This crisis is the 4th major transition of capitalism

Anatole Kaletsky of Reuters shares his thoughts on economics and crisis in this interview.

He says the recent crisis is 4th historic transition of capitalism.

Let’s take a step back from the latest stage of the financial crisis which is playing out in the eurozone, and take a longer view of what has happened over the last five years. How will economic historians write about the financial crisis in 50 years’ time?

This crisis is going to be viewed as the fourth historic transition that capitalism has gone through since the modern market economy was created in the late 18th century. The argument that I make in my book on the crisis – perhaps one of the few predictions in it that has been fully realised – is that this was not just another financial boom and bust, nor a crisis in one particular country or one part of economy. This was, and still is, a crisis of the entire global economy of a kind that has only happened three times before.

I compare this crisis with the great inflation of the late 1960s and 1970s, which created a completely new form of capitalism – Thatcherism and Reaganomics were totally different from the Keynesian social democracy they replaced. The previous systemic transformation started with the Russian Revolution and culminated with the Great Depression. This also created a new form of capitalism, almost unrecognisable from the classical capitalism of the 19th century. And the systemic crisis before that was the one that created liberal capitalism in the first place – the American and French revolutions that broke down agrarian aristocratic economies and established the market-oriented capitalist globalisation that Marx so vividly described.

So in my view this is the fourth systemic crisis of capitalism, and it’s going to give rise to a new kind of capitalist system. One still based on private property, competition and profits, but fundamentally distinct from the classic capitalism of the 19th century – from the government-led Keynesian economics of the postwar period, and from the Reagan and Thatcher market fundamentalism of the last 30 years.

The interesting bit is that in the previous three transitions, there was some clarity on what was likely to emerge as a new standard. This time there is no such thing:

What will this new political economy be? Well, I can tell you what forces and ideas will shape it, but not exactly how it will turn out. Each of the previous transformations of capitalism have been about the relationship between politics and economics, between governments and markets – between decision-making on the basis of one-man-one-vote and one-dollar-one-vote. In the classical capitalism of the 19th century, politics and economics were essentially separate spheres. After the Russian Revolution and Great Depression, the markets were perceived to have failed and huge power was transferred to the political sphere. In the 1970s, the world came to the opposite conclusion: Government was the problem and the market was always right. In the last decade this was taken to its logical conclusion and beyond, which is what made this crisis much worse than previous bubbles. The checks and balances on market forces had been dismantled, and there were no safety nets when the global banking system went over a cliff. A safety net was patched together after Lehman, but by that time it was too late.

The next phase of capitalism will involve a new balance between government and markets – something different both from the market fundamentalism that failed in 2008 and from the overweening government that failed in the 1970s. To put it another way, in the 1930s the world discovered that markets made disastrous mistakes. Forty years later, we learned that governments made disastrous mistakes. Now, after another 40 years, we have learned that markets and governments can both make disastrous mistakes. This sounds terribly depressing and paralysing, but actually it can be empowering, because whatever makes mistakes can be improved, and now we can demand improvements and reform in both politics and previously unquestionable markets.

How exactly these reforms will work, one can only speculate – as I do in the second half of my book, for about 200 pages. But I am no prophet, and predictions of this kind rarely work. Even the greatest books on political economy and history, all the way back to Marx or even Plato, analyse brilliantly what is going on but generally fail to predict what comes next. They see the forces shaping the future, but not the way it will turn out.

And then he goes on to pick his 5 books…


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