The West isn’t threatened by capitalism – but by the return of socialism. Niall Ferguson unedited.
I hope you might have already listened to our interview with Paul Mason – it’s engaging from beginning to end – and, equally worth your time, is today’s unedited recording of the economic historian Niall Ferguson. Professor Ferguson was speaking to Juliet Samuel as she and producer Sean Glynn put together our recent audio documentary on the health of western capitalism. Because only a fraction of what these two big beasts of the current economic debate were used in the curated product we thought you might like to hear everything they said in response to Juliet’s questions.
In case you haven’t got 27 minutes of spare time I’ve PARAPHRASED the key points below…
Approximately 2mins30secs: In recent elections we didn’t see a rejection of capitalism. The victory of Donald Trump, in particular, was the election of a capitalist to the highest office in US politics. Trump’s critique wasn’t of capitalism but of globalisation and its various manifestations – notably free trade as it has been constituted and immigration, and out-sourcing. The backlash we have seen from within certain advanced democracies has largely been against a globalisation that occurred too quickly, and without adequate checks and balances – rather than a reaction against the economic system that overcame socialism in the 1980s.
6min30secs: The huge benefits of globalisation to people in the developing world and to consumers in the developed world don’t combine to have the same political impact or impact on the public imagination as globalisation’s unhappy effects on some workers in advanced nations. I don’t sense any great desire for autarky amongst western voters – they love their cheap consumer goods – but there is a recognition that globalisation overshot and we ended up with too much of it – most obviously resulting in global contagion from the US financial crash and opposition to large migrant movements. No country has fully open borders or European countries like Britain would be experiencing mind-bending levels of inflows. We need to reset the balance between open-ness and protections that will at least allow victims of global competition to transition to something new at a more comfortable pace.
10mins: The decline of unionisation doesn’t explain falling wages at bottom end – it’s simply a reflection of declining demand for unskilled labour, especially in developed countries. Most deserving of blame are the education systems in developed countries – the US & UK in particular – where, despite more and more taxpayers’ money being spent, rates of literacy and numeracy are actually going backwards for large numbers of children. National governments are simply failing to prepare their citizens for the new economy and research by Raj Chetty, a colleague at Stanford, shows the significant contribution of bad schools and bad teachers to widening inequality in US.
13min30secs: As I argued in The Great Degeneration, the current weakness of much of the western world isn’t rooted in capitalism but in fundamental weaknesses of the State – including its structural fiscal deficits, complex and burdensome regulation, and world-trailing public services, where even some gains in public health are being reversed. State failure is not capitalism’s fault – but the fault of inadequate politicians, ineffective public administrators and and public sector unions that are too powerful.
14min40secs: This weakness of the State is why I’m sceptical of claims of a ‘great stagnation’ – as advanced by Harvard University’s Larry Summers. If policy ideas often promised by US Republicans but, it seems, never delivered – including comprehensive tax simplification, deregulation and public service reform – were actually implemented there is no obvious reason why the productivity dips of recent times couldn’t be reversed.
17mins: We’re learning precisely the wrong lessons from the crash by embracing the “silly” but easily understood argument that we need more regulation. The crash of ten years ago began in the part of the financial sector – the banks – where regulations existed “in profusion”. The crash didn’t come from the largely-unregulated hedge funs, who worried regulators before the events of 2007 and 2008. Because the regulations were so complex the banks gamed them. The regulators focused excessively on capital adequacy and by doing so they missed the consequences of the innovations that were taking place. The real explanation for the crash lies in the cosy relationship with the State that the complex regulations brought about. Banks were able to behave as recklessly as they did because they calculated (correctly in all cases but Lehmans) that they were too big for the State to let them fail. Although friends of capitalism have this more accurate explanation for the crash – of excessive closeness between regulators, politicians and the banks on Wall Street and in the City of London, the “fairy story” put about by the likes of Paul Krugman, that it was all about deregulated markets has gained credibility because it’s simple. The result is, since the crash, we’ve learnt precisely the wrong lesson and enacted enormous amounts of extra regulation – which is, at best, “besides the point” and, at worst, damaging and encouraging of moral hazard.
22mins: The big problem is not that capitalism is in crisis (because it’s not). The big problem is that socialism is making a comeback. Fed by the post-crash narrative, younger voters, who have no memory of the economic troubles of 1970s and the turnaround of the 1980s, are ready to embrace Jeremy Corbyn and his promises of jam tomorrow, jam the day after and regulations to stop anything and everything they don’t like. You only need to spend a day studying economic history, or the current economic breakdown in Venezuela to realise the danger he represents. If Tories don’t get their act together, Corbyn will be PM.