Magazine article The Spectator

As Brown Poses as FDR, Look Ahead to a Very New Capitalism

Magazine article The Spectator

As Brown Poses as FDR, Look Ahead to a Very New Capitalism

Article excerpt

We should be searching for a new kind of capitalism, and not just according to the far Left. That is the message from Washington dinner parties and in the pages of the Financial Times.

For most people the next year will not feel like a search for a brave new economic model: it will be more like hand-to-hand combat to keep hold of what you have.

Yet the world is being turned upside down not by wild-eyed revolutionaries but sober central bankers and civil servants. Highoctane, free-market financial capitalism has been devoured from within as the financial markets lost faith in the system they created.

The City of London, once the jewel in the crown of the free-market empire, is being turned into a toxic debt recycling plant.

Bankers may become a bit like trade union leaders. After the excesses of the 1970s and the reforms of the following decade, the trade unions became just another part of the economy in the 1990s. They are still with us and occasionally make news, but they are not a power in the land. Something similar may happen to bankers.

Capitalism's strength is its capacity for evolution. In the mid-1970s managed, national Keynesian capitalism gave way -- in the US and the UK at least -- to a more international, market-driven variety, a shift that gathered pace after the fall of the Berlin Wall in 1989. Will this year mark a further mutation to a new model of capitalism that could be with us for the next three decades?

The answer will depend on the severity of the looming recession, the pain it inflicts on people's finances and the shock it delivers to conventional wisdom. How we end up striking the balance on three central issues will be crucial to the kind of capitalism that will emerge. The first is the balance between regulation and deregulation, the state and the market. This balance continues to shift daily.

A free-market economy needs a state with substantial reserves of power to call on, especially as interconnected, fluid societies are so prone to crisis, from freakish summer floods to terrorist attack and financial contagion. Governments will use more 'soft power', incentives and persuasion to nudge people to become fitter, healthier and greener. But the last three weeks have shown that 'hard power' -- the ability to mobilise massive resources at scale in a crisis -- is still a job only government can do. Gordon Brown has relished playing the role of a latter-day FDR, leading the blitzkrieg into the financial equivalent of a failed state.

This is the high-water mark of the deregulated, bonus-driven, free-market triumphalism that blossomed after 1989. For years to come people arguing for a laissez-faire approach to any issue -- health, transport, carbon trading -- will be met with as much scepticism as advocates of state planning.

The government's guiding role is unlikely to be temporary even if its stakes in the banks are. As 2009 unfolds, government will come under pressure to revitalise property markets to protect the value of public shareholdings in banks and to soften the blow of recession on businesses and households. People will be prepared to pay the price of a little more regulation if that brings a more dependable and less destructive capitalism.

Yet progressive euphoria over the state's new-found economic confidence may be short-lived. The state may be good at saving losers; that does not mean it is any better at picking winners. This year's crisis of legitimacy in financial markets may become the state's crisis next year as its resources are stretched to breaking point as borrowing rises to more than twice national income and recession takes its toll on already depleted public finances.

Demand for good schools and hospitals will not lessen, but the short-term priority will be to slow the rise in unemployment. Everything else will take a back seat for a while.

National crisis -- war and depression -- is a crucible for social and public innovation, from FDR's New Deal in America to the postwar European welfare state. …

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