Transcription
Westin: Here at "Wall Street Week", we bring you stories of capitalism every week. But this story is not just of capitalism but about capitalism, where it came from, where it's headed, and why so many people are questioning its future and its foundations. One of them is about to take over as mayor of Wall Street's home city at the end of the year.
-I am a democratic socialist!
Westin: And if you listen to President Trump, it's not enough that Mr. Mamdani embraces democratic socialism. He insists on calling him an outright communist.
-And now let's see how a communist does in New York. We're going to see how that works out.
Westin: Our Bloomberg colleague John Authers has taken a look through several recent books about capitalism's challenges written not by its opponents, but by its supporters. And he has some thoughts about why there's so much capitalist soul searching these days. Thoughts that he shared with us.
What is capitalism? How do you define it?
-Well, part of its strength, it's something that grew up naturally and has had the ability to morph and adapt in a way that none of its alternatives, socialism, communism, etc. have been able to do. I've been churning my way through this selection of enormous tomes, all of which have in common this belief that capitalism is in crisis. The point is that it adapts each time it has a crisis. There are more truly non-capitalist alternatives being considered at present than they have been. And, arguably, the latest model of capitalism really fell in 2008. We work for Bloomberg. We're part of the citadels of capitalism. Everybody I think has to agree that the model that was in force until '08 really perished with the crisis. You would normally expect them to be more clarity about what was coming next this long after the crisis. And I think the reason people are writing so much about capitalism, now getting so worried, is that we're not seeing that new model, that new narrative, taking shape with any clarity.
Westin: Before we look at the new model, let's start with the old models. What are the models that capitalism has evolved through?
-I'll give you the schema that Anatole Kaletsky who's sort of known these days for having set up the Gavekal. His book "Capitalism 4.0" is about what is capitalism 4.0 going to be. 1.0 was laissez-faire. It gave us the growth of the British Empire, the Industrial Revolution, the Gilded Age here in the States. And it finally perishes after the Great Crash and the Great Depression. Capitalism 2.0 is basically Keynesianism, the New Deal, the Marshall Plan, the GI Bill. It gives you the great successes of the postwar economic miracles in Germany and Japan and founders obviously in stagflation in the 1970s. Capitalism 3.0, we generally think of with regard to Ronald Reagan and Margaret Thatcher, the great pioneers of it. Paul Volcker with the way he took over the Fed and changed monetary policy, the rule of the dollar. Nobody thinks that capitalism of the Thatcher-Reagan kind is going to come back any time soon. We are going to have some transition on the scale of those ones I've just mentioned, the ones that came after '29 and after the '70s. The question is exactly what the capitalism 4.0 will be.
Westin: Although capitalism in markets and democracy in politics tend to occur together and have some things in common, they are not the same.
-In each case, it was the markets that signal to the politicians that this model had ceased to work with the Great Crash, with the great inflation of the '70s, and with the crisis of '08. Democracy and capitalism have a symbiotic relationship. There's a wonderful line from Winston Churchill that democracy is the worst way of running society that anybody has come up with apart from all the others that have ever been tried. Both have it in common that they're not perfect, but that they are more or less impossible to improve upon. They have internal checks. You don't want to get thrown out by the voters if you're a politician. You don't... Greed and fear counter each other. And the two systems check each other. It's largely now up to governments to work out what to do next.
-Does capitalism work without growth?
-Yes, that is a critical problem. This is Sven Beckert's book, professor of history at Harvard. He spent 10 years writing this magnum opus on the history of capitalism. And one of the points he makes it's like a shark that has to keep moving. You could argue that it's capitalism 1.0, Gilded Age. Donald Trump is terribly excited by President McKinley, who went for very high tariffs in the late 19th century when America was expanding the way it was by building railroads connecting up the west and east coast and all the rest of it was a way of protecting this infant economy, as it got ready to take over it's hegemonic position in the world. However most of the people I've been talking to would suggest that there's something a little more alarming going on, which you might call "capitalism 0.0" or "pre-capitalism," which is mercantilism. The idea that came before capitalism grows out of Britain's victory in the Napoleonic Wars, the growth of the British Empire and the Industrial Revolution. Different countries had their own spheres of influence and then try to build empires to give them a place to sell their stuff to.
Westin: One of the problems facing capitalism is the growing role of governments in intervening to minimize pain for markets and investors.
-Well, my point, David, in the book is not that capitalism has failed, but that it's been ruined, and it's been ruined by government over time.
Westin: Author Ruchir Sharma is head of Rockefeller Capital Management's International Business. His book is "What Went Wrong with Capitalism."
-So then you began to expand the role of the state. The problem is that it has now expanded to such an extent. And it's not just about government spending, as I said. It's the culture of the bailouts. Who does it help? It's the regulations. Who does regulation really help? And what I say in the book is that all these things are systematically increased to undermine what capitalism is supposed to be. And the outcomes we're getting today is not what the founders had in mind. When the founders spoke about the architects of capitalism, they wanted more competition, churn to happen, that the incumbents are never entrenched, that they're always challenged by insurgents. Capitalism was supposed to create that freedom. Let the insurgents come and challenge the incumbents. Instead what we are seeing today is that the incumbents are getting more and more entrenched. The concentration of power, as you can see, the number of companies that dominate the S&P 500, how concentrated that is. And also the fact that you get this mismatch in risk, which is that you can capitalize the gains, but we are here to socialize the losses. I think it's this perversion of capitalism that we have seen today. And this is having real consequences.
Westin: That concentration has only increased in recent years. Much of the growth in America's equity markets today is driven by the magnificent seven.
-Productivity growth around the world, and particularly in America, has been falling off. Right? At the end of the day the key to long term economic growth is productivity growth. So productivity growth is falling off. Why is it falling off? I argue it's because the dynamism that capitalism brought, about getting new people to come, about taking out the deadwood. That dynamism is getting lost in this constant state support that we have for capitalism. And the other negative consequence is this concentration of power. And, you know, when you have so much regulation out there that helps the incumbents, they are big, they can afford to deal with those regulations, and they can even lobby in Washington to get the kind of regulations that they want. But small to midsize businesses, they find it increasingly difficult to survive, forget even thrive, in this kind of environment. There's a deep unhappiness with the establishment as most people are very unhappy with their own fortunes. Right? Which is that in America today, for example, I think about 70% of Americans today say that they are unlikely to be better off than their parents. This is a violation of the American capitalist dream. The American capitalist dream from 40, 50 years ago was that most Americans thought they're going to be better off than their parents. You're supposed to be better off over time. Young people in America today, when you poll them, they tell you that they'd rather have socialism than they would have capitalism. You know for me that is possibly the one most important statistic that inspired me to write this book, that why are so many young people in this country disillusioned with capitalism. And the answer for me is the fact that they are disillusioned with the current form of system which they think is capitalism.
Westin: With all the challenges that capitalism faces today perhaps the most ironic is that its biggest advantage, deep capital markets, may in the end itself turn out to be anti-capitalist.
-One of the things that surprised me, I've spent the last 20 years of my life covering this. It's fascinating how many actual capitalists, people involved in finance, now regard the degree of liquidity in the markets, the degree of financialization as having been a problem. One way to express this, Amar Bhide, who's currently at Columbia, a very interesting thinker, argues that to make a market as deep as they currently are to be able to trade things you actually need to homogenize them. You need to plan them. You rely on MSCI and S&P to create indexes and then you trade indexes. You get the rating agencies to tell you, "Yes, this is triple A." You can split it around however you like, that you end up, in order to make markets that liquid so that you can trade, they can become as big and liquid as they are, you have to make such sweeping decisions about how you define companies, how you allocate them, that you're basically taking the role of a communist planner. So there is an argument in which the liquification, the financialization of the economy, basically did away with judgment, did away with the notion of trust in people's dealings with each other, and therefore led to a version of capitalism that frankly isn't any better than socialism or communism.