June 19, 2011
BOOK OF THE WEEK: WEEK TWENTY-FIVE, 2011
Anatole Kaletsky, Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis (New York: PublicAffairs, 2010) ("What, then, does democratic capitalism require for its survival? The lesson from history, evolutionary biology, and everyday common sense is that one condition has to be satisfied for any complex system to survive in an unpredictable and constantly changing world: The system itself must be adaptable, that is, it must have internal mechanisms allowing it to undergo radial change." Id. at 21. "One of the biggest mistakes made by market fundamentalism is the assumption that markets will always create the necessary incentives for private enterprise to solve urgent social problems. In reality, many challenges--mass unemployment in the 1930s, inflation and labor unrest in the 1970s, financial instability and climate change in the present period--can be addressed only if politics creates new economic incentives and new institutions to stimulate the problem-solving, innovative capacities of private enterprise." Id. at 23. "In each of the great transitions of modern capitalism, new institutions had to be created and economic incentives have to be realigned in the face of intense opposition. When the requirements for new incentives become too radical for the existing politico-economic arrangements, capitalism reaches an evolutionary breakpoint, as it did in the 1930s, in the 1970s, and today. Id. "[George] Soros argues that miscalculations made by both lenders and borrowers result from the gap that inevitably exists between reality and human understanding. Human thinking consists of two potentially discordant element--a cognitive function, which tries to understand reality, and a manipulative function, which tries to change reality. These functions can interfere with one another." "The interference between the cognitive and manipulation functions creates two problems. The first is that human knowledge--the cognitive function--is always imperfect and, therefore, market expectations will always be wrong, at least to some extent. The second problem . . . is that in situations where reality involves thinking participants, expectations about the future will alter reality, and this new reality will in turn change expectations. This two-way interaction between reality and expectations is the process that Soros calls reflexivity, and it can create boom-bust cycles to the kind [Hyman] Minsky described." Id. at 116. "What, then, transformed this fairly normal boom-bust cycle into the greatest financial crisis of all time? The main contention of this chapter--and probably the most controversial claim this book makes--is that the primary reason for this disaster was not the stupidity of regulators the greed of bankers, or the improvidence of speculators in low-income real estate but a series of misjudgments made by one man: U.S. Treasury Secretary Henry Paulson." Id. at 129. "The most amazing aspect of this [2007-2009] crisis was the total failure of leadership and judgment in the United States. Hence this chapter's focus on the one man directly responsible for the most important errors. Henry Paulson, despite having been the chairman and CEO of Goldman Sachs--or perhaps because of it--turned out to be the most incompetent economic policymaker in U.S history, with the possible exception of Andrew Mellon, his predecessor at the Treasury from 1921 to 1932." Id. This is controversial, yet important, read. Kaletsky demotes, but does not fire, three demigods of economic and political thinking regarding capitalism: rationality, perfect efficiency, and eternal balance. "Nothing about this new version of the capitalist system will be rational or perfectly efficient or eternally balanced. The future will always be unpredictable and ambiguous and inconsistent--just like human life. For that is what Capitalism 4.0 is about." Id. at 334.).