseas labor, focusing on intellectual capital, and becoming more of a service oriented consumer economy. It is now just a part of a highly interconnected world economy dominated by multinational corporations. With an insatiable appetite for goods and energy, however, we’ve become a nation of borrowers, living on leverage and the largess of countries willing (still) to buy our debt.

At the same time the nature of capitalism has changed. The financial institutions that once existed to solely support industry are now an industry onto itself, trading derivatives and exotic financial instruments and, with this fundamental change, perhaps we’ve arrived at another precipice of “creative destruction,” Joseph Schumpeter's term for the consequence of radical departures.

Mulgan argues that capitalism is sure to change but will not disappear. Instead, it will not dominate in our culture as it did in the “greed is good” era. Capitalism has been adaptable but in some ways has sown seeds of its own destruction. He cites the “collapse of the savings rate—to around zero by 2007 in the US when it needs to be closer to 30 per cent to cope with ageing…a stark symptom of a capitalism that has lost the ability to protect its own future.”

Then, in retrospect, the Great Depression can be seen as both “a disaster and an accelerator of reform. One implication of [Carlota] Perez’s work, and of Joseph Schumpeter’s before her, is that some of the old has to be swept away before the new can find its most successful forms. Propping up failing industries is in this light a risky policy. Perez suggests that we may be on the verge of another great period of institutional innovation and experiment that will lead to new compromises between the claims of capital and the claims of society and of nature.”

Mulgan postulates, “If another great accommodation is on its way, this one will be shaped by the triple pressures of ecology, globalisation and demographics.” This will lead to changes away from consumption to savings and will underscore capitalism’s need to come closer in balance with nature rather than its destruction. Capitalism, in effect will become the servant rather than the master. But “it remains to be seen what political visionary will seize upon ‘servant capitalism.’ (Obama should be ideally suited to offering a new vision, yet has surrounded himself with champions of the very system that now appears to be crumbling.)”

Where today’s seismic financial activity will settle is still a black hole of the unknowable, but for an interesting macro view on the future of capitalism, check out Mulgan’s piece.