Capitalism 4.0

The Birth of a New Economy in the Aftermath of Crisis


By Anatole Kaletsky

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In this controversial book, Anatole Kaletsky puts the upheavals of 2007-2009 in historical and ideological perspective. He shows how the forces that precipitated the financial meltdown are now creating a new and stronger version of the global capitalist system– one that will continue to be led and shaped by the U.S. if its businesses and politicians play their cards well. This is Capitalism 4.0, and it will change politics, finance, international relations, and economic thinking in the coming decades.


Praise for Capitalism 4.0
"Hugely ambitious . . . The overall impression is startlingly original. Kaletsky offers a genuinely new take on the credit crunch."
—JEREMY WARNER, Literary Review
"A path-breaking insight into the next stage of the way we manage the global economy."
"Anatole Kaletsky sometimes seems like the Stephen Hawking of economics.... [He] leave[s] most current economic wisdom stretched flat on the carpet.... He goes—wisely, lucidly, above all confidently—where no experts have gone before. You know you're in the presence of a master."
—PETER PRESTON, The Observer
"Idiosyncratic, entertaining and contrarian."
—DAVID SMITH, The Sunday Times
"Few writers are trying to address future concerns with a new and more hopeful economic agenda. One . . . is the respected British financial journalist Anatole Kaletsky. In Capitalism 4.0, he makes a thoughtful but moderate set of proposals which [rely heavily] on faith in the ingenuity of capitalism as an adaptive mechanism. His recommendations often make sense."
—JEFF MADRICK, New York Review of Books
"At a recent conference of worried bankers I was asked if political hostility to big business was the precursor of a significant "regime change." . . . Had I read Capitalism 4.0 beforehand I would have been able to produce a better answer."
"The surest way to be taken seriously as an economist is to predict disaster . . . [but Kaletsky] does a lot more than doom-saying in this outstanding work. . . . The narration is brilliant, especially where it blends theory with crises. . . . This is a must-read book."
—MADAN SABNAVIS, Business World India
"A good starting point for any meaningful debate on the kind of economic system the world wants after the crisis, and how to achieve it."—RAJESH KUMAR, Outlook India

In memory of my late parents,
Jacob and Esther Kaletsky,
who experienced true calamities and crises—
the Russian Revolution, the two world wars,
the Holocaust, the purges of Stalin—
but whose joyful and indomitable spirits lived on.

Preface to the Paperback Edition
THE WAY TO WIN FAME and fortune in economics is always to predict disaster. Perennial pessimism, regardless of the true conditions, may not be a winning strategy in business, politics, or finance; but in economic forecasting, as in other branches of prophecy since Jeremiah and Cassandra, instilling fear with fervor is the only reliable formula for success. Nobody remembers the prophet who predicts, correctly, that there will be no plague of locusts or that the Ides of March will pass without event.
When Capitalism 4.0 was written, in late 2009, its moderately optimistic message was ahead of its time—and intended to be. "Ahead of its time" can, however, be a euphemism for "'plain wrong," and many of this book's arguments seemed close to this embarrassing position in mid-2010, when it was first published. With the U.S. economy apparently sinking back into recession, with consumers crushed by debts denominated in trillions, with Britain and much of Europe allegedly facing bankruptcy, with the Obama presidency seemingly failing, and with demagoguery displacing reasoned argument in politics around the world, the measured optimism of Capitalism 4.0 seemed Panglossian and far-fetched.
For Americans in particular, bound up as they were in the vicious politics of their culture wars, a strong economic recovery and a consensual political settlement seemed out of the question. And indeed the U.S. economy failed to live up to the unrealistic promises of quick recovery made at Barack Obama's inauguration. More surprisingly, Obama turned out to be a leader who polarized American politics, belying this book's optimism about more constructive relationships between government and business. In Britain, meanwhile, the coalition government proved as politically pragmatic as expected, but surprisingly ideological and dogmatic in its economic approach.
But despite these important caveats, the arguments in this book have generally been strengthened by the passage of time. In fact, many of the ideas and predictions dismissed as almost impossible in 2009 may be so obvious and inevitable a year later as to appear banal. Such intellectual inversions often happen in revolutionary periods—events can move straight from impossible to inevitable, without ever passing through improbable. Consider the most important claims in this book.

The world economy has recovered—and strongly.

Global capitalism did not collapse, and nobody, except a few hysterical TV pundits, believes any longer that it will. Instead, the United States, Britain, and most of Europe definitively came out of recession. The emerging world, led by China and having hardly missed a beat in the crisis, enjoyed its strongest-ever year of economic growth. In America, GDP had regained its peak by the end of 2010 and the total length of the slump turned out to be somewhat shorter than the double-dip recession of 1980–82. The outlook for Britain was less rosy, owing largely to the government's surprisingly ideological approach to fiscal, monetary, and industrial policies, a dogmatism strikingly at odds with the coalition's centrist politics as well as the arguments in this book. Even Britain, however, will benefit from the global economic recovery and should be able to avoid a double-dip recession if the government and the Bank of England rediscover the economic pragmatism and ideological flexibility that are the characteristic features of Capitalism 4.0

Banks have survived and repaid their governments.

Banks in most of the world—with Ireland, Spain, and Germany as the main exceptions—have repaid all of their government loans well ahead of schedule. By early 2011, the official estimate of U.S. taxpayer losses from the government financial support operations was only $20 billion—just 1 percent of the $2 trillion figure widely quoted in the U.S. media as recently as late 2009. By the time the remaining bank shares and securities owned by governments and central banks are returned to the private sector, it is almost certain that U.S. and British taxpayers will make substantial profits, instead of suffering the crippling losses expected a year before.

The crisis has hit Europe harder than the United States.

The process whereby countries with excess savings—such as China, Japan and Germany—financed unsustainable consumption in the United States, Britain, Spain, and other debtor countries turned out to be even more destabilizing and dangerous for Europe than it was for the United States. While everybody had recognized for years that China was lending money to the U.S. mortgage market in order to finance the shoppers who bought Chinese goods at Walmart, there was far less understanding of the a similar chain of "vendor financing" that allowed Greek and Spanish consumers to borrow from German banks or sell villas to German autoworkers and then use the proceeds to buy German cars. This Circle of Manipulation, described in Chapter 16, was acknowledged in Europe only in early 2010, when Greece slid toward default. As a result, the survival of the euro was threatened and the existence of a single currency, far from insulating Europe from trouble, increased the financial risks. But Germany decided to support its neighbors by agreeing to unprecedented collective responsibilities for national debts. As a quid pro quo, Greece, Spain, and other Mediterranean countries agreed to previously unthinkable market-oriented reforms and reductions in government spending. The result was a convergence of politics and economics across Europe that nobody had imagined possible even a year before.

The reinvention of economic theory has started.

Predictions of a second Great Depression gave way to a new cliché in 2010: the Great Recession. But the truth is that the world in 2010 embarked on a Great Transition comparable to the transition forty years before from the Keynesian era to the Reagan-Thatcher market fundamentalism era and the even bigger transition forty years before that, from classical free-market capitalism to the Keynesian New Deal. It is not just the interaction of governments with markets that is changing, it is also the debate about fundamental political and economic ideas.

Orthodox economic policies have been abandoned.

Economic policies have been permanently transformed by the crisis. The huge fiscal and monetary stimuli introduced in 2009, derided and denounced by market fundamentalist skeptics, have worked very much as planned. China, Germany, and Britain introduced bigger fiscal stimuli earlier in the crisis than the United States did, and their economies rebounded more quickly. The relationship reversed by early 2010, with the U.S. economy accelerating well ahead of the others, in response to monetary stimulus, which by its nature acts more slowly than fiscal policy and was much bigger in America than elsewhere.
Near-zero interest rates, considered a bizarre and dangerous aberration when introduced as a panic measure in the post–Lehman Brothers emergency, have been accepted as a quasi-permanent feature of economic life. This book's prediction of interest rates below 2 percent throughout America and Europe for the best part of a decade no longer looks crazy or even particularly bold.
Despite zero percent interest rates and the unprecedented printing of central bank money, inflation has not accelerated (except marginally in Britain). The dollar and the pound have not collapsed as was widely predicted by monetarists. And bond markets, far from panicking, have enjoyed big gains for the reasons explained in this book. Stock markets, meanwhile, have risen at near-record rates and profits are at all-time highs less than two years after their biggest-ever plunge. In short, the unorthodox postcrisis measures of monetary, fiscal, and credit stimulus have worked more or less as intended.

Government has simultaneously expanded and contracted.

Public spending is on a declining path everywhere, yet the whole world is demanding that governments accept new responsibilities, especially for "creating jobs." Governments are therefore being forced to reduce their spending on what used to be considered core public functions. The public financing of pensions, education, and health care is being reconsidered, and privatization of public-owned assets is accelerating around the world. Government is therefore expanding and contracting at the same time, very much as described in Chapter 17.

A new version of capitalism has begun to evolve.

Although the global economy and financial system have survived the crisis, the need for a new model of capitalism is almost universally acknowledged all over the world. In Barack Obama's 2011 State of the Union speech, in David Cameron's concept of a Big Society, in the reconstruction of the euro-zone and, not least, in the surprisingly successful managed capitalism of Asia (especially China), an important part of the message is the same: there must be new partnerships between the public and private sectors and new thinking about the way that governments and markets interact. Even the Tea Party in America demands a transformed relationship of politics and economics, albeit one diametrically opposed to the proposals in this book.
But what if capitalism fails to reinvent itself? What if the global economy reverts to business as usual? It is tempting to suggest that such a failure of imagination would trigger another, even greater, financial collapse. Indeed, the prophets of doom who monopolized public debate in 2009 with their predictions of Armageddon are regrouping behind this concept. When the end of the world failed to arrive on schedule, they responded in the time-honored manner of all millenarian cults—by delving back into their sacred texts and discovering some minor miscalculations. The new consensus among the prophets of doom is that the crisis of 2007–09 was never supposed to be the Big One; it was merely the precursor of another, even greater crash. And that impending apocalypse really will mark the end of the world.
If capitalism fails to reinvent itself, will the prophets of doom finally be proved right? Without fundamental reforms, the next financial crisis really could be far worse than the last one. And in the event of another economic meltdown, China really could seize the standard of global leadership irrevocably from economically discredited democracies of America and Europe. But such calamities are unlikely. The global capitalist system shows every sign of an ability and willingness to reinvent itself in the coming decade, but if this does not happen, the reason will be that the reinvention has turned out to be less urgent than this book suggests.
Therefore, the most likely alternative to this book's central argument about the evolution of a new version of the capitalist system is not that the world economy will sink into permanent stagnation or disintegrate in some sort of apocalyptic crisis. It is that capitalism will turn out to be even more successful than I have suggested by simply muddling through.

THE WORLD DID NOT END. Despite all the forebodings of disaster in the 2007–09 financial crisis, the first decade of the twenty-first century passed rather uneventfully into the second. The riots, soup kitchens, and bankruptcies predicted by economists and pundits never materialized—and a year after the crisis nobody any longer expected the global capitalist system to collapse, whatever that emotive word might have meant.
Yet the capitalist system's survival does not mean that the precrisis faith in the wisdom of financial markets and the efficiency of free enterprise will ever again be what it was before the bankruptcy of Lehman Brothers on September 15, 2008. A return to decent economic growth and normal financial conditions is likely by the middle of 2010, but will this imply a return to business as usual for politicians, economists, and financiers? Although globalization will continue and many parts of the world will gradually regain their prosperity of the precrisis period, the traumatic effects of 2007–09 will not be quickly forgotten. And the economic costs will linger for decades in the debts squeezing taxpayers and government budgets, the disrupted lives of the jobless, and the vanished dreams of homeowners and investors around the world.
For what collapsed on September 15, 2008, was not just a bank or a financial system. What fell apart that day was an entire political philosophy and economic system, a way of thinking about and living in the world. The question now is what will replace the global capitalism that crumbled in the autumn of 2008.
The central argument of this book is that global capitalism will be replaced by nothing other than global capitalism. The traumatic events of 2007–09 will neither destroy nor diminish the fundamental human urges that have always powered the capitalist system—ambition, initiative, individualism, the competitive spirit. These natural human qualities will instead be redirected and reenergized to create a new version of capitalism that will ultimately be even more successful and productive than the system it replaced.
To explain this process of renewal, and identify some of the most important features of the reinvigorated capitalist system, is the ambition of this book. This transformation will take many years to complete, but some of its consequences have become discernible already. And with the benefit of even a few years' hindsight, it is clear that these consequences will be very different from the nihilistic predictions from both ends of the political spectrum at the height of the crisis. On the Left, anticapitalist ideologues seemed honestly to believe that a few weeks of financial chaos could bring about the disintegration of a politico-economic system that had survived two hundred years of revolutions, depressions, and world wars. On the Right, free-market zealots insisted that private enterprise would be destroyed by precisely the government interventions that proved necessary to save the system—and as soon as the crisis was over, started to claim that all the trouble could have been avoided if governments had simply allowed the financial systems to collapse. A balanced reassessment of the crisis must challenge both left-wing hysteria and right-wing hubris.
Rather than blaming the meltdown of the global financial system on greedy bankers, incompetent regulators, gullible homeowners, or foolish Chinese bureaucrats, this book puts what happened into historical and ideological perspective. It reinterprets the crisis in the context of the economic reforms and geopolitical upheavals that have repeatedly transformed the nature of capitalism since the late eighteenth century, most recently in the Thatcher-Reagan revolution of 1979–89. The central argument is that capitalism has never been a static system that follows a fixed set of rules, characterized by a permanent division of responsibilities between private enterprise and governments. Contrary to the teachings of modern economic theory, no immutable laws govern the behavior of a capitalist economy. Instead, capitalism is an adaptive social system that mutates and evolves in response to a changing environment. When capitalism is seriously threatened by a systemic crisis, a new version emerges that is better suited to the changing environment and replaces the previously dominant form.
Once we recognize that capitalism is not a static set of institutions, but an evolutionary system that reinvents and reinvigorates itself through crises, we can see the events of 2007–09 in another light: as the catalyst for the fourth systemic transformation of capitalism, comparable to the transformations triggered by the crises of the 1970s, the crises of the 1930s, and the Napoleonic Wars of 1803–15. Hence the title of this book.
The first of these great transitions—the period of social and economic upheaval that started with the political revolutions in America and France and the industrial revolution in England—created the first era of modern capitalism, running roughly from the British victory over Napoleon in 1815 until the First World War. This long period of relative systemic stability and rising prosperity ended with the First World War, the Russian Revolution, and finally the Great Depression in the United States. These unprecedented political and economic traumas destroyed the classical laissez-faire capitalism of the nineteenth century and created a different version of the capitalist system, embracing Franklin Roosevelt's New Deal, Lyndon Johnson's Great Society, and the British and European welfare states. Then, forty years after the Great Depression, another enormous economic crisis—the global inflation of the late 1960s and 1970s—inspired the free-market revolution of Margaret Thatcher and Ronald Reagan, creating a third version of capitalism, clearly distinct from the previous two. Forty years after the great inflation of the late 1960s, the global economy was hit by another systemic crisis, in 2007–09. The argument of this book is that this crisis is creating a fourth version of the capitalist system, a new economy as different from the designs of Reagan and Thatcher as those were from the New Deal. Hence the birth of a new economy in the subtitle of this book.
The concept of capitalism as an evolutionary system, whose economic rules and political institutions are subject to profound change, may seem controversial and even subversive from the standpoint of precrisis thinking. The Thatcher-Reagan revolution of the early 1980s was widely proclaimed as a rediscovery of true capitalism after the cryptosocialist heresies and deviations of the Keynesian period—and this worldview is still held by most conservative politicians and business leaders. In the great scheme of things, however, the dominance of free-market fundamentalism from 1980 until 2009 was just one thirty-year phase in the long history of modern capitalism's development since the late eighteenth century. Viewing recent events in this historical perspective reveals the crisis and its consequences in a new light.
Many politicians and business leaders consider, for example, that any government interference with market forces is inimical to the free-market system. They oppose all such interventions on principle as the thin end of a socialist wedge. Given the long and triumphant history of capitalism before anyone had heard of Reagan and Thatcher, this is an absurdly narrow-minded view. The changing relationship between government and private enterprise, between political and economic forces, has been the clearest feature of capitalism's evolution from one phase to the next—first in the early nineteenth century, then in the 1930s, then in the 1970s, and again today. And after each of these evolutions, the capitalist system has emerged stronger than it was before. To understand the new politico-economic model emerging from the crisis, it helps to consider the changing relationships of governments and markets in these three previous phases.
In the classical laissez-faire capitalism that dominated the world from the early nineteenth century until 1930, politics and economics were essentially distinct spheres. The interactions of government and markets were confined to collecting taxes, mainly to pay for wars, and erecting tariff barriers, mostly to protect powerful political interests. Then, from 1932 onward, came the New Deal and the social democratic European welfare states. In reaction to the Russian Revolution and the Great Depression, this second version of capitalism was defined by an almost romantic faith in benign, all-knowing governments and an instinctive distrust of markets, especially financial markets. The third version of capitalism, created by the Thatcher-Reagan political revolution of 1979–80, took the opposite view. This version romanticized markets and distrusted government. The last variant of this species—the financially dominated market fundamentalism described in this book as Capitalism 3.3—took this position to its extreme. Capitalism 3.3 did not just distrust governments; it demonized government, ridiculed regulation, and treated public administration with open contempt. This extreme antigovernment ideology, not only in politics but also, and just as importantly, in theoretical economics, triggered the 2007–09 crisis. As Karl Marx might have predicted, Capitalism 3 was destroyed by the contradictions of its own antigovernment ideology.
The self-destruction of Capitalism 3.3 has left the field open for the next phase of politico-economic evolution: the emergence of Capitalism 4. As in the 1930s and 1970s, this transformation will redefine the relationship between politics and economics, between governments and markets. The dominant ideology from the 1980s until the 2007–09 crisis assumed that markets were always right and governments nearly always wrong. The previous phase of capitalism, from the 1930s until the 1970s, assumed that governments were always right and markets nearly always wrong. The most distinctive feature of capitalism's next era will be a recognition that governments and markets can both be wrong and that sometimes their errors can be near-fatal.
This recognition of fallibility may, at first sight, seem paralyzing. In fact, it should be empowering. It creates scope for leadership, creativity, and experimentation in both politics and business—concepts that the preceding version of capitalism was reluctant to accept. Acknowledging that both governments and markets make mistakes implies a collaboration between politics and economics, rather than the adversarial relationship of Capitalism 3. The extraordinary opportunities created by technology, globalization, and social change in the dawning era of Capitalist 4 suggest that, if the rising generation of American and European politicians and business leaders play their cards well, the new economic model will be more prosperous than the last one. Perhaps it will one day be described as Obamanomics. If not, however, and America and Europe cannot show the ideological flexibility required to make Capitalism 4 succeed, the political economy of the coming decades will probably be shaped by China and other authoritarian neocapitalist nations, instead of by Western democracies.
If the West is to rise to this challenge, the 2007–09 crisis, along with its antecedents and its aftermath, need to be seen as a phase in the dynamic process of capitalist evolution. This is the picture presented in Part I.
Part II then discusses the crisis and the boom that came before it from this historical and evolutionary perspective. This book rejects the conventional wisdom that the global boom in housing and credit before the crisis was simply a debt-fuelled illusion. Instead, Part II argues that much of the increase in consumer borrowing and asset values from the early 1990s onward was a rational response to benign economic trends that began in the late 1980s. All these trends were driven ultimately by four tremendous technological and geopolitical transformations that converged in 1989: the breakdown of communism, the reemergence of Asia, the revolution in electronic technology, and the worldwide acceptance of pure paper money that was not backed by gold, silver, foreign exchange reserves, or any other objective symbol of value.
The benign trends of the precrisis period inspired excessive speculation and produced a damaging boom-bust cycle, but this in no way contradicts the argument that most of the growth in credit and asset prices before the crisis was fundamentally justified and will prove sustainable in the long-term. Boom-bust cycles have always been and will continue to be a feature of the capitalist system. The events that led up to the crisis were quite typical of previous boom-bust cycles and less extreme than many in the past. Why then did this particular boom-bust cycle climax in such unprecedented disaster?


On Sale
Jun 28, 2011
Page Count
448 pages

Anatole Kaletsky

About the Author

Anatole Kaletsky is editor-at-large of the Times of London, where he writes weekly columns on economics, politics, and international relations, and a founding partner and chief economist of GaveKal Capital, a Hong Kong-based investment company. He is on the governing board of the New York-based Institute for New Economic Theory.

Learn more about this author