Book Reviews

Capitalism 4.0

Anatole Kaletsky's Capitalism 4.0 is deft, erudite, and essential reading for those looking to better understand the global macroeconomic future ahead.

I'll say up front that I'm a Anatole Kaletsky fan. He's a founding member of GaveKal, a global investing and economic research firm. We at MarketMinder have been reading his work for years. Not because we always see eye to eye—we don't. Instead, GaveKal is one of those unique firms that provides insights worth mulling over, yet very different from typical Wall Street claptrap.

Kaletsky's new book, Capitalism 4.0, is a perfect representation of those features and more. It's both a gutsy thing, and in some sense a foolish thing, to talk in grandiose, sweeping detail about theories of economic history, and then further, to forecast the far flung future with those theories. When this kind of thing's at its best, we learn a great deal whether they're right or not (see my review of George Friedman's latest book); but when such endeavors fail, it's just crackpot theorizing. Put Kaletsky's book firmly in the former category.

Here's the basic argument: Capitalism's been through three distinct eras, and with the 2008 financial debacle, we're witnessing the birth pangs of a fourth, even better era of capitalism. It goes: 1) the Industrial Revolution and pure laissez faire capitalism, 2) FDR era heavily-regulated capitalism, 3) Reagan/Thatcher free market fundamentalism, and 4) Capitalism 4.0, which will be a hybrid of two and three.

Got it?

That is, the period ahead will be marked by even-handed governments who use free market principles as their guiding light, but also see the need for strong oversight and regulation to prevent burnouts. Also, the decades ahead will be marked by stronger government regulation on the one hand, but smaller government on the other as deficits shrink down and politicians gradually reduce entitlement programs like social security.

At times, it feels like something only a politician could argue: "We need more regulation but more freedom! Free markets but more oversight! Bigger government but less spending!" It's like George Lucas got a hold of an economics textbook and spun a tale of adventure! Somehow, despite being bitter enemies locked in intergalactic economic warfare forever, John Keynes and Milton Friedman were…gulp…brothers!

I just read the last few paragraphs back to myself and said, "Jeez. That sure sounds crazy!" And, yeah, it pretty much is. If you think about movements like the Industrial Revolution, or FDR's quasi-socialism, or Reagan/Thatcher's thundering free marketry, heck, even Marx's communism, the prevailing feature is that these aren't atmospheres of compromise and balance. They are movements. Psychological sea changes aren't milquetoast events: They tend to be polar and move with some momentum. What keeps it all (generally) balanced is democracy. On that basis, I have a hard time envisioning a world where we sometimes decide capitalism's good, and sometimes not, and that on balance we're all happy centrists. Particularly that politicians will be true philosopher kings and have the wisdom to know when those times are. But we can understand the spirit of what Kaletsky's saying: that pure form capitalism and pure form socialism are both undesirable, and the world might be poised to live in a more comfortable coexistence with government and free markets.

Kaletsky could end up right, but for the wrong reasons. So much of the world has become democratized, and so much of the world has seen its prosperity increase via capitalism in recent decades, those things are likely to persist in the period ahead, which produces a somewhat similar outcome to his views. Yes, global deficits are likely to come down, if for no other reason than they're at historic highs right now, and yes, we certainly will see some new regulation (already are). I just expect it to be messy, quarrelsome, and with folks on opposite sides instead of some newfangled Middle Way Movement, a la Buddha. What that argues for, though, is not to regard the crisis of 2008 as a turning point in the history of capitalism, but rather just a big bear market.

But what exactly is so radical about believing markets will be right more often than individuals or elites? Or, said differently, why is it that now—despite centuries of evidence to the contrary—are we supposed to take the view that regulation and oversight does any better job of preventing a 2008 than anything else?

One of the reasons Kaletsky is so fun is he can get under your skin. He says stuff like, "Marx was right." And, "2008 proves capitalism is full of internal contradictions that will ultimately fuel its demise!" And, "Free market zealots are as or more dangerous than Marxists!" And so, according to him, without the Feds in 2008 we'd all be sunk.

Thus comes the toughest part of the book to digest: Kaletsky simultaneously excoriates the US government for its performance in 2008, while arguing for more government intervention. Kaletsky even says—rightly—that the panic wasn't necessary at all, but was caused by the government itself. And it's one of the only sources I've read that understands the perversity of Fair Value Accounting (FAS 157). And, dare I say it, may actually be harder on Henry Paulson than is warranted.

But where MarketMinder has argued it was inconsistent and wrong-headed governance that caused the panic, Kaletsky says Paulson's folly was because of market fundamentalism. That is, he, like the entire Bush administration, had a preference for believing the market could sort things out for itself, and should have done much more, much sooner to stave off panic. This view gets even weirder when we listen to Mr. Kaletsky argue—compellingly—that the housing crisis in a purely economic sense wasn't nearly as big as people believe (which is true). So, if the housing bust wasn't so big, and the panic didn't need to happen…why not just zap FAS 157 and be done with it? Why is the answer more government?

The foundation for skepticism of government isn't to be critical of policymakers and then say "next time we'll do it right." It's about being skeptical of any singular or elite body being able to make a correct decision at all. Governmental entities like the Fed are necessary and evolve over time, but in specific situations we can't look to them to solve our problems—no amount of regulation will ever serve that function; there is no silver bullet for bear markets and recessions.

To see this, let's do a quick thought experiment. Let's say, as Mr. Kaletsky does, that it would be prudent for governments to step in when oil prices get too high for fear of derailing the global economy. Ok. So, what is the right price level to step in? Versus which currency? Should the price be normalized for currencies? Why? Should that level now be indexed to inflation going forward? Then what? When do you stop intervening? Who decides all this? How? And when a government does get it right, is it flexible enough to keep it right? The world changes very, very fast—government does not. Most everyone has experienced our plodding bureaucracy on some level. There's simply no way any of that works as a "best practice" for governance. Its treacherous, dangerous thinking.

All that aside, Kaletsky's economic analysis is learned and cogent and even longstanding experts will learn something from his work. His views on how inflation really works (and why it's not happening now), and about the best ways to view sovereign debt are perspectives many alarmists need right now.

A view near to my heart, Kaletsky sees capital markets and economies as adaptive, dynamic, and evolutionary, and that upheavals can actually make them stronger. Further, he argues the only budding branch of economics that has a chance of truly upending classical economics is the study of complexity theory and self-organizing systems. This is provocative stuff, and possibly right. As I said in my own book, 20/20 Money, complex systems theory could potentially develop one day into a framework that integrates both the foibles of men and the macro economic forces they are often governed by without the baseline metaphors of equilibrium, rationality, or efficiency. But we have yet to get there.

Michael Meade pioneered the therapeutic psychological idea that instead of running from conflict we should live with the tension of two opposing things and then watch the "third thing" emerge—spontaneously. That third thing is the answer we seek. Mr. Kaletsky has put socialism and capitalism in tension in hugely ambitious fashion, and found a third thing that might not be right, but is very interesting and worth our while to hear him out anyhow.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.