The Death of American Capitalism

Marc Coleman

Issue 389, vol.98, Spring 2009

The economic, environmental, social, political and cultural changes in the world in the two decades since the fall of the Berlin Wall are very profound. Can it be that the world took a wrong turn in 1989, not in its rejection of totalitarian communism, but in its assumption that liberal democracy was the only path to be followed in its stead? Was there a third way – a Christian Democratic rather than a Liberal Democratic path – that might have set the world on a more cohesive and stable path? It seems appropriate that the current crisis has occurred at the end of the presidency of George W Bush. His strong evangelical beliefs - which contrast with the Episcopalian and almost Catholic moderation of his father – are the stuff of which American capitalism was made: individualism, a hard work ethic and a sense that material reward is a sign of divine approval. His erstwhile Defence Secretary, Donal Rumsfeld, was fond of poking fun at “Old Europe” and its backward ideas. In some ways, Americans were right to criticise the slowness and caution of Europe’s economic and social system. American values are in many ways exhilarating and liberating. But are they sustainable?

We stand on the threshold of the third millennium. At the end of the second one, American values appeared to have won a stunning victory. The End of History, some said, was upon us. Now we are not so sure. Now, “Old Europe” may yet have the last laugh. In the last decade of the last millennium we witnessed the failures of totalitarian socialism as well as the dysfunctional nature of its democratic socialist alternative. As the first decade of this one we are witnessing the collapse of untrammelled neo-liberalism. A return to socialism is out of the question. Due to its requirement for state control and a suppression of the profit motive, socialism is politically unsustainable. But due to the moral vacuum in which it was conceived, not to mention the atomisation of society, community and family and its worship of the individual and the short term, neo-liberalism is not sustainable either. By the end of this article, I hope to offer a sketch of something that is. For want of a better term, I refer to it as Christian Democracy.

A very American crisis
Just as America was central to the re-establishment of democratic capitalism after the Second World War, America is also now central to the crisis in which that system finds itself. The global triumph of American neo-liberal values in the late 1980s and early 1990s was taken to extremes in the last decade and had profound worldwide consequences, not just for Europe. Abandoning the post war model of multilateralism – the careful construction of global institutions such as the General Agreement on Tariffs and Trade (GATT), the International Monetary Fund (IMF) and the Bretton Woods Agreement (Bretton Woods) to order and regulate the world economy - the victory of world capitalism and the globalisation of capital in the 1990s were untrammelled by any proper governance. Financial regulation (which is supposed to ensure that banks do not increase lending disproportionately to the increases in their capital) continued to operate fundamentally on a nation state basis (global institutions, such as the Bank of International Settlements, provided guidelines on capital adequacy, but these were interpreted and implemented by politically appointed national bodies)

As a result of globalising trade and finance before globalising governance, shocks produced in the US economy were destined to travel rapidly around the world economy. Which is precisely what they did. The shock that happened had been building up for some time. For decades, the US has been consuming more than it produces and financing this by selling assets to the rest of the world. As it did so, the US Federal Reserve (its central bank) maintained interest rates at levels that were unjustifiably low for the inherent productivity of its economy. Apart from certain high technology sectors, such as computers and pharmaceuticals, falling real wages in many sectors of the American economy reveal the weaknesses of its once-great education system. Contrasted with the rising living standards of a minority of Americans, it also reveals the growing divide in the US between the highly skilled and professional and other workers.

This mismatch is not referred to in passing: the disparity in opportunity and lack of economic cohesion that it represents (and the political tensions it gave rise to) was a key reason why the Clinton administration facilitated the introduction of the now infamous sub-prime mortgages to deal with a problem whereby home ownership was becoming unaffordable to a growing minority of poorer Americans. We might note, in passing, that this was no real substitute for addressing the underlying causes of this problem: family breakdown, inner city communities that were dead or dying, lack of equal opportunities for schooling and a decline of trust and neighbourliness. To do so is not trivial. Economic productivity and cohesion are in large part determined by such social capital as this and the deterioration of this social capital contributed to America’s current problems in ways other than its impact on low income families unable to afford home ownership: declining trust in financial markets – a deterioration in the internal discipline of market participants in resisting opportunities for obtaining short term gains at the expense of others – was critical in turning what had been a tell tale sign of social and economic dysfunction into an economic crisis of global proportions. Thanks to the activities of a banking system that had grown beyond the control of an unreformed system of financial regulation, such mortgages were aggregated and sold off to investors, around the world, whose remoteness from the realities of the US housing market made it difficult for them to assess their inherent value.

But let us halt a moment here and look at another tributary to this crisis: the growing mismatch between the world’s resource base and the growing demands of its population. You will notice how that last sentence was phrased. Some would have written that last sentence differently as “The growing mismatch between the world’s and the demands of a growing population”. But I have put the words “growing demands of its” instead of “demands of a growing” to avoid giving the impression that population growth is the problem I am addressing here. It is not. Although it has risen from 2.8 billion to 6.5 billion in a decade, population growth is not the problem. The fact that one tenth of the world’s population consume nine tenth of the world’s resources is a clear enough sign that (even if the other 90 per cent of the world’s population vanished) the richest one tenth have it within their power to consume the world’s oil resources within a century. No, the problem is not population. The problem is an oil-based world economy and that fact that although one tenth of the world’s population currently enjoy our Western standards of living, one half of the world’s population (the share that now lives in urban areas), although once content to live more modestly, now wants a piece of the action.

Which brings us to a third tributary. Finance was not the only thing to be globalised in the last decade of the second millennium. The globalisation of the world media assisted the widespread transmission of new values around the world. Although not in themselves malign, these values were morally relativistic and in the main material and sensual in nature. Of course, it must be acknowledged that globalisation has also provided a medium for the Church to transmit its values to a wider audience. But the ownership structures of world media are largely in the hands of what might be called “Anglo-Saxon” countries and it is natural that for that reason – and also by virtue of the fact that they are large commercial concerns – that they would tend to favour the transmission of secular, materialist values, albeit in a benign and democratic context.

A fourth and final tributary is a trend towards rising secularism that – even before the global media was as powerful as it is now – was in evidence. In the one major country where secularism has not strengthened (the USA, strangely) it is because of a rise in evangelical Christianity of the type that does not necessarily advocate moderation when it comes to material acquisition, but can in fact encourage such acquisition as a sign of providence. Writers like Max Weber and, in more modern times, Francis Fukuyama have attributed the rise of capitalism in the US and UK to the strong Protestant ethos in those countries. Fukuyama has warned that, as the strict religious observance that was once the norm of Protestantism was abandoned, so the ethical and moral restraints that regulated the profit motive would loosen.

Which brings us neatly back to sub-prime mortgages. The root cause of the sub-prime crisis (as well as the elevation of property ownership to the status of almost religious worship) was the declining ethics in the US property market and the phenomenon of poor or low income Americans being sold mortgages that the seller knew were unaffordable. A shortening of time horizons and a loosening of ethics (together with the Anglo-Saxon emphasis on the share price of an institution as the measure of its success) increased the pressure on financial institutions to make quick profits at the expense of those to whom they were lending, and also of the financial stability of their own institutions.

Cardinal changes in economic philosophy 
America is more than just a country. It is the highest expression of a philosophical trend that began in the late 17^th century known as the Enlightenment. In many ways a noble development, several aspects of the Enlightenment were deeply flawed: for a start Adam Smith’s belief that the common welfare was always ensured by the separate pursuit of individuals of their own self-interest was false. John Nash and other economists would disprove this in the last century (and so in Ireland did our system of social partnership, its flaws notwithstanding). Secondly, although it did not lead to the abandonment of morality (in some ways it made morality more genuine and less rule oriented) the trend away from a belief in literal and absolute beliefs weakened the ability to say no to financial temptation. At the same time more and more spheres of human endeavour ceased to be undertaken within the realm of kinship and community and became marketable commodities. Two hundred years ago clothes were made and mended within the family. This is now unheard of. A hundred years ago, all meals were cooked within the family or community. Increasingly, eating is undertaken in restaurants and cafés. Twenty years ago, childcare was the preserve of the family. Now the crèche is increasingly substituting as a marketable costed service, for something that was done naturally, out of ties of love and duty. Increasingly, man is becoming a being whose activities can be priced. The material is winning out over the moral, the sensual over the spiritual.

As this has happened, changes in microeconomic organisation during the industrial revolution acted to alienate workers from their work. This process has partly reversed itself in the post- industrial revolution and the intense worker-management strife of the 1960s and 1970s is nowhere near as sharp as it once was. However, it did lasting damage to Europe’s economic model by undermining a model of post war capitalism that, before it occurred, successfully maintained social cohesion. It also created a technology that was excessively reliant on fossil fuels. It seems to us that this was the only path to progress. But the fact that, two hundred years after it, we are looking for alternative and more environmentally friendly technologies (and the fact that we may be doing this too late to prevent catastrophic global warming) suggests we took a wrong turn somewhere. The belief that history is a story of inevitable progress is one of the most powerful prevailing delusions of the last three hundred years and one long overdue for abandonment.

By the 1950s, Europe and the US (thanks to the Marshall Plan and the New Deal) had rediscovered the social cohesion and harmony that the industrial revolution and its long aftermath had disrupted. Partly due to left wing militancy, but also due to crucial macroeconomic policy errors and the economic impact of the US abandoning the Bretton Woods Agreement, an inflationary spiral – exacerbated by conflict in the Middle East (itself a product of the West’s over-dependence on oil) – the social contract exploded into a polarised conflict. In Europe, the centre ground gave way to extremes of left and right. In the US, the centre fought against a resurgent Republican right and lost. Eventually neo-liberal ideas replaced centrist Christian Democratic ideals. This was partly the fault of the politicians to whom those Christian Democratic ideals had been entrusted, politicians who (like Edward Heath or the leaders of Italy’s Christian Democratic Party) were either too weak or too corrupt to renew those ideals and apply them to more challenging times. Their leadership gave way to more neo-liberal forces. At the same time, those who opposed neo-liberalism did so either from the point of view of a discredited and defunct ideology, or out of fear of losing some vested interest. Either way, neo-liberalism has had no credible intellectual opposition since the 1960s.

And it was soon to be internationalised. When the Berlin Wall collapsed and as Soviet Russia crumbled, Red China decided that capitalism was good for its workers, its tenets of free and unregulated markets spread around the world like wildfire.

Neo-Liberalism: A False Dawn
Not just from an economic point of view, but also from a social one, neo-liberal democracy is a false creed. No economic system can survive devoid of a moral structure. The most basic economic transactions require a degree of faith that the other party will honour their commitments: that the shoes being bought will not fall apart within a day of wearing them; that the tin of beans does not contain some toxic ingredient; that the contract being signed with the bank (which most of us are far too busy to read) does not oblige us to pay unfair or hidden charges; that the mortgage being sold is affordable. Capitalism can work only if moderated by trust. And trust in good behaviour requires not only institutions to define what good is, but also institutions that transmit a belief in the intrinsic truth of that good. For centuries, Western man has had the church, the community and the family to perform this function. Is it really an accident that the unravelling of modern capitalism is happening after three decades in which these institutions were so seriously weakened?

The Synthetic society
Barack Obama has been elected President of the US and this portends enormous hope for the future. On the other hand, his refusal to support the Right to Life position is not just morally questionable, because one of the critical challenges facing Western society is the coming ageing crisis: a crisis that will force every worker to support a pensioner. As the contraceptive and abortion revolution of the last three decades takes its toll, Western Europe will become a place where children are a decreasing share of our population. Western Europe will have to choose between allowing its population to decline and its elderly either retire later in life or suffer reduced pensions, or take in mass immigration on a very great scale. Several other issues that are not economic in nature heighten the sense of crisis in the West. Suicide is rising. So are instances of mental illness, violent crime, drug abuse and sexual assault. Thirty years ago the sight of a child being assaulted would have caused any adult walking past to intervene.

That was when communities were physical, geographical places that relate to obligations of kinship and neighbourliness and community. But these obligations have been replaced by new, synthetic society. Our communities are being replaced by our workplaces. Bonds of friendship are being replaced by ties of commercial obligation. Long term bonds of love, affection and duty that are a natural and happy by-product of family life are being slowly but surely replaced by short-term relationships. We will realise, possibly too late, that our social environment is as important as our physical environment and that its degradation by cultural and moral pollution poses hazards that are just as grave for our future as sub-prime mortgages and CO2 emissions.

The Case for of Christian Democracy
I would like to end of a hopeful note. I believe there is an alternative to the current unsustainable trajectory on which mankind finds itself. It cannot come from government alone. We have absorbed the fallacy that humanity can only be improved by government acting from the top down. But governments are like architects: the quality of what they can build is only as strong as the quality of the bricks and timber they are working with and if the bricks are crumbly and the timber rotten, their work is in vain. The twentieth century witnessed several failed attempts to improve the human condition by pursuing secular political philosophies that saw government as the only useful instrument in improving the human condition. Together with other like-minded religious institutions, the Catholic Church must now begin a great work of renewal, working on the ground to improve and repair our society from the bottom up. Likewise, well-meaning politicians across all parties must renew their efforts to improve government from the top down. Hopefully, the two forces will meet in the middle. In my next article, I will elaborate on why I believe this can and will happen.

Marc Coleman is Economics Editor of Newstalk 106 to 108fm and a columnist with the Sunday Independent and Irish Catholic. He is writing here in a personal capacity.