The Future of Capitalism

Paul Collier

• Publisher: Harper
• Year: 2018
• ISBN:
  9780062748669
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

Bill Gates's Five Books for Summer Reading 2019

From world-renowned economist Paul Collier, a candid diagnosis of the failures of capitalism and a pragmatic and realistic vision for how we can repair it.

Deep new rifts are tearing apart the fabric of the United States and other Western societies: thriving cities versus rural counties, the highly skilled elite versus the less educated, wealthy versus developing countries. As these divides deepen, we have lost the sense of ethical obligation to others that was crucial to the rise of post-war social democracy. So far these rifts have been answered only by the revivalist ideologies of populism and socialism, leading to the seismic upheavals of Trump, Brexit, and the return of the far-right in Germany. We have heard many critiques of capitalism but no one has laid out a realistic way to fix it, until now.

In a passionate and polemical book, celebrated economist Paul Collier outlines brilliantly original and ethical ways of healing these rifts—economic, social and cultural—with the cool head of pragmatism, rather than the fervor of ideological revivalism. He reveals how he has personally lived across these three divides, moving from working-class Sheffield to hyper-competitive Oxford, and working between Britain and Africa, and acknowledges some of the failings of his profession.

Drawing on his own solutions as well as ideas from some of the world's most distinguished social scientists, he shows us how to save capitalism from itself—and free ourselves from the intellectual baggage of the twentieth century.

Part One

Crisis

1

The New Anxieties

PASSION AND PRAGMATISM

Deep rifts are tearing apart the fabric of our societies. They are bringing new anxieties and new anger to our people, and new passions to our politics. The social bases of these anxieties are geographic, educational and moral. It is the regions rebelling against the metropolis; northern England versus London; the heartlands versus the coasts. It is the less educated rebelling against the more educated. It is the struggling workers rebelling against the ‘scroungers’ and ‘rent-seekers’. The less-educated, toiling provincial has replaced the working class as the revolutionary force in society: the sans culottes replaced by the sans cool. So, what are these people angry about?

Place has become a dimension of the new grievances; after a long period during which geographic economic inequalities narrowed, recently they have been widening rapidly. Across North America, Europe and Japan, metropolitan areas are surging ahead of the rest of the nation. Not only are they becoming much richer than the provinces, socially they are becoming detached and no longer representative of the nation of which they are often the capital.

But even within the dynamic metropolis, these extraordinary economic gains are heavily skewed. The newly successful are neither capitalists nor ordinary workers: they are the well educated with new skills. They have forged themselves into a new class, meeting at university and developing a new shared identity in which esteem comes from skill. They have even developed a distinctive morality, elevating characteristics such as minority ethnicity and sexual orientation into group identities as victims. On the basis of their distinctive concern for victim groups, they claim moral superiority over the less-well educated. Having forged themselves into a new ruling class, the well educated trust both government and each other more than ever.

While the fortunes of the educated have soared, pulling up national averages with them, the less-well educated, both in the metropolis and nationally, are now in crisis, stigmatized as the ‘white working class’. The syndrome of decline began with the loss of meaningful jobs. Globalization has shifted many semi-skilled jobs to Asia, and technological change is eliminating many others. The loss of jobs has hit two age groups particularly hard: older workers and those trying to find their first job.

Among older workers, job loss often led to family breakdown, drugs, alcohol and violence. In America, the resulting collapse in the sense of a purposeful life is manifested in falling life expectancy for whites who have not been to college; this at a time when the unprecedented pace of medical advances is delivering rapidly rising life expectancy for more favoured groups.¹ In Europe, social safety nets have muted the extremity of outcomes, but the syndrome is also widespread and in the most broken cities, such as Blackpool, life expectancy is also falling. Redundant over-fifties are drinking the dregs of despair. Yet the less-educated young have fared little better. In much of Europe, young people face mass unemployment: currently, a third of young Italians are unemployed, a scale of job shortage last seen in the Depression of the 1930s. Surveys show an unprecedented level of youthful pessimism: most young people expect to have lower living standards than their parents. Nor is this a delusion: during the past four decades, the economic performance of capitalism has deteriorated. The global financial crisis of 2008–9 made it manifest, but from the 1980s this pessimism has been slowly growing. Capitalism’s core credential of steadily rising living standards for all has been tarnished: it has continued to deliver for some, but has passed others by. In America, the emblematic heart of capitalism, half of the 1980s generation are absolutely worse off than the generation of their parents at the same age.² For them, capitalism is not working. Given the huge advances in technology and public policy that have taken place since 1980, that failure is astounding. These advances, themselves dependent on capitalism, make it entirely feasible for everyone to have become substantially better off. Yet a majority now expect their children’s lives to be worse than their own. Among the American white working class this pessimism rises to an astonishing 76 per cent.³ And Europeans are even more pessimistic than Americans.

The resentment of the less educated is tinged with fear. They recognize that the well educated are distancing themselves, socially and culturally. And they conclude that both this distancing and the emergence of more-favoured groups, perceived as creaming off benefits, weaken their own claim to help. The erosion of their confidence in the future of their social safety net is happening just as their need for it has increased.

Anxiety, anger and despair have shredded people’s political allegiances, their trust in government and even their trust in each other. The less educated were at the core of the mutinies that saw Donald Trump defeat Hillary Clinton in the USA; Brexit defeat Remain in the UK; the insurgent parties of Marine Le Pen and Jean-Luc Mélenchon gain over 40 per cent of the vote in France (shrivelling the incumbent Socialists to under 10 per cent); and in Germany so shrinking the Christian Democrat–Social Democrat coalition to turn the far right AfD (Alternative for Germany) into the official opposition in the Bundestag. The education divide was compounded by the geographic divide. London voted heavily for Remain; New York voted heavily for Clinton; Paris eschewed Le Pen and Mélenchon; and Frankfurt eschewed the AfD. The radical opposition came from the provinces. The mutinies were age-related, but they were not as simple as old-versus-young. Both older workers, who had been marginalized as their skills lost value, and young people, entering a bleak job market, turned to the extremes. In France, youth voted disproportionately for the new-look far right; in Britain and the USA, they voted disproportionately for the new-look far left.

Nature abhors a vacuum, and so do voters. The frustration born of this gulf between what has happened and what is feasible has provided the pulse of energy for two species of politician that were waiting in the wings: populists and ideologues. The last time capitalism derailed, in the 1930s, the same thing happened. The emerging dangers were crystallized by Aldous Huxley in Brave New World (1932) and George Orwell in Nineteen Eighty-Four (1949). The end of the Cold War in 1989 appeared to usher in a credible prospect that all such disasters were behind us: we had arrived at ‘the end of history’, a permanent utopia. Instead, we are facing the all-too-credible prospect of our very own dystopia.

The new anxieties have promptly been answered by the old ideologies, returning us to the stale and abusive confrontation of left and right. An ideology offers the seductive combination of easy moral certainties and an all-purpose analysis, providing a confident reply to any problem. The revived ideologies of nineteenth-century Marxism, twentieth-century fascism and seventeenth-century religious fundamentalism have all already lured societies into tragedy. Because the ideologies failed, they lost most of their adherents, and so few ideologue politicians were available to lead this revival. Those that were belonged to tiny residue organizations: people with a taste for the paranoid psychology of the cult, and too blinkered to face the reality of past failure. In the decade preceding the collapse of communism in 1989, the remaining Marxists thought they were living in ‘late capitalism’. The public memory of that collapse has now receded sufficiently to support a revival: there is a new flood of books on the same theme.⁴

Rivalling the ideologues in seductive power is the other species of politician, the charismatic populist. Populists eschew even the rudimentary analysis of an ideology, leaping directly to solutions that ring true for two minutes. Hence, their strategy is to distract voters from deeper thought through a kaleidoscope of entertainment. The leaders with these skills are drawn from another tiny pool: the media celebrities.

While both ideologues and populists thrive on the anxieties and anger generated by the new rifts, they are incapable of addressing them. These rifts are not repeats of the past; they are complex new phenomena. But in the process of implementing their passionate snake-oil ‘cures’, such politicians are capable of doing enormous damage. There are viable remedies to the damaging processes underway in our societies, but they derive neither from the moral passion of an ideology nor the casual leap of populism. They are built upon analysis and evidence, and so require the cool head of pragmatism. All the policies proposed in this book are pragmatic.

Yet there is a place for passion, and it suffuses the book. My own life has straddled each of the three grim rifts that have opened in our societies. While I have maintained a cool head, they have seared my heart.

I have lived the new geographic divide between booming metropolis and broken provincial cities. My hometown of Sheffield became the emblematic broken city, the collapse of the steel industry immortalized in The Full Monty. I lived this tragedy: our neighbour became unemployed; a relative found a job cleaning toilets. Meanwhile, I had moved to Oxford, which became the location of choice for metropolitan success: my postcode now has the highest ratio of house prices to income in the entire country.

I have lived the divide in skill and morale between families of hyper-success and families disintegrating into poverty. Aged fourteen, my cousin and I were in tandem: born on the same day, the children of uneducated parents who had won places in grammar schools. Her life was derailed by the early death of her father; shorn of that authority figure, she became a teenage mother, with its attendant failings and humiliations. Meanwhile, my life progressed through the stepping-stones of transformation, from school to a scholarship at Oxford.^* From there, more steps led to chairs at Oxford, Harvard and Paris; lest this should not be enough for my self-esteem, a Labour government awarded me a CBE, a Conservative government a knighthood, and my colleagues in the British Academy awarded me its Presidential Medal. Once started, divergence has its own dynamic. By seventeen, the daughters of my cousin were themselves teenage mothers. My seventeen-year-old has a scholarship at one of the finest schools in the country.

Finally, I have lived the global divide between the rampaging prosperity of the USA, Britain and France, in each of which I have lived in comfort, and the despairing poverty of Africa, where I work. My students, mostly African, face this stark contrast in making their life choices after graduation. Currently, a Sudanese student, a doctor who has been working in Britain, is facing the choice of whether to stay in Britain or return to Sudan to work in the office of the prime minister. He has decided to go back: he is exceptional, there are more Sudanese doctors in London than in the Sudan.

These three appalling cleavages are not just problems that I study: they are the tragedies that have come to define my sense of purpose in life. This is why I have written this book: I want to change this situation.

THE TRIUMPH AND CORROSION OF SOCIAL DEMOCRACY

Sheffield is an unfashionable city, but that only strengthens its people’s bonds, and those bonds were once a powerful political force. The cities of northern England pioneered the industrial revolution, and their people were the first to face the new anxieties that it brought. Through recognizing that they had a common attachment to the place where they grew up, communities such as Sheffield’s built co-operative organizations that addressed these anxieties. By putting affinity to use, they built organizations that reaped the benefits of reciprocity. Co-operative building societies enabled people to save for a home; another Yorkshire town, Halifax, gave birth to what became the largest bank in Britain. Co-operative insurance societies enabled people to reduce risks. Co-operative agribusiness and retailing gave farmers and consumers bargaining power against big business. From its crucible in northern England, the co-operative movement rapidly spread across much of Europe.

By banding together, these co-operatives became the foundation of the political parties of the centre-left: the parties of social democracy. The benefits of reciprocity within a community were scaled up as the community became the nation. Like the co-operatives, the new policy agenda was practical, rooted in the anxieties that beset the lives of ordinary families. In the post-war era, across Europe many of these social democrat parties came to power and used it to implement a range of pragmatic policies that effectively addressed these anxieties. Health care, pensions, education, unemployment insurance cascaded from legislation into changed lives. These policies proved to be so valuable that they became accepted across the central range of the political spectrum. Political parties of the centre-left and centre-right alternated in power, but the policies remained in place.

Yet, social democracy as a political force is now in existential crisis. The last decade has been a roll-call of disasters. On the centre-left, mauled by Bernie Sanders, Hillary Clinton lost against Donald Trump; the Blair–Brown British Labour Party has been taken over by the Marxists. In France, President Hollande decided not even to seek a second term, and his replacement as the Socialist Party candidate, Benoît Hamon, crashed out with merely 8 per cent of the vote. The Social Democrat parties of Germany, Italy, the Netherlands, Norway and Spain have all seen their vote collapse. This would normally have been good news for the politicians of the centre-right, yet in Britain and America they too have lost control of their parties, while in Germany and France their electoral support has collapsed. Why has this happened?

The reason is because the social democrats of the left and right each drifted away from their origins in the practical reciprocity of communities, and became captured by an entirely different group of people who became disproportionately influential: middle-class intellectuals.

The intellectuals of the left were attracted by the ideas of a nineteenth-century philosopher, Jeremy Bentham. His philosophy, Utilitarianism, detached morality from our instinctive values, deducing it from a single principle of reason: an action should be judged as moral according to whether it promoted ‘the greatest happiness of the greatest number’. Because people’s instinctive values fell short of this saintly standard, society would need a vanguard of morally sound technocrats who would run the state. This vanguard, the paternalistic guardians of society, were an updated version of the Guardians of Plato’s Republic. John Stuart Mill, brought up as Bentham’s disciple – and the other intellectual who built Utilitarianism – was reading The Republic in the original Greek by the age of eight.

Unfortunately, Bentham and Mill were not latter-day moral giants, equivalent to Moses, Jesus and Muhammad; they were weirdly asocial individuals. Bentham was so bizarre that he is now thought to have been autistic, and incapable of having a sense of community. Mill stood little chance of normality: deliberately kept away from other children, he was probably more familiar with ancient Greece that with his own society. Given such origins, it is unsurprising that the ethics of their followers are highly divergent from the rest of us.⁵

The weird values of Bentham would not have had any impact had they not been incorporated into economics. As we will see, economics developed an account of human behaviour as far from Utilitarian morality as it is possible to get. Economic man is utterly selfish and infinitely greedy, caring about nobody but himself. He became the bedrock of the economic theory of human behaviour. But for the purpose of evaluating public policy, economics needed a measure for aggregating the well-being, or ‘utility’, of each of these psychopathic individuals. Utilitarianism became the intellectual underpinning for this arithmetic: ‘the greatest happiness of the greatest number’ fortuitously lent itself to standard mathematical techniques of maximization. ‘Utility’ was assumed to result from consumption, with extra consumption generating ever smaller increments to utility. Were the total amount of consumption in society fixed, the maximization of utility would be a simple matter of redistributing income so that consumption was perfectly equal. Social-democrat economists recognized that the consumption ‘pie’ was not a fixed size and, since taxation would discourage work, the pie would shrink. Advanced theories of ‘optimal taxation’, and ‘the principal–agent problem’ were developed to address the incentive problem. In essence, social-democratic public policies became increasingly sophisticated ways of using taxation to redistribute consumption while minimizing disincentives to work.

It was soon proved that there was no mechanical way of moving from individual ‘utilities’ to statements about the well-being of society that met even basic rules of intellectual coherence. The profession nodded, yet carried on doing it. Most academic philosophers abandoned Utilitarianism as being riddled with inadequacies: economists looked the other way. Utilitarianism was turning out to be amazingly convenient. In fairness, for many questions of public policy it is indeed good enough; whether the deficiencies are devastating depends on the policy. For modest questions, such as ‘should a road be built here?’ it is sometimes the best technique available. But for many larger issues it is hopelessly inappropriate.

Armed with its Utilitarian calculus, economics rapidly infiltrated public policy. Plato...