With capitalism in crisis, bankers and policy-makers are turning to some surprising and conflicting thinkers to help solve it
Stephanie Flanders Published: 9 September 2012
Stephanie Flanders believes prescriptions offered by Keynes and Marx are still relevant (BBC) We like markets.
They give us what we want, whether it is food on our table or a pleasant holiday. If we?re smart, lucky or both, they can make us rich. The trouble is, they can also get us into bother. Deep bother.
That has never been more true than now. The financial crisis has dragged our economy into the doldrums and it might be a decade before we emerge. As consumers, politicians and business leaders look to the future, they ? we ? are searching for the holy grail, a way to have markets without the mayhem. Can it be done?
I have just made a series for BBC2 about three great economic thinkers who thought they had an answer: John Maynard Keynes, the British economist, Friedrich Hayek, the Austrian, and Karl Marx. They understood, earlier than most, the incredible benefits that modern markets could bring. But they were also more keenly alive to the risks.
In their different ways they each helped to create the troubled global economy we live in today. Now policy-makers, bankers and people around the world are turning to these thinkers to help fix it.
Sir Mervyn King has not given an extended television interview since becoming governor of the Bank of England in 2003. But when the subject was Keynes he was willing to talk to me for more than an hour.
Keynes has gone down in history as the great spendthrift ? the man who thought governments could, and should, borrow their way out of any economic problems. This is not the Keynes that King was so keen to talk about. In 2010 the governor had taken the unprecedented step of endorsing the coalition?s tough deficit reduction plan only hours after it had been agreed.
King does have tremendous respect for Keynes, however. He admitted that living through this recent crisis had given him a fresh appreciation of Keynes?s analysis of the financial crises of the 1930s. As a student he had never really understood what Keynes meant by a ?collapse in animal spirits? ? the wholesale destruction of confidence that could send an economy into a tailspin. Then he saw what happened to the world economy in the weeks after Lehman Brothers collapsed in 2008. Suddenly, he got it.
If you have heard Friedrich Hayek?s name, it?s probably as Keynes?s arch-enemy. He wrote The Road to Serfdom, the bestselling book warning against government intervention in the economy. It was an inspiration for Margaret Thatcher in the late 1970s. In the programme Lord Patten describes how she used to enliven cabinet debates by pulling tiny bits of paper from her handbag with favourite quotations on them. Many were from Hayek.
He may be out of fashion now in Britain, but Americans have recently been hearing his name surprisingly often. Congressman Ron Paul spent a good part of his campaign to be the Republican candidate for president talking about Hayek and the ?Austrian school? of economics.
?Austrians? blame central banks for most of the bad things that happen in modern economies and say government intervention almost always makes things worse. Let?s just say that Paul is no fan of the Federal Reserve, America?s central bank. On his official website, ?End the Fed? has its own page.
Marx ? well, of course you?ve heard his name. But wasn?t he a communist? The man who wanted to bury capitalism and thought it was the root of all evil? How could he possibly help us save it?
While filming the series I spent the weekday rush hour at Canary Wharf in London?s Docklands ostentatiously reading The Communist Manifesto. I got some intriguing looks. But there are some respected voices in the City who think Marx is on the money.
George Magnus, a senior economic adviser to the Swiss bank UBS, told me he hadn?t thought about Marx since college. But, looking at the way the world was going a few years ago, he had decided that Marx?s warnings about the internal contradictions in capitalism were becoming more and more relevant.
Magnus wrote an article headlined ?Give Karl Marx a chance to save the world economy?. He told me he had received more emails in response to it than to anything else he has written and some of the emails were pretty vicious.
He is not the only one getting in touch with his inner Marxist. The economist Nouriel Roubini, nicknamed ?Dr Doom?, who had predicted much of the financial crisis, recently told The Wall Street Journal that ?Karl Marx had it right?.
Marx thought capitalism was inherently unstable because it could be a victim of its own success In my series we have called Keynes, Hayek and Marx the ?Masters of Money?. But the power of their ideas in today?s climate comes from the fact that they didn?t think we could ?master? money. We could never truly tame it. Capitalism and markets were inherently unstable and vulnerable to crises.
They violently disagreed on the implications of that basic reality. But, while making the series, I realised that each of their very different prescriptions for the world economy had something relevant and oddly useful to say to us today.
Writing during the Great Depression of the 1930s, Keynes thought governments could and should step in to curb the market?s excesses ? to borrow and spend at key moments to save capitalism from itself.
Keynes also highlighted the importance of international co-operation and collaboration in economic affairs. He first broke onto the world stage with his book The Economic Consequences of the Peace, a damning assessment of the tough terms meted out to Germany by the allied powers at Versailles after the first world war.
His views are eerily relevant to today?s crisis in Europe. Alistair Darling, the former chancellor, says that by demanding tough terms of Greece or Spain in return for financial bailouts, eurozone leaders are forgetting the lessons of Versailles: if you beggar your neighbour, you may ultimately beggar yourself.
Keynes?s economic ideas changed the way governments think about the world. But, oddly, I discovered that economics was not even his main interest in life. He was an aesthete with a renowned art collection who helped to set up the Arts Council and a theatre in Cambridge that is still operating today. He even found a way to shock his famously unshockable friends in the Bloomsbury group. He married a Russian ballerina when they had all thought ? with good reason ? that he was gay.
You might be surprised to hear that Hayek, the arch free-marketeer, had a similar assessment of the economy. Like Keynes he, too, understood the great complexity and uncertainty inherent in economic life and the inevitability of crises.
The big difference was Hayek didn?t think you should do anything about that instability. In his view, recessions were ?cleansing?. They were a way to get rid of all that over-investment and over-borrowing from the boom years that would otherwise clog up our economic arteries. If governments tried to get in the way of that process, they were only going to make things worse. That?s exactly what modern ?Austrians?, such as Paul, argue.
You might think the financial crisis was caused by letting markets ? the financial markets, especially ? get too free. Not so, say Hayek and his modern-day fans. The real reason was the markets weren?t free enough. After decades of government financial intervention, bail-outs and safety nets, the people working in those markets thought ? correctly ? they would not be allowed to fail. They were free to do everything, except go bust.
That meant Wall Street and the City could create the financial tools of mass destruction, safe in the knowledge that whatever havoc they caused, they would make a ton of money along the way and, probably, walk away unscathed. That resonates with many people today on both sides of the Atlantic.
There is even, in America at least, support for Hayek?s most outlandish suggestion: that we should get rid of national currencies altogether. The idea was to stop governments once and for all from abusing their monopoly power over money ? as they do when they produce too much of it and cause inflation, or simply print the cash to pay their bills.
The programme features Bernard von NotHaus, who created a private currency ? ?the Liberty Dollar? ? in the late 1990s to provide some competition for the Federal Reserve.
By 2009 the US authorities said that as much as $50m worth of Liberty Dollars may have been distributed in the US economy. The FBI arrested Von NotHaus that year and in 2011 he went on trial for counterfeiting US currency. In the courthouse in North Carolina he cited Hayek in his defence.
You don?t have to be Von NotHaus or a member of the American Tea Party to feel uneasy about the massive bank bailouts of 2008 and 2009 ? or to wonder, looking at the state of the real economy, whether the hundreds of billions that central banks have pumped into the economy have done anyone outside the financial system any good.
In an environment where the usual policy tools don?t seem to be working, you can also understand why some would be turning to Austrians such as Hayek for a different kind of answer. But whether any government or mainstream politician is really prepared to step back and let the system ?heal itself? ? whatever the short-term consequences ? is another matter.
I asked Paul whether he thought Americans were ready to become ?Austrians?. He paused. ?Well, I think you?d have to change the name,? he deadpanned.
And Marx? Sitting in Germany and Britain as the modern industrial economy was born, he saw the two conflicting sides of capitalism long before either Keynes or Hayek.
His conclusion was the most radical of all: don?t fix capitalism. Just get rid of it.
Marx thought capitalism was inherently unstable because it could be a victim of its own success. He had some complicated ways of explaining it. In the programme I use Lego men.
Marx said the pursuit of profit in a competitive capitalist economy causes an inherent tension. If companies have to pay more to workers to compete with other firms, their profit goes down. If they get access to more labour ? by expanding to the developing world, for example ? they can pay workers less. But profits across the economy still go down, because paying workers less means they have less money to spend on the capitalists? goods.
In the 1950s and 1960s that looked completely wrong. Capitalism was thriving in the West. Workers were becoming more prosperous. A rising tide lifted all boats.
When you look at the western economies today, however, with real wages for most households flat or falling and a rising share of the economic wealth going to those at the very top, economists such as Roubini and Magnus say it?s harder to dismiss Marx?s analysis.
They think that sub-prime ? and the great explosion of property-based credit and debt during the past few decades ? was a response to the fact that the real wages of the average worker were not rising enough to keep up demand. Marx would have said that couldn?t last. And of course it didn?t.
Marx was good at analysing capitalism?s strengths as well as its flaws. He saw how capitalism was going to transform the world economy on the way to its (supposedly inevitable) demise.
In hundreds of pages of dense prose about capitalism, however, Marx spent surprisingly few describing what could come after it. You might think that rather telling.
No one else has been very good at coming up with an alternative to capitalism either. I did not find a single mainstream economist who thought dismantling capitalism was desirable ? or feasible. The Occupy movement that started on Wall Street and has spread around the world is extremely good at protesting about what it is against. It?s less good at saying what it is for. Its members are talking about a revolution, not leading one.
Still, what all these disparate thinkers take from Marx is that if capitalism doesn?t work for large parts of the population, it cannot work at all. Keynes and Hayek would probably have agreed. We might not think there is a ready replacement for capitalism out there ? as Marx would have hoped. But everyone agrees that the past few years have left it with a lot to prove.
Masters of Money was made with the support of the Open University and starts on BBC2 on Monday, September 17


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