The neoliberal world economy is in crisis: inflation rising, banks collapsing, the financial system in turmoil. What was the cause? And is there a cure?
The Trillion-Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash, Charles Morris, PublicAffairs, 224pp, £13.99
Supercapitalism: the Battle for Democracy in an Age of Big Business, Robert Reich, Icon Books, 288pp, £12.99
The Crunch: the Scandal of Northern Rock and the Escalating Credit Crisis, Alex Brummer, Random House Business, 256pp, £11.99
All around us there is a widespread feeling of malaise about capitalism. It is implicit in the newspaper headlines: job losses, bank collapses, financial meltdown. It underpins much public discourse, with commentators blaming chief executives, hedge-fund managers and big corporations for all sorts of ills. And, although they will never say it explicitly, a disappointment with capitalist structures now permeates the utterances of politicians around the world. Take, for example, Nicolas Sarkozy's promise not to submit at "the altar stone of liberal globalisation".
Clearly, some of this is just a function of where the world economy is right now. In particular, it is to do with the huge crisis that disrupted the international financial markets about a year ago: the "credit crunch". A year later, a range of titles has been published, reflecting this growing discomfort with capitalism.
Supercapitalism is a rounded and explicit discussion of how capitalist structures have stretched into the realm of democracy and eroded it. The Trillion-Dollar Meltdown is an equally well- documented critique, but focuses on a narrower set of issues relating to financial innovation and the risky excesses of modern international investment banking. The Crunch is a more topical account of the credit crunch, centred on the collapse of Northern Rock and the chronology of events around it.
In different ways, each book tries to answer similar questions. How did our economies acquire these structures? Did society ever agree to be run this way? What role did politicians play? What does the era of big business and accelerating globalisation mean for individuals?
Robert Reich offers the fullest and most considered set of answers to these questions. And he does so from a position of knowledge: he is not only professor of public policy at Berkeley, but also a former secretary of labour under Bill Clinton and a prolific commentator on both sides of the Atlantic. His exposition is intellectually rigorous and offers a sound argumentative baseline, but it can at times feel overly academic and hard to get through. Supercapitalism could have done with a bit of Brummer's capacity to tell a good story in an engaging way (of which more later).
Reich commences by taking a few steps back. Between 1945 and 1975, America did remarkably well: full employment, rising incomes and technological innovations that allowed greater choices and saved people time. This was possible because American companies were hugely profitable world leaders in many industries - and they shared their profits with their workers. Meanwhile, market regulators had the public interest at heart and grass-roots democratic engagement happened through informal structures, such as local clubs and groups.
Going against the received wisdom, Reich calls this period "the not quite golden age". Why? Partly because efforts to improve equality and citizens' rights were out of step with economic developments, but mainly because it planted the seeds for what followed: a period during which corporate interests grew so big that they eroded the democratic power of citizens.
What caused this? Some blame the high inflation of the 1970s. Reich says this is not the case. Was it the supply-side economics of the Reagan administration? No. Was it the wave of deregulation that started in the early 1970s? No. Was it the advent of executive greed in the 1980s, the Adam Smith revival, or the wave of poli tical corruption sparked off by Watergate? No to all of these.
His answer comes in two parts: technology helped by greater globalisation, and the enormous expansion of the corporate lobby. The Cold War was a boon to new technologies, and it soon transpired that the machines which can produce weapons can also help sell goods. Reich recounts the stories of the worldwide web, cheap sea transportation, supply-chain structures - developments that often started their life as military, rather than commercial, applications.
What's more, in the past 30 years, greater and deeper globalisation has exponentially expanded the trade and investment possibilities of US corporations. These two processes combined made for huge productivity improvements and intense competition in most sectors. This meant that the pursuit of profit took pre cedence over all else - including unionised labour and workers' rights. And companies really needed to up their game: in a more open world, investors could run away with their money more easily.
Then there are the lobbyists. Reich recounts his younger days as a political appointee in Washington, DC: of how, in "the mid-1970s . . . much of the downtown was still run down. I'd take any lobbyist who insisted on lunch to a cockroach-infested sandwich shop on the other side of Pennsylvania Avenue." But when he returned in the 1990s, it was very different: "Office complexes of glass, chrome and polished wood . . . restaurants with linen napkins, leather-bound menus and heavy silverware, which served $75 steaks and offered $400 magnums of vintage French wine . . ." The result? Armies of lobbyists, experts and legal specialists, all employed to prevent the politicians of Washington and Brussels from hurting their corporate masters' profits. A healthy amount of money is poured into electoral campaigns. Supercapitalism triumphs over democracy. Citizens' rights, values and voices are drowned out.
In the financial services industry the benefits are often privatised and the costs socialised. In the 1980s, there was a shift of power away from citizens and towards big banks, and The Trillion-Dollar Meltdown provides the most insightful account of this phenomenon. Charles Morris made his name as a lawyer and innovator for complex financial products in the US, and as an author concerned about financial bubbles.
He, too, begins with a bit of a history lesson, recounting the eclipse of Keynesian economic policy after the high-inflation days of the 1970s. Paul Volcker, chairman of the US Federal Reserve until 1987, is the great hero of his story (and there aren't many other heroes). The legacy of the following two decades, the heyday of monetarism, was to convince society at large about "the great power of markets" and "the importance of fully deregulated financial markets". Which was strange, given the succession of highly damaging asset bubbles that had preceded. This included the Japanese bubble, which burst in 1990 - one of the largest in history, with consequences felt even today.
Morris then explains how a combination of belief in market deregulation, combined with ever faster financial innovation and a steady worsening of the "agency" problem (or how to prevent your employees from acting against your best interest), created the dangerous cocktail of the US sub-prime housing market. It is a fascinating, enlightened and sharp story. In just over 200 pages, Morris describes corporate excess, crazy lending and gargantuan leverage.
Alex Brummer's account shares many of the core elements covered by Reich and Morris: financial deregulation, poor oversight, rapid financial innovation . . . It differs in that it is more UK-centric, focusing in great detail on the events leading up to the crisis at Northern Rock and the ensuing political management of the fallout. This is the roller-coaster version of events - and a surprisingly entertaining book about an otherwise dreary subject. It does lack the referential framework and academic rigour of the other two titles, but that does not detract from the fun.
In all this criticism of capitalism, however, one can't help spotting a flaw. Surely, although the emergence of big business has some negatives, there are many positives. After all, there is a reason why these companies are making such big profits: we like the convenience of the new products and services that capitalism generates for us. Corporations cannot really be blamed, as they mostly operate within the law.
According to Reich, the solution rests in either changing the law or allowing citizens greater protection and voice in the political activities funded by their money: someone may want to invest in company X because it makes a good product, but not want to support its political lobbying. Morris also comes out near the middle of the road, despite all his criticisms of the system. Ultimately, he says, there is a choice: about stability over growth, about innovation versus security, and so on. Yet, "after a quarter-century run, it's time for the pendulum to swing in the other direction". Brummer is pretty down on capitalism and the likely impact of the credit crunch: "Almost every day brings a new shock to the financial system, and there are only so many shocks it can take before imploding."
It is refreshing to read economics books that are not about China becoming bigger than the universe. And these three books make a timely and interesting point: to back-pedal on capitalism, and the many benefits it has brought, would be a mistake, but to allow it to keep expanding without any checks, and at the cost of democracy, would be an even bigger mistake. A debate is needed about how we reconcile these often conflicting priorities. These books provide a useful starting point.
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