Julius Caesar
Caesar, Julius - (Caius Julius Caesar), 100? b.c.–44 b.c., Roman statesman and general.
Rise to Power
Although he was born into the Julian gens, one of the oldest patrician families in Rome, Caesar was always a member of the democratic or popular party. He benefited from the patronage of his uncle by marriage, Caius Marius. In 82 b.c., when Caesar refused to obey Sulla's order to divorce Read More...
Caesar, Julius - (Caius Julius Caesar), 100? b.c.–44 b.c., Roman statesman and general.
Rise to Power
Although he was born into the Julian gens, one of the oldest patrician families in Rome, Caesar was always a member of the democratic or popular party. He benefited from the patronage of his uncle by marriage, Caius Marius. In 82 b.c., when Caesar refused to obey Sulla's order to divorce Cornelia, the wealthy daughter of Lucius Cornelius Cinna, he was proscribed and subsequently fled from Rome (81 b.c.).
On Sulla's death, Caesar returned (78 b.c.) and began his political career. He quickly gained popularity with his party and a reputation for oratory. In 74 b.c. he went into Asia to repulse a Cappadocian army. Upon his return, he agitated for reform of the government on popular lines and helped to advance the position of Pompey, the virtual head of the popular party. Caesar was made military tribune before 70 b.c. and was quaestor in Farther Spain in 69 b.c.; he helped Pompey to obtain the supreme command for the war in the East. He returned to Rome in 68 b.c., and in Pompey's absence was becoming the recognized head of the popular party. His praise of Marius and Cinna made him popular with the people, but earned him the hatred of the senate.
In 63 b.c. he was elected pontifex maximus [high priest], allegedly by heavy bribes. His later reform of the calendar with the help of Sosigenes, was one of his greatest contributions to history. In Dec., 63 b.c., Caesar advocated mercy for Catiline and the conspirators, thereby increasing the enmity of the senatorial party and its leaders, Cato the Younger and Quintus Lutatius Catulus (see Catulus, family). In 62 b.c., Clodius and Caesar's second wife, Pompeia, were involved in a scandal concerning the violation of the secret rites of Bona Dea, and Caesar obtained a divorce, saying, "Caesar's wife must be above suspicion."
The First Triumvirate
Having served in Farther Spain as proconsul in 61 b.c., he returned to Rome in 60 b.c., ambitious for the consulate. Against senatorial opposition he achieved a brilliant stroke—he organized a coalition, known as the First Triumvirate, made up of Pompey, commander in chief of the army; Marcus Licinius Crassus, the wealthiest man in Rome (see Crassus, family); and Caesar himself. Pompey and Crassus were jealous of each other, but Caesar by force of personality kept the arrangement going.
In 59 b.c. he married Calpurnia. In the same year, as consul, he secured the passage of an agrarian law providing Campanian lands for 20,000 poor citizens and veterans, in spite of the opposition of his senatorial colleague, Marcus Calpurnius Bibulus. Caesar also won the support of the wealthy equites by getting a reduction for them in their tax contracts in Asia. This made him the guiding power in a coalition between people and plutocrats.
He was assigned the rule of Cisalpine and Transalpine Gaul and Illyricum with four legions for five years (58 b.c.–54 b.c.). The differences between Pompey and Crassus grew, and Caesar again moved (56 b.c.) to patch up matters, arriving at an agreement that both Pompey and Crassus should be consuls in 55 b.c. and that their proconsular provinces should be Spain and Syria, respectively. From this arrangement he drew an extension of his command in Gaul to 49 b.c. In the years 58 b.c. to 49 b.c. he firmly established his reputation in the Gallic Wars.
In 55 b.c., Caesar made explorations into Britain, and in 54 b.c. he defeated the Britons, led by Cassivellaunus. Caesar met his most serious opposition in Gaul from Vercingetorix, whom he defeated in Alesia in 52 b.c. By the end of the wars Caesar had reduced all Gaul to Roman control. These campaigns proved him one of the greatest commanders of all time. In them he revealed his consummate military genius, characterized by quick, sure judgment and indomitable energy. The campaigns also developed the personal devotion of the legions to Caesar. His personal interest in the men (he is reputed to have known them all by name) and his willingness to undergo every hardship made him the idol of the army—a significant element in his later career.
In 54 b.c. occurred the death of Caesar's daughter Julia, Pompey's wife since 59 b.c. She had been the principal personal tie between the two men. During the years Caesar was in Gaul, Pompey had been gradually leaning more and more toward the senatorial party. The tribunate of Clodius (58 b.c.) had aggravated conditions in Rome, and Caesar's military successes had aroused Pompey's jealousy. Crassus' death (53 b.c.) in Parthia ended the First Triumvirate and set Pompey and Caesar against each other.
Civil War
After the First Triumvirate ended, the senate supported Pompey, who became sole consul in 52 b.c. Meanwhile, Caesar had become a military hero as well as a champion of the people. The senate feared him and wanted him to give up his army, knowing that he hoped to be consul when his term in Gaul expired. In Dec., 50 b.c., Caesar wrote the senate that he would give up his army if Pompey would give up his. The senate heard the letter with fury and demanded that Caesar disband his army at once or be declared an enemy of the people—an illegal bill, for Caesar was entitled to keep his army until his term was up.
Two tribunes faithful to Caesar, Marc Antony and Quintus Cassius Longinus (see under Cassius) vetoed the bill and were quickly expelled from the senate. They fled to Caesar, who assembled his army and asked for the support of the soldiers against the senate. The army called for action, and on Jan. 19, 49 b.c., Caesar with the words "Iacta alea est" [the die is cast] crossed the Rubicon, the stream bounding his province, to enter Italy. Civil war had begun.
Caesar's march to Rome was a triumphal progress. The senate fled to Capua. Caesar proceeded to Brundisium, where he besieged Pompey until Pompey fled (Mar., 49 b.c.) with his fleet to Greece. Caesar set out at once for Spain, which Pompey's legates were holding, and pacified that province. Returning to Rome, Caesar held the dictatorship for 11 days in early December, long enough to get himself elected consul, and then set out for Greece in pursuit of Pompey.
Caesar collected at Brundisium a small army and fleet—so small, in fact, that Bibulus, waiting with a much larger fleet to prevent his crossing to Epirus, did not yet bother to watch him—and slipped across the strait. He met Pompey at Dyrrhachium but was forced to fall back and begin a long retreat southward, with Pompey in pursuit. Near Pharsalus, Caesar camped in a very strategic location. Pompey, who had a far larger army, attacked Caesar but was routed (48 b.c.) and fled to Egypt, where he was killed.
Caesar, having pursued Pompey to Egypt, remained there for some time, living with Cleopatra, taking her part against her brother and husband Ptolemy XII, and establishing her firmly on the throne. From Egypt he went to Syria and Pontus, where he defeated (47 b.c.) Pharnaces II with such ease that he reported his victory in the words "Veni, vidi, vici" [I came, I saw, I conquered]. In the same year he personally put down a mutiny of his army and then set out for Africa, where the followers of Pompey had fled, to end their opposition led by Cato.
Dictatorship and Death
On his return to Rome, where he was now tribune of the people and dictator, he had four great triumphs and pardoned all his enemies. He set about reforming the living conditions of the people by passing agrarian laws and by improving housing accommodations. He also drew up the elaborate plans (which Augustus later used) for consolidating the empire and establishing it securely. In the winter of 46 b.c.–45 b.c. he was in Spain putting down the last of the senatorial party under Gaeus Pompeius, the son of Pompey. He returned to Rome in Sept., 45 b.c., and was elected to his fifth consulship in 44 b.c. In the same year he became dictator for life and set about planning a campaign against Parthia, the only real menace to Rome's borders.
His dictatorial powers had, however, aroused great resentment, and he was bitterly criticized by his enemies, who accused him of all manner of vices. When a conspiracy was formed against him, however, it was made up of his friends and protégés, among them Cimber, Casca, Cassius, and Marcus Junius Brutus. On Mar. 15 (the Ides of March), 44 b.c., he was stabbed to death in the senate house. His will left everything to his 18-year-old grandnephew Octavian (later Augustus).
Legacy
Caesar has always been one of the most controversial characters of history. His admirers have seen in him the defender of the rights of the people against an oligarchy. His detractors have seen him as an ambitious demagogue, who forced his way to dictatorial power and destroyed the republic. That he was gifted and versatile there can be little doubt. He excelled in war, in statesmanship, and in oratory.
His literary works are highly esteemed. Of Caesar's literary works, his commentaries on the Gallic Wars (seven books) and on the civil war (three books) survive. They are masterpieces of clear, beautiful, concise Latin, and they are classic military documents. Caesar wrote poetry, but the only surviving piece is a poem on Terence.
Bibliography
A literary classic on Caesar is Shakespeare's tragedy, Julius Caesar. See biographies by M. Gelzer (tr. 1968, repr. 1985), S. Weinstock (1971), and C. Meier (1996).
The Columbia Encyclopedia, Sixth Edition Copyright© 2004, Columbia University Press. Licensed from Lernout & Hauspie Speech Products N.V. All rights reserved.
Sunday, March 15, 2009
Wednesday, March 11, 2009
Now is the time for a less selfish capitalism
March 11, 2009 11:16pm 1 comment
By Richard Layard
What is progress? The Organisation for Economic Co-operation and Development has been asking this question for some time and the current crisis makes it imperative to find an answer. According to the Anglo-Saxon Enlightenment, progress means the reduction of misery and the increase of happiness. It does not mean wealth creation or innovation, which are sometimes useful instruments but never the final goal. So we should stop the worship of money and create a more humane society where the quality of human experience is the criterion. Provided we pay ourselves in line with our productivity, we can choose whatever lifestyle is best for our quality of life.
And what would that involve? The starting point is that, despite massive wealth creation, happiness has not risen since the 1950s in the US or Britain or (over a shorter period) in western Germany. No researcher questions these facts. So accelerated economic growth is not a goal for which we should make large sacrifices. In particular, we should not sacrifice the most important source of happiness, which is the quality of human relationships – at home, at work and in the community. We have sacrificed too many of these in the name of efficiency and productivity growth.
Most of all we have sacrificed our values. In the 1960s, 60 per cent of adults said they believed “most people can be trusted”. Today the figure is 30 per cent, in both Britain and the US. The fall in trustworthy behaviour is clear in the banking sector but can also be seen in family life (more break-ups), in the playground (fewer friends you can trust) and in the workplace (growing competition between colleagues).
Increasingly, we treat private interest as the only motivation on which we can rely and competition between individuals as the way to get the most out of them. This is often counterproductive and does not generally produce a happy workplace since competition for status is a zero-sum game. Instead, we need a society based on positive-sum activities. Humans are a mix of selfishness and altruism but generally feel better working to help each other rather than to do each other down.
Our society has become too individualistic, with too much rivalry and not enough common purpose. We idolise success and status and thus undermine our mutual respect. But countries vary in this regard, and the Scandinavians have managed to combine effective economies with much greater equality and mutual respect. They have the greatest levels of trust (and happiness) of any countries in the world.
To build a society based on trust we have to start in school, if not earlier. Children should learn that the noblest life is the one that produces the least misery and the most happiness in the world. This rule should apply also in business and professional life. People should do work that is useful to society and does not just make paper profits. And all professions – including journalism, advertising and business – should have a clear, professional, ethical code that its members are required to observe. It is not for nothing that doctors form the group most respected in our society – they have a code that is enforced and everyone knows it.
So we need a trend away from excessive individualism and towards greater social responsibility. Is it possible to reverse a cultural trend in this way? It has happened before, in the early 19th century. For the next 150 years there was a growth of social responsibility, followed by a decline in the next 50. So a trend can change and it is often in bad times (such as the 1930s in Scandinavia) that people decide to seek a more co-operative lifestyle.
I have written a book about how to do this and there is room here for three points only. First we should use our schools to promote a better value system – the recent Good Childhood report sponsored by the UK Children’s Society was full of ideas about how to do this. Second, adults should reappraise their priorities about what is important. Recent events are likely to encourage this and modern happiness research can help find answers. Third, economists should adopt a more realistic model of what makes humans happy and what makes markets function.
Three ideas taught in business schools have much to answer for. One is the theory of “efficient capital markets”, now clearly discredited. The second is “principal agent” theory, which says the agents will perform best under high-powered financial incentives to align their interests with those of the principal. This has led to excessive performance-related pay, which has often undermined the motive to work well for the sake of doing a good job and introduced unnecessary tension among colleagues. Finally, there is the macho philosophy of “continuous change”, promoted by self-interested consulting companies, which disregards the fundamental human need for stability – in the name of efficiency gains that are often not realised.
We do not want communism – as research shows, the communist countries were the least happy in the world and also inefficient. But we do need a more humane brand of capitalism, based not only on better regulation but on better values.
Values matter and they are affected by our theories. We do not need a society based on Darwinian competition between individuals. Beyond subsistence, the best experience any society can provide is the feeling that other people are on your side. That is the kind of capitalism we want.
Lord Layard is at the London School of Economics Centre for Economic Performance. He has written ‘Happiness’ (2005) and co-authored ‘A Good Childhood’ (2009)
March 11, 2009 11:16pm 1 comment
By Richard Layard
What is progress? The Organisation for Economic Co-operation and Development has been asking this question for some time and the current crisis makes it imperative to find an answer. According to the Anglo-Saxon Enlightenment, progress means the reduction of misery and the increase of happiness. It does not mean wealth creation or innovation, which are sometimes useful instruments but never the final goal. So we should stop the worship of money and create a more humane society where the quality of human experience is the criterion. Provided we pay ourselves in line with our productivity, we can choose whatever lifestyle is best for our quality of life.
And what would that involve? The starting point is that, despite massive wealth creation, happiness has not risen since the 1950s in the US or Britain or (over a shorter period) in western Germany. No researcher questions these facts. So accelerated economic growth is not a goal for which we should make large sacrifices. In particular, we should not sacrifice the most important source of happiness, which is the quality of human relationships – at home, at work and in the community. We have sacrificed too many of these in the name of efficiency and productivity growth.
Most of all we have sacrificed our values. In the 1960s, 60 per cent of adults said they believed “most people can be trusted”. Today the figure is 30 per cent, in both Britain and the US. The fall in trustworthy behaviour is clear in the banking sector but can also be seen in family life (more break-ups), in the playground (fewer friends you can trust) and in the workplace (growing competition between colleagues).
Increasingly, we treat private interest as the only motivation on which we can rely and competition between individuals as the way to get the most out of them. This is often counterproductive and does not generally produce a happy workplace since competition for status is a zero-sum game. Instead, we need a society based on positive-sum activities. Humans are a mix of selfishness and altruism but generally feel better working to help each other rather than to do each other down.
Our society has become too individualistic, with too much rivalry and not enough common purpose. We idolise success and status and thus undermine our mutual respect. But countries vary in this regard, and the Scandinavians have managed to combine effective economies with much greater equality and mutual respect. They have the greatest levels of trust (and happiness) of any countries in the world.
To build a society based on trust we have to start in school, if not earlier. Children should learn that the noblest life is the one that produces the least misery and the most happiness in the world. This rule should apply also in business and professional life. People should do work that is useful to society and does not just make paper profits. And all professions – including journalism, advertising and business – should have a clear, professional, ethical code that its members are required to observe. It is not for nothing that doctors form the group most respected in our society – they have a code that is enforced and everyone knows it.
So we need a trend away from excessive individualism and towards greater social responsibility. Is it possible to reverse a cultural trend in this way? It has happened before, in the early 19th century. For the next 150 years there was a growth of social responsibility, followed by a decline in the next 50. So a trend can change and it is often in bad times (such as the 1930s in Scandinavia) that people decide to seek a more co-operative lifestyle.
I have written a book about how to do this and there is room here for three points only. First we should use our schools to promote a better value system – the recent Good Childhood report sponsored by the UK Children’s Society was full of ideas about how to do this. Second, adults should reappraise their priorities about what is important. Recent events are likely to encourage this and modern happiness research can help find answers. Third, economists should adopt a more realistic model of what makes humans happy and what makes markets function.
Three ideas taught in business schools have much to answer for. One is the theory of “efficient capital markets”, now clearly discredited. The second is “principal agent” theory, which says the agents will perform best under high-powered financial incentives to align their interests with those of the principal. This has led to excessive performance-related pay, which has often undermined the motive to work well for the sake of doing a good job and introduced unnecessary tension among colleagues. Finally, there is the macho philosophy of “continuous change”, promoted by self-interested consulting companies, which disregards the fundamental human need for stability – in the name of efficiency gains that are often not realised.
We do not want communism – as research shows, the communist countries were the least happy in the world and also inefficient. But we do need a more humane brand of capitalism, based not only on better regulation but on better values.
Values matter and they are affected by our theories. We do not need a society based on Darwinian competition between individuals. Beyond subsistence, the best experience any society can provide is the feeling that other people are on your side. That is the kind of capitalism we want.
Lord Layard is at the London School of Economics Centre for Economic Performance. He has written ‘Happiness’ (2005) and co-authored ‘A Good Childhood’ (2009)
The consequence of bad economics
The consequence of bad economics
March 10, 2009 12:51pm Comment
FT editorial
As a shell-shocked world tries to fathom how its economic collapse happened, commentators are busily outbidding each other with claims about the exceptional nature of this crisis. But the most astounding fact is how familiar its physiognomy and physiology look compared to past financial crashes.
No one can read the chronicles of those earlier crashes without sensing – with a chill – that history is repeating itself. The story of the modern capitalist economy is a rhythmic repetition of cycles, syncopated by eerily similar crises. These crises, while their details differ, are but variations on the same theme. Easy money, geared up by leverage, floods the financial system through innovative products. This simultaneously pumps up asset prices and obscures their speculative nature, with euphoria usurping the place of analysis. Until, one day, something triggers a loss of confidence in the continued rise of prices, and the whole leveraged edifice crumbles.
Today’s collapse has followed the same pattern – as outlined on Tuesday in the FT’s series on the future of capitalism. Easy money came from global macroeconomic imbalances that generated enormous capital inflows into deficit countries. Those flows helped drive interest rates down and increase access to credit, fuelling a leveraged asset bubble. Many leaders in the affected countries – in particular the US – knew this: Alan Greenspan himself spoke of “irrational exuberance”. And yet they did not understand how they had to act to prevent a replay of the past.
Today’s disastrous outcome is testimony to those leaders’ intellectual failure. Most fundamentally to blame is their unwillingness to see (or their wilful ignorance of) what markets need in order to produce good outcomes for society.
Every first-year economics student learns the conditions for an unregulated market, in theory, to function efficiently. The most important are full information, enforceable property rights and contracts, and the absence of “externalities” – effects of economic transactions on third parties. These conditions are never fulfilled, but many markets come close enough that participants’ self-interested actions achieve good outcomes for all.
When these conditions are absent, markets malfunction; the way they do so is one of the great topics of economic theory. It tells those who care to listen that when a market is too opaque, or when the effects of market transactions are too inter-dependent, the pursuit of self-interest can make everyone worse off, or unfairly land some with the losses caused by others, or – in extremis – make markets disappear altogether. Nowhere are these problems greater than in financial markets.
Finance expands our economic possibilities by enabling us to shift funds between the present and the future, and between different outcomes of risky ventures. For that reason, confidence in future values is everything for a financial product: if confidence is lost, the market collapses. But in a non-transparent financial sector, unwarranted valuations will often occur, which, when they fail, can destroy confidence throughout the financial system. And the more implicated the economy is in the financial sector, the wider are the repercussions of such dysfunctions – to the point where financial failures can threaten the economic system as a whole.
Economic policymakers could have limited these dangers, but they did not do so. Instead, they allowed the bubble to inflate and let financial transactions become increasingly opaque and ever more leveraged. As in previous bubbles, value came to rely on the perception of value itself: growth pulling itself up by its own leveraged bootstraps. Many assets were not even priced through market trading but valued by complex formulas – akin to peddling tulips with equations.
People were not unaware of the risks, but both regulation and private risk management were based on the faulty premise that if each entity looks after its own risk, no one needs to worry about systemic risk. The great mistake was to rely merely on self-interest in as imperfect and as important a market as the financial sector. The huge profits bankers reaped reinforced their collective blindness to the illusory value of the assets they traded.
Those who sound the death knell of market capitalism are therefore mistaken. This was not a failure of markets; it was a failure to create proper markets. What is to blame is a certain mindset, embodied not least by Mr Greenspan. It ignored a capitalist economy’s inherent instabilities – and therefore relieved policymakers who could manage those instabilities of their responsibility to do so. This is not the bankruptcy of a social system, but the intellectual and moral failure of those who were in charge of it: a failure for which there is no excuse.
March 10, 2009 12:51pm Comment
FT editorial
As a shell-shocked world tries to fathom how its economic collapse happened, commentators are busily outbidding each other with claims about the exceptional nature of this crisis. But the most astounding fact is how familiar its physiognomy and physiology look compared to past financial crashes.
No one can read the chronicles of those earlier crashes without sensing – with a chill – that history is repeating itself. The story of the modern capitalist economy is a rhythmic repetition of cycles, syncopated by eerily similar crises. These crises, while their details differ, are but variations on the same theme. Easy money, geared up by leverage, floods the financial system through innovative products. This simultaneously pumps up asset prices and obscures their speculative nature, with euphoria usurping the place of analysis. Until, one day, something triggers a loss of confidence in the continued rise of prices, and the whole leveraged edifice crumbles.
Today’s collapse has followed the same pattern – as outlined on Tuesday in the FT’s series on the future of capitalism. Easy money came from global macroeconomic imbalances that generated enormous capital inflows into deficit countries. Those flows helped drive interest rates down and increase access to credit, fuelling a leveraged asset bubble. Many leaders in the affected countries – in particular the US – knew this: Alan Greenspan himself spoke of “irrational exuberance”. And yet they did not understand how they had to act to prevent a replay of the past.
Today’s disastrous outcome is testimony to those leaders’ intellectual failure. Most fundamentally to blame is their unwillingness to see (or their wilful ignorance of) what markets need in order to produce good outcomes for society.
Every first-year economics student learns the conditions for an unregulated market, in theory, to function efficiently. The most important are full information, enforceable property rights and contracts, and the absence of “externalities” – effects of economic transactions on third parties. These conditions are never fulfilled, but many markets come close enough that participants’ self-interested actions achieve good outcomes for all.
When these conditions are absent, markets malfunction; the way they do so is one of the great topics of economic theory. It tells those who care to listen that when a market is too opaque, or when the effects of market transactions are too inter-dependent, the pursuit of self-interest can make everyone worse off, or unfairly land some with the losses caused by others, or – in extremis – make markets disappear altogether. Nowhere are these problems greater than in financial markets.
Finance expands our economic possibilities by enabling us to shift funds between the present and the future, and between different outcomes of risky ventures. For that reason, confidence in future values is everything for a financial product: if confidence is lost, the market collapses. But in a non-transparent financial sector, unwarranted valuations will often occur, which, when they fail, can destroy confidence throughout the financial system. And the more implicated the economy is in the financial sector, the wider are the repercussions of such dysfunctions – to the point where financial failures can threaten the economic system as a whole.
Economic policymakers could have limited these dangers, but they did not do so. Instead, they allowed the bubble to inflate and let financial transactions become increasingly opaque and ever more leveraged. As in previous bubbles, value came to rely on the perception of value itself: growth pulling itself up by its own leveraged bootstraps. Many assets were not even priced through market trading but valued by complex formulas – akin to peddling tulips with equations.
People were not unaware of the risks, but both regulation and private risk management were based on the faulty premise that if each entity looks after its own risk, no one needs to worry about systemic risk. The great mistake was to rely merely on self-interest in as imperfect and as important a market as the financial sector. The huge profits bankers reaped reinforced their collective blindness to the illusory value of the assets they traded.
Those who sound the death knell of market capitalism are therefore mistaken. This was not a failure of markets; it was a failure to create proper markets. What is to blame is a certain mindset, embodied not least by Mr Greenspan. It ignored a capitalist economy’s inherent instabilities – and therefore relieved policymakers who could manage those instabilities of their responsibility to do so. This is not the bankruptcy of a social system, but the intellectual and moral failure of those who were in charge of it: a failure for which there is no excuse.
Adam Smith's view on capitalism
Adam Smith’s market never stood alone
By Amartya Sen
Published: March 10 2009 20:15 Last updated: March 10 2009 20:15
Exactly 90 years ago, in March 1919, faced with another economic crisis, Vladimir Lenin discussed the dire straits of contemporary capitalism. He was, however, unwilling to write an epitaph: “To believe that there is no way out of the present crisis for capitalism is an error.” That particular expectation of Lenin’s, unlike some he held, proved to be correct enough. Even though American and European markets got into further problems in the 1920s, followed by the Great Depression of the 1930s, in the long haul after the end of the second world war, the market economy has been exceptionally dynamic, generating unprecedented expansion of the global economy over the past 60 years. Not any more, at least not right now. The global economic crisis began suddenly in the American autumn and is gathering speed at a frightening rate, and government attempts to stop it have had very little success despite unprecedented commitments of public funds.
The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change. The invoking of old and new capitalism played an energising part in the animated discussions that took place in the symposium on “New World, New Capitalism” led by Nicolas Sarkozy, the French president, Tony Blair, the former British prime minister, and Angela Merkel, the German chancellor, in January in Paris.
The crisis, no matter how unbeatable it looks today, will eventually pass, but questions about future economic systems will remain. Do we really need a “new capitalism”, carrying, in some significant way, the capitalist banner, rather than a non-monolithic economic system that draws on a variety of institutions chosen pragmatically and values that we can defend with reason? Should we search for a new capitalism or for a “new world” – to use the other term on offer at the Paris meeting – that need not take a specialised capitalist form? This is not only the question we face today, but I would argue it is also the question that the founder of modern economics, Adam Smith, in effect asked in the 18th century, even as he presented his pioneering analysis of the working of the market economy.
Smith never used the term capitalism (at least, so far as I have been able to trace), and it would also be hard to carve out from his works any theory of the sufficiency of the market economy, or of the need to accept the dominance of capital. He talked about the important role of broader values for the choice of behaviour, as well as the importance of institutions, in The Wealth of Nations ; but it was in his first book, The Theory of Moral Sentiments, published exactly 250 years ago, that he extensively investigated the powerful role of non-profit values. While stating that “prudence” was “of all virtues that which is most helpful to the individual”, Smith went on to argue that “humanity, justice, generosity, and public spirit, are the qualities most useful to others”.*
What exactly is capitalism? The standard definition seems to take reliance on markets for economic transactions as a necessary qualification for an economy to be seen as capitalist. In a similar way, dependence on the profit motive, and on individual entitlements based on private ownership, are seen as archetypal features of capitalism. However, if these are necessary requirements, are the economic systems we currently have, for example, in Europe and America, genuinely capitalist? All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy.
It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed. Perhaps the biggest mistake lies in interpreting Smith’s limited discussion of why people seek trade as an exhaustive analysis of all the behavioural norms and institutions that he thought necessary for a market economy to work well. People seek trade because of self-interest – nothing more is needed, as Smith discussed in a statement that has been quoted again and again explaining why bakers, brewers, butchers and consumers seek trade. However an economy needs other values and commitments such as mutual trust and confidence to work efficiently. For example, Smith argued: “When the people of any particular country has such confidence in the fortune, probity, and prudence of a particular banker, as to believe he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them.”
Smith explained why this kind of trust does not always exist. Even though the champions of the baker-brewer-butcher reading of Smith enshrined in many economics books may be at a loss to understand the present crisis (people still have very good reason to seek more trade, only less opportunity), the far-reaching consequences of mistrust and lack of confidence in others, which have contributed to generating this crisis and are making a recovery so very difficult, would not have puzzled him.
There were, in fact, very good reasons for mistrust and the breakdown of assurance that contributed to the crisis today. The obligations and responsibilities associated with transactions have in recent years become much harder to trace thanks to the rapid development of secondary markets involving derivatives and other financial instruments. This occurred at a time when the plentiful availability of credit, partly driven by the huge trading surpluses of some economies, most prominently China, magnified the scale of brash operations. A subprime lender who misled a borrower into taking unwise risks could pass off the financial instruments to other parties remote from the original transaction. The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.
This institutional vulnerability has implications not only for sharp practices, but also for a tendency towards over-speculation that, as Smith argued, tends to grip many human beings in their breathless search for profits. Smith called these promoters of excessive risk in search of profits “prodigals and projectors” – which, by the way, is quite a good description of the entrepreneurs of subprime mortgages over the recent past. The implicit faith in the wisdom of the stand-alone market economy, which is largely responsible for the removal of the established regulations in the US, tended to assume away the activities of prodigals and projectors in a way that would have shocked the pioneering exponent of the rationale of the market economy.
Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.
The economic difficulties of today do not, I would argue, call for some “new capitalism”, but they do demand an open-minded understanding of older ideas about the reach and limits of the market economy. What is needed above all is a clear-headed appreciation of how different institutions work, along with an understanding of how a variety of organisations – from the market to the institutions of state – can together contribute to producing a more decent economic world.
*An anniversary edition of ‘The Theory of Moral Sentiments’ will be published by Penguin Books this year, with a new introduction in which I discuss the contemporary relevance of Smith’s ideas
The writer, who received the 1998 Nobel Prize in economics, teaches economics and philosophy at Harvard University. A longer essay by him on this topic appears in the current edition of The New York Review of Books
To join the debate go to www.ft.com/capitalismblog
By Amartya Sen
Published: March 10 2009 20:15 Last updated: March 10 2009 20:15
Exactly 90 years ago, in March 1919, faced with another economic crisis, Vladimir Lenin discussed the dire straits of contemporary capitalism. He was, however, unwilling to write an epitaph: “To believe that there is no way out of the present crisis for capitalism is an error.” That particular expectation of Lenin’s, unlike some he held, proved to be correct enough. Even though American and European markets got into further problems in the 1920s, followed by the Great Depression of the 1930s, in the long haul after the end of the second world war, the market economy has been exceptionally dynamic, generating unprecedented expansion of the global economy over the past 60 years. Not any more, at least not right now. The global economic crisis began suddenly in the American autumn and is gathering speed at a frightening rate, and government attempts to stop it have had very little success despite unprecedented commitments of public funds.
The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change. The invoking of old and new capitalism played an energising part in the animated discussions that took place in the symposium on “New World, New Capitalism” led by Nicolas Sarkozy, the French president, Tony Blair, the former British prime minister, and Angela Merkel, the German chancellor, in January in Paris.
The crisis, no matter how unbeatable it looks today, will eventually pass, but questions about future economic systems will remain. Do we really need a “new capitalism”, carrying, in some significant way, the capitalist banner, rather than a non-monolithic economic system that draws on a variety of institutions chosen pragmatically and values that we can defend with reason? Should we search for a new capitalism or for a “new world” – to use the other term on offer at the Paris meeting – that need not take a specialised capitalist form? This is not only the question we face today, but I would argue it is also the question that the founder of modern economics, Adam Smith, in effect asked in the 18th century, even as he presented his pioneering analysis of the working of the market economy.
Smith never used the term capitalism (at least, so far as I have been able to trace), and it would also be hard to carve out from his works any theory of the sufficiency of the market economy, or of the need to accept the dominance of capital. He talked about the important role of broader values for the choice of behaviour, as well as the importance of institutions, in The Wealth of Nations ; but it was in his first book, The Theory of Moral Sentiments, published exactly 250 years ago, that he extensively investigated the powerful role of non-profit values. While stating that “prudence” was “of all virtues that which is most helpful to the individual”, Smith went on to argue that “humanity, justice, generosity, and public spirit, are the qualities most useful to others”.*
What exactly is capitalism? The standard definition seems to take reliance on markets for economic transactions as a necessary qualification for an economy to be seen as capitalist. In a similar way, dependence on the profit motive, and on individual entitlements based on private ownership, are seen as archetypal features of capitalism. However, if these are necessary requirements, are the economic systems we currently have, for example, in Europe and America, genuinely capitalist? All the affluent countries in the world – those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Taiwan, Australia and others – have depended for some time on transactions that occur largely outside the markets, such as unemployment benefits, public pensions and other features of social security, and the public provision of school education and healthcare. The creditable performance of the allegedly capitalist systems in the days when there were real achievements drew on a combination of institutions that went much beyond relying only on a profit-maximising market economy.
It is often overlooked that Smith did not take the pure market mechanism to be a free-standing performer of excellence, nor did he take the profit motive to be all that is needed. Perhaps the biggest mistake lies in interpreting Smith’s limited discussion of why people seek trade as an exhaustive analysis of all the behavioural norms and institutions that he thought necessary for a market economy to work well. People seek trade because of self-interest – nothing more is needed, as Smith discussed in a statement that has been quoted again and again explaining why bakers, brewers, butchers and consumers seek trade. However an economy needs other values and commitments such as mutual trust and confidence to work efficiently. For example, Smith argued: “When the people of any particular country has such confidence in the fortune, probity, and prudence of a particular banker, as to believe he is always ready to pay upon demand such of his promissory notes as are likely to be at any time presented to him; those notes come to have the same currency as gold and silver money, from the confidence that such money can at any time be had for them.”
Smith explained why this kind of trust does not always exist. Even though the champions of the baker-brewer-butcher reading of Smith enshrined in many economics books may be at a loss to understand the present crisis (people still have very good reason to seek more trade, only less opportunity), the far-reaching consequences of mistrust and lack of confidence in others, which have contributed to generating this crisis and are making a recovery so very difficult, would not have puzzled him.
There were, in fact, very good reasons for mistrust and the breakdown of assurance that contributed to the crisis today. The obligations and responsibilities associated with transactions have in recent years become much harder to trace thanks to the rapid development of secondary markets involving derivatives and other financial instruments. This occurred at a time when the plentiful availability of credit, partly driven by the huge trading surpluses of some economies, most prominently China, magnified the scale of brash operations. A subprime lender who misled a borrower into taking unwise risks could pass off the financial instruments to other parties remote from the original transaction. The need for supervision and regulation has become much stronger over recent years. And yet the supervisory role of the government in the US in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk.
This institutional vulnerability has implications not only for sharp practices, but also for a tendency towards over-speculation that, as Smith argued, tends to grip many human beings in their breathless search for profits. Smith called these promoters of excessive risk in search of profits “prodigals and projectors” – which, by the way, is quite a good description of the entrepreneurs of subprime mortgages over the recent past. The implicit faith in the wisdom of the stand-alone market economy, which is largely responsible for the removal of the established regulations in the US, tended to assume away the activities of prodigals and projectors in a way that would have shocked the pioneering exponent of the rationale of the market economy.
Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.
The economic difficulties of today do not, I would argue, call for some “new capitalism”, but they do demand an open-minded understanding of older ideas about the reach and limits of the market economy. What is needed above all is a clear-headed appreciation of how different institutions work, along with an understanding of how a variety of organisations – from the market to the institutions of state – can together contribute to producing a more decent economic world.
*An anniversary edition of ‘The Theory of Moral Sentiments’ will be published by Penguin Books this year, with a new introduction in which I discuss the contemporary relevance of Smith’s ideas
The writer, who received the 1998 Nobel Prize in economics, teaches economics and philosophy at Harvard University. A longer essay by him on this topic appears in the current edition of The New York Review of Books
To join the debate go to www.ft.com/capitalismblog
capitalism
The audacity of help
By Chrystia Freeland
Published: March 11 2009 20:40 Last updated: March 11 2009 20:40
On inauguration day, after the euphoric mass celebration on the Mall and before the black-tie balls that evening, leading Democrats gathered for dinner in Washington’s Park Hyatt Hotel. It was a crowd including Paul Volcker, former head of the Federal Reserve, Lawrence Summers, incoming head of the National Economic Council, and three future cabinet secretaries.
But the first person to speak was the last Democratic occupant of the Oval Office – Bill Clinton. And in his brief comments the former president sketched a passionately optimistic view of the political implications of the current crisis. “We are at a pivotal moment in this country,” the politician who taught the American left how to win elections in the age of Ronald Reagan exulted. “I think there will be a progressive majority in this country for the next 30 years.”
For the Main Street families losing their homes and their jobs, and for the Wall Street firms that have been facing collapse, the economic crisis has felt like a natural disaster. The economy, as the investor Warren Buffett put it this week, seems to have “fallen off a cliff”. But Mr Clinton urged his listeners to perceive in the cataclysm a once-in-a-lifetime chance. President Barack Obama and his administration have “an enormous opportunity”, he said with a note of wistfulness. “They will have more freedom to do it than any other team in a long time.”
After barely 50 days in office, it is clear the administration perceives the watershed identified by Mr Clinton and intends to exploit it. This determination to turn the world’s deepest economic downturn since the Great Depression into the beginning of a new era of progressive politics in America is the most important political consequence – and the biggest political gamble – of the crisis of capitalism in capitalism’s homeland.
Rahm Emanuel, the president’s chief of staff, likes to say that a crisis is a terrible thing to waste. Mr Obama, characteristically, provides a more stirring spin. Beginning with his inaugural address, he served notice that he intended to be a consequential president, rebutting future critics even as he laid out his plans: “There are some who question the scale of our ambitions – who suggest that our system cannot tolerate too many big plans ... What the cynics fail to understand is that the ground has shifted beneath them ... The question we ask today is not whether our government is too big or too small but whether it works.”
The echo of Reagan – remember when government was the problem and not the solution? – is meaningful and intentional. Early in the primary fight, Mr Obama ruffled Clintonian feathers by naming Reagan as the most significant president of modern times. Mr Obama hopes to have a similar impact. According to former Reagan staffers, the Obama team has gone so far as to get in touch with detailed questions about the mechanics of the Gipper’s White House and how they choreographed his first 100 days.
Nor is it just the hope-drenched Obama-ites who see in the economic downturn a chance to change America’s political weather. Grizzled Democratic warriors see the opportunity, too. “I have been in government for 35 years and this is the most exciting time. You really feel you are making history,” says Charles Schumer, New York’s senior senator. “In every generation there are tectonic elections which redefine the role of government. Obama has a chance to create a new generation of Democrats.”
“I have never seen a shift in public opinion like the one we’ve had now,” agrees Barney Frank, the influential congressman. Mr Frank believes the long era of “Republican ascendancy”, which he dates to Richard Nixon’s election in 1968, has been replaced by a period of Democratic dominance.
Republicans, too, admit their era of setting the terms of the political debate has come to an end. “The only question is whether the Obama era lasts two years, four years, or eight years,” says Newt Gingrich, the former House of Representatives speaker who is re-emerging as powerful intellectual force in the party. “The question is whether this is a new era or an interregnum.”
The Obama era, if that is what it becomes, will be built on the two defining political and economic shifts of the past six months: the evident and acknowledged failure of “market fundamentalism” and the response by Hank Paulson as Treasury secretary.
Ideologically, the manifest failure of market fundamentalism is the starting point. There are, to be sure, some hardcore Republican hold-outs: Mr Gingrich argues that the current crisis “is a government problem, not a market problem”. But the consensus view is that, as Alan Greenspan, former Fed chairman, confessed in his influential congressional testimony in October, there was a “flaw” in the model.
Mr Summers, a strong defender of free markets, likewise has concluded: “The view that the market economy is inherently self-stabilising, always, has been dealt a fatal blow ... This notion that the economy is self-stabilising is usually right, but it is wrong a few times a century and this is one of those times.”
The central political consequence of this market failure, Mr Summers says, is that there “is a need for extraordinary public action at those times”. As he put its: “The debate over whether you can love your country and hate your government has been settled with a negative answer.” This rehabilitation of intervention in the economy as not just acceptable but essential is the second foundation for Mr Obama’s new progressive agenda.
Usefully for the Democrats, it was the outgoing administration that brought the state back in with a vengeance. “Paulson is the champion nationaliser of all times. He managed more nationalisation than any man on the planet,” says Fred Bergsten, director of the Peterson Institute for International Economics. “It is maybe a bit of protection for Obama.”
Mr Paulson said his purpose was to save capitalism. Mr Obama wants to do much more than that. Over the past few weeks, he has unveiled a sweeping progressive agenda aimed not merely at sorting out the market economy’s travails but addressing a deeper failing in the current manifestation of American capitalism. That flaw, in his view, is the rising income inequality and median wage stagnation of the past three decades – it is this central idea that unites his ambitious project.
. . .
Education, one of Mr Obama’s three main initiatives, is all about fixing what economists identify as a leading cause of income inequality. Healthcare reform, the president’s second big initiative, would lighten one of the main burdens on the falling-behind middle class.
Only energy and environmental reform, his third mission, is not directly connected to income inequality – but, as with the other two, its proposed financing is built on the view that income inequality is a central fact of America today. Mr Obama unapologetically advocates a shift to a more redistributive tax system: he wants the very rich to pay for the programmes that he hopes will alleviate the stagnation of wages of those in the middle.
Campaigning on class has long been political poison for the Democrats. As recently as the Democratic primaries, economic inequality did not seem to work as a central campaign theme. Americans’ reluctance to vote according to their apparent class interests became a truism of politics and a source of considerable hand-wringing on the left. In What’s the Matter with Kansas? Thomas Frank attributed it to the right’s skill at playing up cultural issues. George Soros, the hedge fund manager and active Democrat, says it was because Americans, unlike Europeans, did not envy the super-rich – they hoped to emulate them.
The credit crunch exposed a more hard-nosed reason for the political quiescence of the stagnant middle class. As is now being discovered, the era of cheap money allowed families to consume far more than they produced. All of those home equity loans, vendor-financed car deals and credit card purchases may have masked the reality that real incomes were falling behind.
The financial crisis has turned that old political logic upside down. As the recession deepens, cultural issues pale in significance next to economic ones. Public anger towards Wall Street – late-night comedians have taken to calling for Chinese-style public executions – has transformed the Masters of the Universe from heroes to villains. The end of cheap credit seems meanwhile to have shattered middle America’s illusion that it too was partaking in the prosperity of the second Gilded Age.
The result is that class and redistribution are no longer dirty words in American politics. “John Kerry [the 2004 Democratic presidential candidate] was intimidated out of talking about economic redistribution because it was class warfare,” says congressman Frank. Now, by contrast, “people are very aware that in the good times they weren’t getting any, that income maldistribution greatly increased”.
This shift may be why the right’s most strident criticisms of the new president – that Mr Obama is a “socialist” or even a “Manchurian candidate” with a secret plot to destroy capitalism – are making little headway with the public. Instead, the accusations underscore an important and little-noted aspect of the American left’s reaction to the crisis: for all the bold reach of the progressive agenda Mr Obama has laid out, neither the president nor anyone in the Democratic mainstream is challenging the tenets of the market economy. Indeed, the Democratic White House has been more allergic to the idea of nationalising banks than have some leading Republicans.
At a time when historical analogies are popular, one anniversary is not much talked about in the US: the fall of the Berlin Wall 20 years ago. But even as it goes largely unacknowledged, the collapse of communism is helping to define the debate about the most significant crisis of capitalism in 80 years. During the Great Depression it was possible for some American progressives to look to the Soviets and wonder whether they had it right. Today, that option does not even get a hearing.
Mr Obama, the most ambitious president since Reagan, is determined to use this pivotal moment to advance an agenda on income inequality he began to talk about before the credit crunch began. But even as he lays out bold – many would say too bold – plans for the long term, he and his team recognise that their first and necessary step is to patch up America’s faltering capitalist engine. According to Mr Summers: “It is periodically the task of progressives to, ironically, save the market system from its own excesses.”
Copyright The Financial Times Limited 2009
By Chrystia Freeland
Published: March 11 2009 20:40 Last updated: March 11 2009 20:40
On inauguration day, after the euphoric mass celebration on the Mall and before the black-tie balls that evening, leading Democrats gathered for dinner in Washington’s Park Hyatt Hotel. It was a crowd including Paul Volcker, former head of the Federal Reserve, Lawrence Summers, incoming head of the National Economic Council, and three future cabinet secretaries.
But the first person to speak was the last Democratic occupant of the Oval Office – Bill Clinton. And in his brief comments the former president sketched a passionately optimistic view of the political implications of the current crisis. “We are at a pivotal moment in this country,” the politician who taught the American left how to win elections in the age of Ronald Reagan exulted. “I think there will be a progressive majority in this country for the next 30 years.”
For the Main Street families losing their homes and their jobs, and for the Wall Street firms that have been facing collapse, the economic crisis has felt like a natural disaster. The economy, as the investor Warren Buffett put it this week, seems to have “fallen off a cliff”. But Mr Clinton urged his listeners to perceive in the cataclysm a once-in-a-lifetime chance. President Barack Obama and his administration have “an enormous opportunity”, he said with a note of wistfulness. “They will have more freedom to do it than any other team in a long time.”
After barely 50 days in office, it is clear the administration perceives the watershed identified by Mr Clinton and intends to exploit it. This determination to turn the world’s deepest economic downturn since the Great Depression into the beginning of a new era of progressive politics in America is the most important political consequence – and the biggest political gamble – of the crisis of capitalism in capitalism’s homeland.
Rahm Emanuel, the president’s chief of staff, likes to say that a crisis is a terrible thing to waste. Mr Obama, characteristically, provides a more stirring spin. Beginning with his inaugural address, he served notice that he intended to be a consequential president, rebutting future critics even as he laid out his plans: “There are some who question the scale of our ambitions – who suggest that our system cannot tolerate too many big plans ... What the cynics fail to understand is that the ground has shifted beneath them ... The question we ask today is not whether our government is too big or too small but whether it works.”
The echo of Reagan – remember when government was the problem and not the solution? – is meaningful and intentional. Early in the primary fight, Mr Obama ruffled Clintonian feathers by naming Reagan as the most significant president of modern times. Mr Obama hopes to have a similar impact. According to former Reagan staffers, the Obama team has gone so far as to get in touch with detailed questions about the mechanics of the Gipper’s White House and how they choreographed his first 100 days.
Nor is it just the hope-drenched Obama-ites who see in the economic downturn a chance to change America’s political weather. Grizzled Democratic warriors see the opportunity, too. “I have been in government for 35 years and this is the most exciting time. You really feel you are making history,” says Charles Schumer, New York’s senior senator. “In every generation there are tectonic elections which redefine the role of government. Obama has a chance to create a new generation of Democrats.”
“I have never seen a shift in public opinion like the one we’ve had now,” agrees Barney Frank, the influential congressman. Mr Frank believes the long era of “Republican ascendancy”, which he dates to Richard Nixon’s election in 1968, has been replaced by a period of Democratic dominance.
Republicans, too, admit their era of setting the terms of the political debate has come to an end. “The only question is whether the Obama era lasts two years, four years, or eight years,” says Newt Gingrich, the former House of Representatives speaker who is re-emerging as powerful intellectual force in the party. “The question is whether this is a new era or an interregnum.”
The Obama era, if that is what it becomes, will be built on the two defining political and economic shifts of the past six months: the evident and acknowledged failure of “market fundamentalism” and the response by Hank Paulson as Treasury secretary.
Ideologically, the manifest failure of market fundamentalism is the starting point. There are, to be sure, some hardcore Republican hold-outs: Mr Gingrich argues that the current crisis “is a government problem, not a market problem”. But the consensus view is that, as Alan Greenspan, former Fed chairman, confessed in his influential congressional testimony in October, there was a “flaw” in the model.
Mr Summers, a strong defender of free markets, likewise has concluded: “The view that the market economy is inherently self-stabilising, always, has been dealt a fatal blow ... This notion that the economy is self-stabilising is usually right, but it is wrong a few times a century and this is one of those times.”
The central political consequence of this market failure, Mr Summers says, is that there “is a need for extraordinary public action at those times”. As he put its: “The debate over whether you can love your country and hate your government has been settled with a negative answer.” This rehabilitation of intervention in the economy as not just acceptable but essential is the second foundation for Mr Obama’s new progressive agenda.
Usefully for the Democrats, it was the outgoing administration that brought the state back in with a vengeance. “Paulson is the champion nationaliser of all times. He managed more nationalisation than any man on the planet,” says Fred Bergsten, director of the Peterson Institute for International Economics. “It is maybe a bit of protection for Obama.”
Mr Paulson said his purpose was to save capitalism. Mr Obama wants to do much more than that. Over the past few weeks, he has unveiled a sweeping progressive agenda aimed not merely at sorting out the market economy’s travails but addressing a deeper failing in the current manifestation of American capitalism. That flaw, in his view, is the rising income inequality and median wage stagnation of the past three decades – it is this central idea that unites his ambitious project.
. . .
Education, one of Mr Obama’s three main initiatives, is all about fixing what economists identify as a leading cause of income inequality. Healthcare reform, the president’s second big initiative, would lighten one of the main burdens on the falling-behind middle class.
Only energy and environmental reform, his third mission, is not directly connected to income inequality – but, as with the other two, its proposed financing is built on the view that income inequality is a central fact of America today. Mr Obama unapologetically advocates a shift to a more redistributive tax system: he wants the very rich to pay for the programmes that he hopes will alleviate the stagnation of wages of those in the middle.
Campaigning on class has long been political poison for the Democrats. As recently as the Democratic primaries, economic inequality did not seem to work as a central campaign theme. Americans’ reluctance to vote according to their apparent class interests became a truism of politics and a source of considerable hand-wringing on the left. In What’s the Matter with Kansas? Thomas Frank attributed it to the right’s skill at playing up cultural issues. George Soros, the hedge fund manager and active Democrat, says it was because Americans, unlike Europeans, did not envy the super-rich – they hoped to emulate them.
The credit crunch exposed a more hard-nosed reason for the political quiescence of the stagnant middle class. As is now being discovered, the era of cheap money allowed families to consume far more than they produced. All of those home equity loans, vendor-financed car deals and credit card purchases may have masked the reality that real incomes were falling behind.
The financial crisis has turned that old political logic upside down. As the recession deepens, cultural issues pale in significance next to economic ones. Public anger towards Wall Street – late-night comedians have taken to calling for Chinese-style public executions – has transformed the Masters of the Universe from heroes to villains. The end of cheap credit seems meanwhile to have shattered middle America’s illusion that it too was partaking in the prosperity of the second Gilded Age.
The result is that class and redistribution are no longer dirty words in American politics. “John Kerry [the 2004 Democratic presidential candidate] was intimidated out of talking about economic redistribution because it was class warfare,” says congressman Frank. Now, by contrast, “people are very aware that in the good times they weren’t getting any, that income maldistribution greatly increased”.
This shift may be why the right’s most strident criticisms of the new president – that Mr Obama is a “socialist” or even a “Manchurian candidate” with a secret plot to destroy capitalism – are making little headway with the public. Instead, the accusations underscore an important and little-noted aspect of the American left’s reaction to the crisis: for all the bold reach of the progressive agenda Mr Obama has laid out, neither the president nor anyone in the Democratic mainstream is challenging the tenets of the market economy. Indeed, the Democratic White House has been more allergic to the idea of nationalising banks than have some leading Republicans.
At a time when historical analogies are popular, one anniversary is not much talked about in the US: the fall of the Berlin Wall 20 years ago. But even as it goes largely unacknowledged, the collapse of communism is helping to define the debate about the most significant crisis of capitalism in 80 years. During the Great Depression it was possible for some American progressives to look to the Soviets and wonder whether they had it right. Today, that option does not even get a hearing.
Mr Obama, the most ambitious president since Reagan, is determined to use this pivotal moment to advance an agenda on income inequality he began to talk about before the credit crunch began. But even as he lays out bold – many would say too bold – plans for the long term, he and his team recognise that their first and necessary step is to patch up America’s faltering capitalist engine. According to Mr Summers: “It is periodically the task of progressives to, ironically, save the market system from its own excesses.”
Copyright The Financial Times Limited 2009
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