As Brown poses as FDR, look ahead to a very new capitalism

Charles Leadbeater from The Spectator:

"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. High-octane, 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. The Labour government has often put off radical public services reform in favour of more investment to modernise services. That recipe will not work over the next two years. The only way to avoid cries of ‘cuts, cuts, cuts’ will be to deliver better public services at much lower cost through radical innovation — the Conservatives call it the post-bureaucratic age — to break down the silos, bureaucracy and duplication that still characterise public services. This will be the first real test of the strength of the social enterprise movement that was in its infancy during the last recession. The state is in for a torrid time. But the idea that societies in the developed world would be made safer, more productive and stable by having a smaller state is dead.


The second big issue is the balance between being networked and feeling safe.
The crisis was brought on by densely connected, tightly coupled, far-flung financial networks: it was like a high-speed motorway pile-up. Nick Leeson was a rogue trader. Enron was a rogue company. Financial markets have become a rogue system.


The complex maze of financial relationships has allowed a shadow banking system of hedge funds to trade financial instruments few understood, generating unfathomable risks in the wings of mainstream banking. This is further proof that the apparently marginal and insignificant — some subprime loans in the US Midwest — can up-end an entire industry, especially if it is densely networked.


As banks stopped lending to one another they retreated from these networks. Repeated across the economy as a whole, this would mean people hoarding resources and countries resorting to protectionism. The economy could yet shudder to a halt.
The crisis may make us turn away from cosmopolitan connections. The most significant banking casualties were formerly solid, proudly provincial institutions — Northern Rock from Newcastle, the Halifax, banks with their roots in respectable Edinburgh — who were seduced by the lure of international expansion through the cosmopolitan City. Many people will want a return to down-to-earth provincialism.
Yet we will not be able to retreat far from the cosmopolitan networks we have come to depend on in the last two decades. Hopes for avoiding deep recession depend on unprecedented levels of co-ordination among economic policy-makers. The cities and regions most likely to prosper will be those with outward-looking, entrepreneurial civic and business leaderships. Companies will learn to innovate and produce more through networks that allow them to share resources and defray risks. Many will be forced to look East for markets.
The eastward shift of capitalism’s dynamic will accelerate and so will its mutation in places with very different cultures and political regimes — Dubai, Shanghai and Kerala. That will create many more alternate forms of capitalism.



Networks will also be critical for individuals. This is the first downturn we have faced with the web woven into our lives. A recession will be a boon for the web’s pro-am, do-it-yourself ethic. Professional social networks such as Linked In may come into their own as out-of-work people look for jobs. There may be more Popbitch and less Heat magazine; more use of free, open-source software than expensive offerings from Microsoft; more recycling of secondhand goods through eBay and freecycling schemes; more sharing of resources like cars through websites like GoLoco and Liftsharing. The collaborative, low-cost organisational models the web allows will come into their own; high-cost industrial-era models will suffer.





Third, a downturn may lead people to a more balanced perspective on money and wealth.
In the next year money will become more important to people: credit will be scarce, getting hold of money will be harder. We will all learn to haggle and bargain. The foundations of future fortunes will be laid, as those with the money buy distressed assets at knockdown prices to set off a new cycle of wealth creation.

Yet the capitalism that emerges will be more modest, thrifty and subdued. Shows of wealth acquired through speculation will attract resentment. Ostentatiously overpaid footballers may fall out of favour. When Lehman Brothers could be worth $15 billion at the start of a week and next to nothing at the end, people may wonder what money really means.

Many people want a simpler, back-to-basics capitalism, one that does what it says on the tin. The crisis may encourage more people to place more value on what cannot be bought and sold, realising that relationships underpin our wellbeing more than money.

Capitalism will emerge more chastened and subdued. After the bubble burst in the early 1990s, Japan became just another productive, well-educated, slow-growth economy. It was no longer a wonder economy. But nor was it a basket case.

Capitalism will be more socialised. More emphasis, at least rhetorically, will be put on social stability, responsibility and shared capacities to take risks. That might give us a capitalism that is more civic, collaborative, creative and sustainable, in which the state’s role is more accepted and firms are less driven by the short-term demands of financiers. There will be greater pragmatism about the mix of public and private.

Yet in some places capitalism could get uglier. A severe recession could provoke an unseemly fight for resources and a generalised breakdown of trust. That would not usher in a new era of co-operation but a brutal struggle in which each protects what is his. Those with money will drive a harder bargain than those without. The state will be beset by demands it may not be able to meet. In white working-class communities that gained very little even during the boom years, things could turn nasty. People already disconnected from mainstream economic activity and public life, even during the boom, will be further disconnected. People may not turn en masse to fascism and communism as they did in the 1930s, but their sense of anger and dispossession will be more difficult to contain.
In all likelihood we will get a mix of subdued capitalism, social capitalism and ugly capitalism, even within the same cities.

All of this is speculation. I am old enough to have lived through several anxiety-inducing downturns but I cannot recall ever before feeling scared, planning to grow vegetables in our garden or escape with my family to Greece to run a B&B. Personally I would settle with relief for a capitalism that was safer, more stable and accountable, less destructive. After what we have already been through, and considering what we are about to go through, a more subdued and accountable capitalism would be a good starting point in our search for something more ambitious.

Thus far this has been framed as a crisis that requires an urgent response. In time the confused and battered population may want a politician who can frame it as a challenge or even an opportunity to remake capitalism. If Gordon Brown can successfully make that pitch, he deserves to be compared to FDR and the New Deal. But he may yet turn out to be more like Churchill. Winning the war may not win him the right to guide economic reconstruction.
This still has a long way to run.


Charles Leadbeater is the author of We-Think and a visiting fellow of the National Endowment of Science, Technology and the Arts. Visit www.nesta.org for more details of Nesta’s analysis and events discussing the impact of the financial crisis.