Finance
Capitalism is
reinventing itself
BIG takes a deep look at the emergence of capitalism and
how does present situation is reshaping ideologies.
A A
s the recession deepens, people across
the ideological spectrum declare that
capitalism has failed. Almost every
economic news report carries words like ‘cri-
sis’ and ‘disaster’. Yet, recessions are not aberra-
tions of capitalism but an intrinsic part of it.
Markets create boom and bust cycles, aris-
ing from human tendencies to swing from
euphoria to fear and back. A bust is an oc-
casion for cleaning out deadwood and failed
experiments, and re-inventing capitalism.
Erstwhile, the Communist Party polit-
buro would meet after every recession and
declare “capitalism is now in its final death
throes.” In fact, capitalism re-invented itself
and grew constantly stronger, while the re-
cession-free communist system collapsed.
Two decades ago, economist Jerry Muller
chronicled never-ending predictions of the
demise of capitalism, by its friends as well as
foes. In the 1850s, Karl Marx claimed capi-
talism was dying. Rosa Luxemburg wrote
in The Accumulation of Private Capital
(1913), “Though imperialism is the histori-
cal method prolonging the career of capital-
ism, it is also a sure means of bringing it to
a swift conclusion.” Lenin harboured similar
illusions: his 1916 book was titled Imperial-
ism: the Last Stage of Capitalism.
The Great Depression of the 1930s pro-
voked further predictions of capitalism’s
demise. Ferdinand Fried, of the German
radical right, made waves with his 1930 book
The End of Capitalism. In the US, Howard
Scott’s technocracy movement predicted
the replacement of market prices by central
planning. British sociologist Karl Mannheim
asserted in Man and Society in An Age of
Reconstruction (1940) that democracy could
survive only by delinking from capitalism.
World War II came and went, but obitu-
aries of capitalism continued. Historian AJP
Taylor declared on BBC in 1945 that “No-
body believes in the American way of life,
that is, private enterprise. Or rather, those
who believe in it are a defeated party, and a
...Read more in BIG MARCH 2009 Issue
party which seems to have no more future
than the Jacobites in England after 1688.”
Economist Joseph Schumpeter, a great
protagonist of entrepreneurship, never-
theless suggested in Capitalism, Social-
ism and Democracy that capitalism could
die through self-inflicted wounds. Nikita
Krushchev was certain history was on his
side: “We will crush you”.
All capitalist nations became welfare
states after World War II, devoting unprec-
edented sums to the sick, aged and poor.
This was interpreted by some as meaning
that capitalism was fading away. The stag-
nation of capitalist economies in the 1970s
fuelled new hopes in the European Left,
and Francois Mitterand came to power
in France on a platform of breaking with
capitalism. He nationalised major French
industries, raised taxes, shortened working
hours and lengthened holidays. He would
not, he said, take the Thatcher-Reagan path
to disaster. But soon France was in even
deeper recession than the US or Britain. A
disillusioned Mitterand later re-privatised
nationalised companies.
Why have so many intelligent, learned
people been constantly wrong about capital-
ism? First, the word capitalism has been used
by some people to mean a system with no role
for governments at all, whereas modern capi-
talism is very much a government-business
joint venture. Second, critics have constantly
underestimated capitalism’s ability to re-engi-
neer itself and evolve into new forms that get
rid of some of the old defects.
The current bust certainly calls for some
re-engineering of markets. Yet, economists
and politicians have been quicker to con-
demn existing flaws than propose compre-
hensive reforms that will nip financial crises
in the bud. Ever since the Asian financial
crisis, we have heard much talk about a new
financial architecture, yet in practice that has
not gone much beyond suggesting higher
IMF quotas for developing countries, which
is desirable but of marginal importance.
We hear talk of doubling or tripling the
lending power of the IMF. That will enable
the IMF to rescue some developing countries
or East Europeans, but not to end the hous-
ing and credit busts in the US and EU.
Everybody agrees that financial markets
need more regulation. We will doubtless see
more controls on financial derivatives and
stricter lending norms. Yet, recessions and
financial crises occured in earlier decades
when lending controls were much stricter,
and financial derivatives did not exist.
After having demanded for decades a
greater say in the global financial system,
developing countries now have a chance to
actually press for reforms. They now have
unprecedented clout: Asian forex reserves
greatly exceed those of the IMF. The world is
looking seriously for new ideas, and wants to
hear from Asia. Yet, developing countries —
including India and China — have little to
suggest except larger quotas for themselves
in the IMF, and bigger IMF lending. So sad.
If you have nothing to say, why demand a
greater say? Here’s your big chance! B.I.G
march 2009 B.I.G 53