The second crisis of capitalism (part 4)
In the last blog, I summarised Thomas Piketty’s arguments in Capital in the 21st Century. Now I want to add another book into the mix – Reckless Opportunists: Elites at the End of the Establishment by Aeron Davis.
It seems unlikely that Davis would disagree with any part of Piketty’s analysis, but his concise, snappy book deals with somewhat different aspects of the problem of growing wealth inequality (assuming one agrees that it is a problem). The two books complement each other. Piketty supplies the heavy artillery and Davis the sabre. To be precise, Piketty’s work is quantitative and Davis’s qualitative – based on interviews with leading figures in finance and industry over many years. It relates entirely to Britain, but it is hard to imagine that his conclusions are not equally applicable elsewhere, especially in America.
Behind Davis’s analysis lies the largely implicit acknowledgement that Britain’s traditional establishment – whatever its multiple flaws – was at least concerned about the long term. Because it was a self-perpetuating elite, it valued continuity and stability. Because it was a social elite, it needed to protect its wealth and its interests, as far as it could, several generations into the future. The consequence was a large measure of enlightened self-interest, and some sense of responsibility for social cohesion.
Davis contends that this has changed. The old establishment has not disappeared, but its importance is much reduced. Instead, there is a new elite. It has what might seem to be the advantage of being more meritocratic. But the downside is a diminution of social responsibility. The principal characteristics are greed and short-termism. The members of this new elite are the ‘reckless opportunists’ of the title of his book.
According to his analysis, the 2008 financial crisis was not a one-off event, from which lessons have now been learnt so we can sail on serenely into the future. It was indicative of a fundamental instability in our financial and corporate systems. It was a warning shot: a warning to make deep-rooted changes, and a warning that has so far been largely ignored. We can therefore expect replicas of 2008 in the future, possibly even more extreme.
Like Piketty, Davis attacks current levels of executive pay. Piketty, through quantified research, demonstrates that these pay levels are a major factor in growing inequalities of wealth. Davis, through observation and interviews, provides an insight into the human characteristics that drive them.
The Davis archetype may not be universally true, but it resonates. It portrays an elite cluster of executives who seldom stay in one job long enough for the eventual consequences of their decisions to be laid at their door. Their objectives are to improve the balance sheet and to drive up this year’s profits. Their remunerations are linked to apparent short-term success in achieving these objectives. They then flit off to another company to do the same thing there. The ambition is to build a huge stash of personal wealth, bomb-proofed against future failure, which will enable them to retire early. Needless to say, part of the strategy is to use the best tax lawyers and financial advisers that money can buy to stay (just) on the right side of the law, while paying as little personal or corporation tax as possible.
Remuneration committees still fail to address the issue of executive pay. Piketty would like swingeing tax rates on the very highest incomes. He reminds us that, ironically, it was Britain and America above all that used to have such rates. He admits that the resulting increase in tax revenues would be minimal in practice, but believes this measure would deter the constant escalation of pay, because the net income gain to the individual would not be worth the effort required to get it. Perhaps there is also a case for bonus payments to be deferred until five years after the year for which they are awarded, and made dependent on the company’s success in the intervening period.
There is a great deal more meat in Davis’s short book. His conclusions are damning:
“The City may appear to be a thriving, world-beating sector, but it is a broken, destructive system… It handicaps British industry and unbalances the economy… Opaque and exotic financial instruments don’t spread risk; they destabilise finance and the real economy… Systems of corporate governance … are still pretty much a stitch-up between senior management and big investors… Those big intermediary professions, such as law, public affairs and accounting … make elite networks tick. They are the physical proof of what pure money can do and, accordingly, have become powerful generators of inequality in their own right.”
So where does all this leave us? I dislike ideologies, whether political, economic or religious. I agree with Samuel Butler that “there is no permanent, absolute, unchangeable truth; what we should pursue is the most convenient arrangement of our ideas.” As the quotation implies, ‘the most convenient arrangement’ is something that changes with time. And (as another Sam said), “a change is gonna come.” It needs to come soon.
The first crisis of capitalism was provoked by the Wall Street crash of 1929, harbinger of the hungry ’30s. That crisis proved the inherent instability of capitalism when left entirely to its own devices. It is a standing reproach to neo-liberals who claim that the system will always correct itself through its own mechanisms. It didn’t then, and it isn’t now.
That first crisis coincided with a time when capitalism’s rival, Soviet communism, was at the peak of both its intellectual and its practical attraction. That perhaps made it easier, as well as more urgent, for the elites of the time to accept the drastic economic and social changes of the 1930s and, particularly, the post-war years. Enlightened self-interest demanded it. Greatly increased taxation decimated personal fortunes, but stability was maintained. Memories of the 1930s, and of the two world wars, governed political thinking through to the end of the 1970s.
I do not think it is hyperbolic to say that we are now starting to experience the second crisis of capitalism. As in the 1920s, the financial edifice is unstable and overblown. Inequality is nearly as great now as it was then. However, while the instruments of policy needed to combat the crisis are more sophisticated now, other factors in the situation make the task far more difficult.
It is no coincidence that the second crisis has developed since the demise of Soviet Communism. Free market economics have had no intellectual counterpoint. The lack of a tangible, immediate alternative makes elites less convinced of the compelling need for change – in their own self interest, if for no other reason. The diffusion and the secretion of wealth around the world has made the types of tax change introduced after 1945 almost impossible to conceive today.
So what is to be done? Next week’s blog will explore some options.