On John Plender’s Capitalism

John Plender, previous financial editor of the Financial Times, recently released his book Capitalism: Money, Morals and Markets, available at Amazon. Below, I have highlighted some of the interesting sections and omitted material from the full version available in this weekend’s FT ‘The Big Read: Capitalism (Morality and the money motive)’:

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At first sight the spectacular stock market bubble that has wreaked havoc on the Shanghai and Shenzhen exchanges in recent weeks appears uniquely Chinese. It was, after all, substantially fomented by the state, no doubt with a view to recapitalising rocky government-owned enterprises on the cheap thanks to stratospheric share prices.

China illustrates on an epic scale a fundamental truth about the capitalist system it embraced in 1978 under the leadership of Deng Xiaoping. It has a phenomenal capacity to lift people out of poverty. Yet it does so at a cost, which is not just about the tendency of capital to tyrannise dehumanised workers in the early stages of industrialisation; nor about the rigours of creative destruction and the turbulent cycles that have marked the system from the industrial revolution up to the great financial crisis of 2008; nor again the rising levels of inequality that have accompanied capitalism in recent decades — especially in the English-speaking countries and in China.

There is a more fundamental question of legitimacy, relating to the central role of the money motive — greed, in a word — in driving economic growth. As the economist John Maynard Keynes is said to have remarked, “capitalism is the astonishing belief that the nastiest motives of the nastiest men somehow or other work for the best results in the best of all possible worlds”.

Why did so much opprobrium attach to business and finance? The economic context provides part of the answer. For centuries there was little or no growth in per capita income. Without growth, trade seemed a zero-sum game where one man’s profit inevitably inflicted loss on another man. The moral basis of trade thus appeared dubious.

Then came Adam Smith, with his glorification in 1776 of self-interest in The Wealth of Nations. The 18th-century French political philosopher Montesquieu tried to make trade respectable by writing in De L’Esprit des Lois: “ … the natural effect of commerce is to lead to peace. Two nations that trade together become mutually dependent: if one has an interest in buying, the other has one in selling; and all unions are based on mutual needs.

The rules of the game changed dramatically in the second half of the 18th century with the industrial revolution, which embodied the workings of what we now know as capitalism — the system that would lift millions out of grinding poverty.

The snag was that red-blooded capitalism brought with it the extremities of the business cycle and an even more extreme financial cycle, prompting savage critiques — not least from Marx and Engels, who were shocked by capital’s tyrannising over labour. Schiller, in his Letters on the Aesthetic Education of Man, fulminated about the triumph of utility over art, while Oliver Goldsmith, in his poem “The Deserted Village”, highlighted the social disruption that arose from the urbanisation that accompanied industrialisation.

Among the most perceptive critics was Goethe. In Faust, especially in his story of the great land reclamation project that Faust undertakes with Mephistopheles, he anticipates critiques of capitalism that followed later in the 19th century.

Today in the developed world, the harshest features of capitalism have been softened by state intervention, albeit at the cost of ever increasing public debt. Yet the worry about the moral basis of capitalism remains. Ever contradictory, Keynes tried to put the best complexion on it in The General Theory : “Dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow citizens.”

Capitalism has its eternal verities. One is that it has not and will never create the political economy of a just society. Another is that boom and bust, together with severe financial crises, are permanent features of the system. The Chinese bubble, like the financial crisis of 2008 in the west, is a salutary reminder of that fundamental truth.

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