Is capitalism dead?
The Financial Times has an ongoing series, The
Future of Capitalism (I
haven’t read it all, but "dubious" would seem to be the most apt
one-word review so far), Knowledge @ Wharton has "revisited"
the question whether capitalism
is working, and even the normally staid and circumpsect McKinsey Quarterly has The
New Normal, positing that "the business landscape has changed fundamentally."
Meanwhile, the redoubtable Economist has Greed–and
fear: a special report on the future of finance (for a taste, try
"Financial services are in ruins….") and I will commend to you
again Amartya Sen’s Capitalism beyond the crisis from The New York
Review of Books.
I’ve written before–but it’s worth reprising–that a smart friend of mine observed that today "people are reading too many newspapers and not enough history." So a quick bit of history (Wharton):
The April 21, 1980, cover of Time magazine carried the stark headline: "Is Capitalism Working?" The American economy was in crisis after years of stagflation. The story recounted the ills: Mortgage rates were 17%, business loans carried 20% interest rates and productivity had collapsed. The article quoted Robert Lekachman, a left-leaning City University of New York economist, as saying, "The central economic fact of our day is the declining vitality and élan of capitalism and capitalists." On the opposite side of the political spectrum, Chrysler Chairman Lee Iacocca was quoted as saying, "Free enterprise has gone to hell."
Is the doubt now being sown on the fertile fields of capitalism surprising? Not in the least.
For perspective, we’ve come off a tremendous 2-1/2 decade bull run favoring capitalism: The Reagan Revolution here, the Thacher Era in the UK, China and India opening up, the fall of the Berlin Wall and the spontaneous resurgence of beaten-down Eastern Europe, even the technology bubble can be seen (charitably) in hindsight as a period of glorious experimentation, with some durable innovators that have changed the daily conversation (Google, Microsoft, Apple, just for starters).
Perhaps, then, we should have been more prepared for a backlash.
But what precisely are the terms of that backlash?
A large part of it, I respectfully submit, stems from the outsized importance that the financial services sector took on (Economist).
For a quarter of a century finance basked in a golden age. Financial globalisation spread capital more widely, markets evolved, businesses were able to finance new ventures and ordinary people had unprecedented access to borrowing and foreign exchange. Modern finance improved countless lives.
But more recently something went awry. Through insurance and saving, financial services are supposed to offer shelter from life’s reverses. Instead, financiers grew rich even as their industry put everyone’s prosperity in danger. Financial services are supposed to bring together borrowers and savers. But as lending markets have retreated, borrowers have been stranded without credit and savers have seen their pensions and investments melt away. Financial markets are supposed to be a machine for amassing capital and determining who gets to use it and for what. How could they have been so wrong?
The core function of finance, after all, is not complicated. It’s to channel capital from investors (be they private equity and hedge funds, university endowments, or CD buyers at your corner Bank of America) to productive users of capital. And to reallocate risk in the process from those less willing or able to be exposed to it to those more willing and able.
This is where financial services failed us in the past several years. And in the process, or as the result, of that failure, they have betrayed our trust. Again, to the Economist:
Financial transactions are a series of promises. You hand your money to a bank, which promises to pay it back when you ask; you invest in a company, which promises you a share of its future profits. Money itself is just a collective agreement that a piece of paper can always be exchanged for goods or services.
Imagine, for a second, how finance began, with small loans within families and between trusted friends…. Trust in a modern economy has evolved to the miraculous point where people give complete strangers sums of money they would not dream of entrusting to their next-door neighbours. From that a further miracle follows, for trust is what raises the billions of dollars that fund modern industry.
Trust’s slow accumulation pushes financial markets forward; its shattering betrayal batters them back.
A new era of financial regulation is, to be sure, called for (and more work for us, not incidentally). Our patchwork of largely Depression-era regulators, supplemented by rudely bolted-on encrustations designed in haste and for which we can only repent at leisure (see: Sarbanes Oxley), could stand a blank-sheet-of-paper rethink.
After all, were we to task ourselves with the challenge of designing a 21st-Century financial services regulatory structure for the world’s leading economy, what are the odds that it would bear any resemblance to what we have today?
But we have strayed a bit from the initial question.
To answer it, I can only recur to first principles, and to do that, I submit to the wisdom of the masters.
First, of course, is the intellectual namesake and virtual godfather of the publication you’re reading, Adam Smith himself.
I honestly believe–without meaning to slide into exaggeration or aggrandisement–that Adam Smith did more to improve the lives of more people than anyone in human history who is not reputedly a deity.
His wisdom is too overwhelming to abandon. So I hope.
Second, Joseph Schumpeter. I hope that Wharton is right when they write that:
Stripped down to its core and at its best, American capitalism is ideologically close to the theories espoused by Joseph Schumpeter…. The centerpiece of his thinking is the concept of "creative destruction…"
Creative destruction means that old established companies under capitalism tend to lose their dynamism with time and atrophy under a layer of corporate bureaucracy and complacency. Then entrepreneurs, who usually have few links to the past, introduce bold and fresh ideas for new products, manufacturing techniques, or distribution and displace the old order. The process is often destructive, but also creative. This corporate lifecycle has repeated itself again and again in numerous fields.
The moral here is both harsh and liberating.
Harsh because it involves destruction. Liberating because it involves creativity.
Permit me to make this less abstract. We have traded:
- Howard Johnson’s for Starbucks;
- American Motors for Lexus;
- Faxes for emails;
- Trunk-size "mobile" phones for BlackBerry’s; and
- Google for almost everything.
Is capitalism, then, done?
As has often been said about America (but not often enough, of late) and has equally often been said about New York City (same), "nobody ever won by betting against them." The same, I devoutly believe, goes for capitalism–although it will surely have a longer reign in the history of the human race than, as passionately as I love both, either America or New York City.
And what has this to do with Law Land?
We’re about to experience an unprecedented multiplication of business models in our industry, an exhilarating and tragic journey through what works and what doesn’t, an effervescence of creativity and a mournful descent into destruction, all carried out in accelerated time.
Global law firms are not "over" unless you believe that globalization is over. Wall Street law firms are not over unless you believe that Wall Street is history. Boutiques are not over unless you believe we will never see visionary iconoclasts again. Regional firms are not over unless you believe in the brotherhood of man.
The only future that’s certain is one of an efflorescence of creativity, right in front of our eyes.
Hold on to your hats.
