Capitalism 4.0

I attended the talk on the above subject by Anatole Kaletsky, co-founder of GaveKal Research and Economics Correspondent (Editor?) of the London TIMES newspapear. The speech was based on his book with the above title. GaveKal research was rather positive on the US model of outsourcing manufacturing and pitching its tent in the services sector (dark matter and all that), prior to the crisis. Thus, the crisis drilled holes into their worldview. His Capitalism 4.0 was less dogmatic. 

Capitalism 1.0, according to him (assuming I heard him right, that is) could be dated from the end of the 18th century to the beginning of the 20th – markets were right.

Capitalism 2.0 from the end of the Great Depression to the 1970s when the governments were right.

Capitalism 3.0 from the 1970s to the global financial crisis of 2008 – governments were wrong

Capitalism 4.0 from 2009 onwards: both markets and capitalism are wrong

It means that both have to recognise their limitations and learn to co-exist. As each interferes with the other (because proponents of each school believe that the other is more egregiously wrong), there would be more volatility.

Plausible scenario.

I asked him about the failure of the proponents of capitalism (read USA) to allow creative destruction in the wake of the crisis through the adoption of the zero interest rate policy which also acts as a disincentive for savings and investment. Then, I asked him about the growth-inflation trade-off in the face of resource constraints (signalled by rising price of crude oil).

He said that the zero percent interest rate was a small price to pay for saving the system and that the price had not become too high yet, although it could generate malinvestments.  He said that the price could become too high if the US did not embrace fiscal austerity soon. Lax fiscal and lax monetary policies would be too much of stimulus, stoking bubbles, etc.

On the resource trade-off, he said that the growth-inflation trade-off has not worsened yet. He said that the rise in the price of oil was a relative price rise and it would be inflationary only if it led to a general rise in the price level which was not yet the case, as wages remain depressed in the US, etc.

Both were partial answers and that could, of course, mean that I did not word the questions precisely.

On the resource trade-off,  it is worthwhile checking out the ‘Early Warning’ blog. I do not recall how I stumbled on to this site. But, the blogger (Stuart Staniford) seems to do thorough work.  Two posts are relevant to the discussion on the pursuit of high growth and the costs of inflation.

I just preview his conclusion from one of them here:

as long as the world is trying to grow at 4%+ a year on the current technological base, I think the strain will be getting worse. [More here]

In another post, he digs into the IMF World Economic Outlook (April 2011) Growth forecast up to 2016. I had not paid attention to that. He wades into their projections of 4%+ global GDP growth projections. I am disappointed that the IMF made these projections without assuming any recession, slowdown along the way. They (in) famously raised their global growth projection in July 2007 and I remember telling my colleagues that that was the best contrarian indicator, at that time. I think they are at it again. It is disappointing because one thought that some fresh intellectual winds were blowing in the hallway at the IMF.

His last two paragarphs are spot on:

So I think the IMF’s growth projections are seriously improbable.  What is going to happen instead is that people will keep trying to grow without getting much more oil efficient, that won’t work, oil prices will go through the roof, another global recession, or at least a major slowdown, will ensue, and then people will begin in earnest the work of starting to transition away from oil dependence.

I can’t tell you the timing precisely.  It could easily be this year, it could be next.  It’s even possible that some other global crisis will intervene first (like the credit crash of 2008 did).  But I will say categorically that there’s no way we are going to get through 2016, as the IMF projects, with business-as-usual economic growth. [More here]

As a side-note, I must also record my appreciation of his thorough dissection of the Barry Eichengreen paper on the peak in Chinese growth in 2015. Read the full post here. He finds the argument too simplistic, even if the forecast itself might turn out to be correct for other reasons.

Coming back to Capitalism 4.0,  it resonates well with the debate between Keynes and Hayek. The ‘Fight of the Century’ is, of course, both false and exaggerated. The world needs a bit of both. The challenge is to figure out when to invoke whom and by how much and for how long. Democratic governments cannot afford to wait for economic recoveries to autostart after a collapse, if they wish to be re-elected. The challenge is to limit the collateral and long-term damage such interventions entail.

Check out Paul Kedrosky’s reaction to the news that Economics is today where medicine was 200 years ago. He disagrees strongly and for the right reasons:

More likely is that, over time, economics will come to be seen as an adrift discipline, one whose predictions mostly made mischief. The right approach to economies and economics, insofar as there can be, is to worry about over-optimization. When you don’t understand a system, and equally importantly, can’t predict how it will respond to shocks and stimuli, your best policy is to build in slack and protect it from itself.

Right now, of course, we do the opposite — and brag about it. Rather than building in slack we find ways to link economies more tightly, from economic indicators and trading, to inventories and production around the world. This a path to precariousness and fragility, not the way to resilience — and economics, in that it isn’t medicine and will never be, only makes it worse. [More here]

This is where I find this quote, attributed to Hayek,  wholly appealing, relevant and still elusive in policy and in business circles:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm

This post originally appeared at The Gold Standard and is reproduced here with permission.

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