Great financial crises bring chaos, but they can also give capitalism a much-needed jolt
Five years after the tsunami of the financial crisis, the world still doesn't know what to do next. When the crisis hit, economists and governments were taken by surprise, their assumptions blown to smithereens. Now, as their economies bump along in a desultory way, they still don't know what to do.
In the US, Obama won re-election – but he did so despite levels of unemployment that were worse than the most extreme forecasts at the beginning of his term. In Britain, meanwhile, we can expect another "no change" budget, even though the economy stubbornly refuses to behave as the government says it should. The only new ideas involve the Bank of England pumping even more credit into the economy, confirmation perhaps that to the man with a hammer every problem looks like a nail. And across Europe, an endless procession of summits communicate little conviction that the chosen remedies will work.
What does all this tell us? That we still don't know what to do with the capitalism that surrounds us. We depend on it for our incomes, our cars, our food. But we see it as profoundly flawed, rewarding the wrong people for the wrong things. Jeff Immelt, the chairman and chief executive of General Electric, perhaps the most consistently successful capitalist enterprise of modern times, ascribed the crisis to "the meanness and greed" of business leaders: "the richest people made the most mistakes with the least accountability". But it's certainly not they who ended up paying the price. No wonder the Swiss voted for tight curbs on excessive pay this month. In Britain, polls show large majorities in favour of mansion taxes and higher taxes on the finance sector.
Yet although the old models are discredited, the new alternatives are too weak to replace them. There's no shortage of green shoots of an alternative economy – from collaborative consumption platforms and sustainable, closed-loop manufacturing, to peer-to-peer finance and local food sourcing. Equally there's no shortage of politicians willing to denounce austerity or wish away deficits. The problem is that no one is offering a coherent alternative to capitalism.
So how should we work out what's gone wrong and what needs to be done? Understanding capitalism is in some ways simple. At its best, capitalism rewards creators, makers and providers: the people and firms that create valuable things for others, like imaginative technologies and good food, cars and drugs. Its moral claim is to provide an alternative to the predatory, locust-like tendencies of states and feudal rulers. It rewards the people who work hard and innovate, and by doing so makes everyone better off – more than any other economic system in history.
But capitalism also rewards takers and predators, the people and companies who extract value from others without contributing much in return. Predation is part of the everyday life of capitalism, in sectors as mainstream as pharmaceuticals, software and oil – where people's money, their data, their time and their attention are routinely taken in fundamentally asymmetrical exchanges. It's commonplace in the behaviour of slum landlords and loan sharks, and a large proportion of financial activity exploits asymmetries to capture, rather than create, value.
The crisis we're still living with resulted from too much predation and not enough creation – a vast extraction of value from the real economy by finance that coincided with a failure to feed new sources of growth in science, entrepreneurship and creativity.
You can see the symptoms very clearly in Britain. On the one hand, yet another round of bonuses that have only a flimsy relationship with genuine value; on the other, businesses that have slashed their investment in innovation (£24bn down, by the latest count), and a severe squeeze on universities and the science base.
The modern world has spread many things: the rationality of science; the rule of law; and the messy, but generally robust, forms of democracy. Yet none of these is as contested as capitalism. Capitalism has run into repeated crises of profitability. But it has also run into periodic crises of meaning. In every capitalist economy there are anti-capitalist movements, activists, and even political parties, in a way that there are no longer anti-democratic movements, activists, and parties. There are hundreds of millions of sceptics and cynics who look with distaste on the bland reassurances of corporate advertising – dissidents in their heads even if not on the streets. For all its achievements in raising living standards, capitalism has, quite literally, failed to make enough sense – not just for the losers but often for the winners.
In this context the lazy rhetoric of politicians who say that if only we cut taxes, or regulations, all would be well, is as unconvincing as the state of denial that appears to have descended on countries like Italy, where the public just wishes everything would go away.
The last great financial crisis, in the 1930s, unleashed war and chaos. But it also led to an extraordinary period of social creativity that left large parts of the world with welfare states and Keynesian economics, the UN and human rights. This was one of the many moments when capitalism was remade, its energies channelled, tempered and constrained in new ways – whether by the creation of science and public health systems, or by laws that ban the sale of everything from drugs to body parts, unsafe foods to public offices.
Always the crucial driver has been to prevent the worst abuses of the predators – whether predatory finance or predatory industries feeding off the environment – while corralling the creative, productive power of capitalism to improve living standards.
Today's position is no different. But you'll get little sense of this over the next few weeks. Instead, just as the governments' fiscal room for manoeuvre has narrowed, so have the horizons of imagination and debate. Perhaps it's only when everything has been tried, and has failed, that we'll be ready to try something genuinely new.