RIP Communism and Capitalism

A not-terribly-welcome aspect of my new student lifestyle is the odd night of insomnia when I simply cannot get my brain to shut up. Now that it is being encouraged to think, it doesn't necessarily want to stop just because the time happens to be, say, 4am. Luckily I don't usually have to get up the next morning. Less luckily, I do need to tomorrow.

Recently I've been thinking about free market capitalism and Marxism. Until the financial mayhem started in 2008, it was quite widely accepted that the former had triumphed and Marxism was more or less dead. Francis Fukuyama's 'End of History and the Last Man' is the best-known exponent of this. (To my shame, I haven't read it yet.) From what I can tell, Fukuyama and a host of other commentators assumed that democracy and free market capitalism were inseparable. The vast human suffering caused by the totalitarian regimes, of the USSR and China in particular, made socialism something to dread. Marx' proscriptions for the future had been fatally undermined.

Something I recently noticed about the financial shenanigans (which really need a definitive name but are unlikely to get one before they end) is that they follow Marx' view of capitalism as unstable and subject to periodic crises. Free market capitalism assumes that markets are self-correcting, yet the debt crisis in which we find ourselves was caused by the operation of free markets. Large international banks systematically understated and mismanaged risk in pursuit of profit, in the process causing an asset-price bubble that could not be sustained. Once property prices in the US began to fall and mortgage defaults increased, financial products that had been valued in the hundreds of billions of dollars became effectively worthless. This took place because unregulated free markets failed. Bankers' incentives did not encourage them to promote societal or even economic good. Information asymmetries were rampant, market power was highly concentrated, and risk was incredibly poorly managed. These problems occurred in markets that were either unregulated or extremely lightly regulated, and did not self-correct. Governments were required to step in and shore up these banks, in order that their wider roles holding deposits and lending to individuals and businesses could continue.

The bailouts have nationalised the losses made by banks, whilst their profits remain privatised. I oversimplify somewhat, but this is broadly why we now have terrifying levels of sovereign debt. Three years ago the fear was that banks had too much debt and not enough assets, now the same fear is gripping whole nations. The operation of free financial markets has destabilised entire countries. If he could, I'm sure Marx would say, "I told you so."

Now that the debt has been nationalised, it is everyone's problem. Repayment is hindered by the fact that the mind-bogglingly large sums were effectively borrowed against the value of future economic growth. That growth is no longer happening, largely as a result of the ongoing credit crunch and austerity measures designed to reduce the debt. Even the IMF admits this. The great economist Keynes took the view that recessions are caused by inadequate overall demand for goods and services; Marx also noted that capitalism periodically suffers a crisis of overproduction. Arguably, we could get growth going by stimulating demand - but this would require taking on more debt, which returns us to the starting point. In order to grow as we did before, we'd have to recreate the conditions that got us into the current doldrums. I doubt this is even possible.

Moreover, now seems to be a very good time to consider whether it is socially and environmentally desirable to stimulate demand and therefore consumption. Doesn't the Western world consume more than enough already? Is endless economic growth worth the social costs? However, very few seem to be speaking up for a Marxist revolution, for the very good reason that however accurate his assessment of current capitalism might seem, memories of communism's failure are still fresh. In my idealistic view, maybe we've gone beyond the capitalism/communism dichtomy and into a post-ideological era? Perhaps another ideology will appear, but for the moment we need to work with what we've got, two big ideas with big flaws and a wealth of information as to how they've been implemented with varying success. I think the new theory should be pragmatism. Not every country, region, or city will desire or require the same balance of free markets, regulation, public participation, taxation, etc.

There should be more choice and less absolutism. Rather than trying to shore up a clearly broken system, the EU could be considering what reforms would promote the greatest wellbeing. This is obviously easier said than done, given that institutions have their own momentum and the banks are fighting hard to survive despite having brought about their own ruin. However, I am a great believer in the power of imagining a better world. In the UK at least, this has fallen out of fashion and an apparent political and economic death spiral has made us a nation of apathetic pessimists. In a recent yougov poll, 80% of respondents said the state of Britain's economy was quite bad or very bad. Just 3% said it was good or very good. When asked how they thought the financial situation of their household would change over the next year, 62% said it would get worse and 8% said it would get better. Meanwhile, 53% said that Cameron is doing badly as Prime Minister, 54% said Milliband is doing badly as Labour leader, and 69% said Clegg is doing badly as Liberal Democrat leader. In response to a question about whether the current government is good for 'people like you', 24% said good and 53% bad. As a snapshot, that's quite a revealing survey.

In order to avoid pervasive depression, both economic and social, we need to first accept that there must be ways to make things better. I don't know what the new economies of pragmatism would look like; hopefully when I get round to reading 'Prosperity without Growth' I'll start getting an idea. What I have noticed is that The Economist chastises the Occupy Wall Street movement for a lack of ideology and lauds the economic successes of China whilst lamenting the decline of America. Lest we forget, China is far from a free democracy. The most successful free market economy of recent years is ostensibly communist; how can this be reconciled with the supposed opposition of the two ideologies? In my opinion, it no longer can be.


Soon to come: recommended reading about the credit crunch and Cambridgeshire's sometimes fraught relationship with renewable energy.