Past masters and the future of capitalism

The following review by me appeared in the latest Fund Strategy (16 March).

The debate about the future of capitalism is welcome in many respects. It raises the possibility of developing a deeper understanding of how the real economy works. This in turn would make it easier to find solutions to the present crisis.

It would certainly be welcome if people became familiar with great economic thinkers of the past such as Adam Smith, Karl Marx and John Maynard Keynes. Despite their lack of elaborate mathematical models they had a better understanding of economic fundamentals than any living economist.

Hopefully people would read what these men actually said rather than rely on secondhand accounts. For example, the portrayal of Adam Smith as an 18th century Thatcherite is a historical travesty. Nor was he, as others argue, a precursor to New Labour’s economic world view. It is equally wrong to present Marx as a believer in an inevitable socialist victory over capitalism. This is just one of several areas where he did not argue what is widely supposed.

However, reading economic greats would only be a first step in getting to grips with contemporary capitalism. Ideas cannot be taken in a ready-made form from any previous thinkers. Capitalism has moved on in important respects since the early 20th century, when Keynes was writing, let alone earlier. Ideas from dead economists are useful but they have to be adapted to the conditions of the present day.

There are important ways in which contemporary capitalism differs from earlier variants, including:

– The massive growth of the financial sector. Although it would be wrong to see this as driving the economy, it is more substantial in size than in previous incarnations of capitalism.

– The relative decline in importance of industrial production in the West.

– The rise of substantial emerging economies in Asia.

– The powerful current of risk aversion that envelops contemporary societies and particularly the West.

– The pervasiveness of green ideas about the importance of limiting the rise in economic output and consumption.

It is not possible to talk meaningfully about the future of capitalism before properly getting to grips with its present.