11th October 2011
The constant shocks to the world's financial system prompt the question – Is the system doomed?
As Will Hutton writes in the Guardian, Britain is in the gravest economic position in modern times.
He says: "It will be a full five years before output recovers to the peak levels of 2008. But today there is no empire on which to build a system of imperial preference, as in the 1930s; no North Sea oil as in the early 1980s; no booming City and readily available credit as in the 1990s and 2000s to drive a consumption-led recovery….
"What is left of our economy is gravely underperforming in structural terms. Business investment has been modest for years; productivity remains weak; rates of innovation are at best moderate…Many parts of the country are dependent on the public sector and welfare transfer payments for their survival. In short, the brand of capitalism we have practised for the last 30 years has failed."
Rethinking the system
It appears it's time to rethink the system. Rohit Talwar is CEO of Fast Future Research a global research and consulting company that helps governments and global companies to explore and respond to the ideas, trends and forces shaping the next 5-20 years. He believes we are seeing "a number of fault lines" in the current system.
He says: "It is beginning to look unsustainable – whether that be the accumulation of state, corporate or individual debt, major anomalies in taxation systems, the rising disparity between rich and poor or the increasing proportion of wealth that is accruing to the richest in society. The model as it stands today just isn't working efficiently or providing a stable platform for economic and social development.
"Effectively the market operates under an extreme model of capitalism with few real restraints – until something goes wrong – when the states individually and collectively step in and apply a more socialist model to fund the bail outs."
He adds: "Concerns over future possible shocks are paralysing corporate and individual spending and citizens in major economies such as the USA and Germany are seeing their incomes decline in real terms. The current protests on the streets of the USA suggest that there is a growing proportion of society who support capitalism – but think it needs to be reworked.
"There will be growing calls to rethink the system and come up with capitalism 2.0. This will not be an overnight fix – it will take 10-20 years or more to define, test and roll out a new model globally. I also don't believe we'll have a single model globally – we don't today."
Chandran Nair, Founder of Hong-Kong based think tank Global Institute For Tomorrow (GIFT), told the BBC that capitalism has essentially hit a wall.
He says: "The extreme form of capitalism which has permeated the world, particularly in the last 30-40 years, is in deep trouble and we are in denial.
"It is important to understand that fundamental principles of capitalism – that human beings are rational and markets behave rationally, and that markets will assign prices – are flawed…
"When I speak about this in Europe, they say there has been 30 years of over-leverage, but I say they should multiply that by 10 and look at 300 years of essentially exploited growth. What we need to recognise now is that the world is a very different place from what it was 100 years ago when we had one billion people…
"That game is over and we need a fundamental restructuring – essentially about how people will live, and we need to move beyond simple notions about growth to more sophisticated, nuanced discussions about human progress."
leoRoverman comments on the piece: "Capitalism has not failed anymore than communism failed because the concept was bad – they failed and are failing because of the human dimension. All plans work well until the human gets hold of them, add a dash of Murphy's Law [the concept that if it can go wrong it will] on the basis that one expert is cleverer than another and you have the perfect mix."
So what other ideologies could shed light on the crisis?
Talwar says: "There's a lot of very interesting research going on into complex systems in the biological, physical and mathematical worlds that could provide much deeper insights into how financial systems work than our current rather limited economic models.
"In defining a new economic system we will need to take into account a wide variety of factors including the goals of the economy, social aspirations, the purpose of work, and the role of money in a digital world. We will also need to draw on a much deeper understanding of human behaviour and motivations.
"It will take real courage to undertake a root and branch rethink – but not as much as to do nothing and run the risk of a total and painful system collapse – which is looking like an increasingly plausible scenario."
What about science?
On the benefits of the way physicists look at the work, theoretical physicist Lisa Randall tells wired.co.uk: "One example is the recent financial crisis was when bankers and economists were evaluating risk. They allowed for some variation in how the economy would grow, and maybe they even thought it could go down a little bit. But they didn't account for the possibility that it could go down by as much as it did. Now I would say it was clear that the previous d
ecade was a bit anomalous. So you might want to allow for this variation, account for your uncertainties and then evaluate your risk within that context."
Economist John Kay speaks of the ‘physics envy' that many economists suffer: "The absurdities of rational expectations come from the physics envy of many economists, who mistake occasional insights for universal truths. Economic models are illustrations and metaphors, and cannot be comprehensive descriptions even of the part of the world they describe…
"The strong version of the efficient market hypothesis is popular because the world it describes is free of extraneous social, political and cultural influences. Yet if reality were shaped by beliefs about the world, not only would we need to investigate how beliefs are formed and influenced – something economists do not want to do – but models and predictions would be contingent on these beliefs.
"Of course, models and predictions are so contingent, and an understanding of how beliefs form is indispensable. Economics is not so much the queen of the social sciences but the servant, and needs to base itself on anthropology, psychology – and the sociology of ideologies. The future of investing – and economics – lies in that more eclectic vision."
There is little doubt we are on the road to dramatic economic change – but what form will it take?
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