AMERICAN FUTURE

Two articles have been added at the bottom of this post.

Notice that the title of this post doesn’t conclude with a question mark. The reason for its absence is that, since early this month, the Financial Times has been running a series of  articles asserting that there is — rather than asking whether there is — a crisis of capitalism. It’s always been evident to me that the philosophical/ideological divide between London’s Financial Times and New York’s Wall Street Journal is greater than the geographical distance between the two financial centers. The WSJ never has and never will claim that anything is wrong with capitalism; instead, it’s government’s growing involvement in the private sector that’s preventing capitalism from functioning properly.

As some of you know, I’m a retired Wall Street analyst. As such, I’m one of capitalism’s beneficiaries. Notwithstanding that fact, I believe that — to use Churchillian words — capitalism is the worst economic system, except for all the others. More to the point, my judgment is that capitalism’s flaws have intensified during the past 30 years. The most important of these flaws is the unrelenting increase in the concentration of income and wealth in the United States. I’m convinced that, if this trend is not reversed, it will eventually undermine the social stability that we all take for granted. As yet, there are no alternatives to capitalism, as there were during capitalism’s last great crisis in the 1930s. It would be both presumptuous and dangerous, however, to conclude that our country will forever be immune to discord resulting from an ever-widening gulf between the few “haves” and the many “have-nots.”

With the posting today of a video interview of two of the paper’s top columnists, this strikes me as the right moment for me to post the articles from the FT’s “Crisis of Capitalism” series. Below the fold are the contributions to this series.

John Plender, “Capitalism in crisis: The code that forms a bar to harmony”

Business in the leading English-speaking countries attracts misgivings. Fewer than half of the American and British people sampled in the 2011 Edelman Trust Barometer have faith in business to do what is right. The survey rates the US and the UK only marginally ahead of Russia on this score. So there is talk of a crisis of legitimacy and an erosion of business’s “licence to operate”.

As Stewart Lansley, author of a recent book on inequality*, puts it, the modern economy appears to consist of two tracks: a fast one for the super-rich and a stalled one for everyone else. Those in the slow lane enjoyed rising living standards before 2007, despite stagnant real incomes, thanks to increased borrowing on the security of their homes. Since the crisis, however, American and British homeownershave faced a long and deep squeeze on real living standards, while struggling to service an unprecedented level of indebtedness. At the same time, says Mr Lansley, finance has come to play a new role as “a cash cow for a global super-rich elite”.

In continental Europe, the increase in inequality is less pronounced and the legitimacy problem has more to do with the way imbalances in the eurozone are being addressed. Northern Europeans resent a monetary union that has permitted southern Europe to engage in what they see as fiscally profligate behaviour, while southern Europeans and the Irish are required to submit to extreme austerity programmes that exacerbate their sovereign debt problems.

As the German-led policy elite inches towards “more Europe” as a solution to the fissures in the eurozone, it is far from clear that more Europe is what the citizens of Europe want. Democratic legitimacy has been largely lacking from the outset of this gigantic monetary experiment. On both sides of the Atlantic there is now a risk that reasonable aspirations to equality of opportunity are being undermined, accompanied by a growing threat of political instability. Support for open trade and free markets is also being adversely affected.

Misery and money motive

The problem of consent in relation to capitalism is nothing new. In fact, it returns with nagging frequency. In the early years of the industrial revolution, average per capita incomes were slow to rise and the contrast between the plight of the working population and the lifestyle of rich manufacturers prompted savage diatribes such as that of Charles Dickens in Hard Times. Even when living standards did rise, David Ricardo and Karl Marx worried whether the free markets trumpeted by Adam Smith could produce an income distribution that was politically tolerable.

By the late 19th century the debate turned more heavily on the moral question posed by the unedifying behaviour of the American robber barons at a time of spectacular economic growth. The centrality of the money motive in wealth creation appeared to detract from capitalism’s legitimacy unless there was an implicit social contract between the rich and the rest of society, whereby the wealthy tempered ostentation and engaged in philanthropy.

What, then, is different about today’s outbreak of disaffection? Perhaps the most important difference is that it is not the product of despair. The people in Manhattan’s Zuccotti Park and on the steps of St Paul’s Cathedral in London had no need of soup kitchens and took to their tents out of choice, unlike many in the 1930s US who slept in cardboard box colonies – Hoovervilles – out of necessity.

If there is no proliferation of soup queues, it is because in all the economies of the developed world capitalism has been humanised to a greater or lesser degree by forms of social democracy and by bank bail-outs. Unemployment in the US has gone nowhere near the 25 per cent rate that prevailed in 1933. While there are exceptionally high rates of youth unemployment, especially in southern Europe, there is more of a safety net for the victims than in the Depression. And if today’s protesters articulate no coherent programme, it seems clear that underlying frustrations are to do with perceptions of unfairness, not immiseration.

Much of that frustration relates to the banks. In contrast to the 1930s, when banking was about deposit-taking and lending, modern bankers engage in complex trading that they themselves do not always understand and whose social utility is not apparent to ordinary mortals – or even to the likes of Lord Turner, head of the UK Financial Services Authority, who famously declared that many parts of the banking business had “grown beyond a socially reasonable size”. Many have shown a disregard for their customers, while fiduciary obligation has become a casualty of deregulation and the shareholder value revolution. There is a widespread conviction that these bankers constitute a protected class who enjoy bonuses regardless of performance, while relying on the taxpayer to socialise their losses when they have taken excessive risks. At the same time, the public is aware that top executive rewards more generally are poorly related to performance and tend to go up even when profits fall.

Human capital or ‘hand’

Such resentment is not completely new. It bears some resemblance to the hostility towards profiteers after the first world war, which prompted Keynes to remark: “To convert the business man into the profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards. The businessman is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society.”** On that basis, no one can be surprised that the legitimacy of capitalism is currently in question. And it would be wrong to call it a “winner takes all” form of capitalism, because privileged losers appear to be making off with the prizes too.

What is unquestionably novel is the ferocity with which US business sheds labour now that executive pay and incentive schemes are more closely linked to short-term performance targets. In effect, the American worker has gone from being regarded as human capital to a mere cost, or what was known in the 19th century as a “hand”. Yet this pursuit of a narrowly financial conception of shareholder value may destroy value for the ultimate pension beneficiaries – because of the disruption that slashing and burning causes, and the cost and time involved in hiring and retraining when conditions improve.

That underlines the “agency problem” at the heart of the banking and boardroom pay sagas. The accountability of management – the agent acting on behalf of the highly dispersed beneficiaries of equity ownership – is fundamentally flawed. While the public may not be aware of the details of the weak chain of accountability, or the growing number of investors such as high-frequency traders or hedge funds that have no interest in playing a stewardship role, it sees the outcome, which contributes to the wider inequality story.

So what to do? It is not as if there are attractive alternative models. While the west is chastened by the rise of Asia, few would wish to adopt the communist Chinese mixture of state ownership, red-in-tooth-and-claw private markets, wholesale corruption and even greater inequality than the US. As for the cleaner authoritarian approach of Singapore, despite delivering high economic growth, it has started to lose its appeal with the island’s electorate. Nor would many in the west find free-market Hong Kong a comfortable environment.

The real question, as Keynes argued in the 1930s, is therefore how to improve the existing model of capitalism. The snag is that there is minimal flexibility in macro policy after the crisis, especially in the US where broadly centrist politics have been replaced by a polarised, stalemated debate. And in both the US and UK there is a greater mistrust of big government, according to the Edelman Trust Barometer, than of business. Efforts to re-regulate the banking system, meantime, have failed to convince many experts that an even larger financial crisis can be avoided.

From distribution to decline

If Hyman Minsky, the expert on financial market fragility, provided the best route map for understanding events before the crisis, and Keynes offered the best guide to crisis management, Mancur Olson, a theorist on institutional economics, could now be a posthumous beacon on how to manage the aftermath. Olson argued that nations decline because of the lobbying power of distributional coalitions, or special-interest groups, whose growing influence fosters economic inefficiency and inequality.***

When he was writing, the main interest groups were trade unions and business cartels. Today, the pre-eminent interest group consists of finance professionals on Wall Street and in London. Through campaign finance and political donations, they have bought themselves protection from proper societal accountability. And they pose a continuing obstacle to the de-risking of banking of the kind recommended by the Vickers commission in the UK.

Tackling such interest groups both in the US and Europe is one of the biggest post-crisis tasks for policymakers and a key to addressing concerns about systemic legitimacy. The inchoate nature of the public’s complaints is another. Not the least of the difficulties, to reformulate Winston Churchill’s famous remark on democracy, is that capitalism is the worst form of economic management except for all those other forms that have been tried from time to time. The public relations problem implicit in that pale endorsement is an underlying reason why legitimacy crises recur.

* The Cost of Inequality, Gibson Square, 2011
** Quoted in Keynes and Capitalism, Roger E. Backhouse and Bradley W. Bateman, History of Political Economy, 2009
*** The Rise and Decline of Nations, Yale University Press, 1982

Sidebar: Calculations, causes and costs

It then spread in the 2000s to such low-inequality countries as Germany, Denmark and Sweden. Household incomes have been increasing faster at the top, with earners in the top 10 per cent leaving middle earners more rapidly behind than the lowest earners have been drifting away from the middle. Only in France, Japan and Spain has the pay of the best paid failed to rise faster than that of the lowest paid.

Rising income inequality has been variously attributed to globalisation, skills-based technological change, regulatory reforms in labour and product markets, changing household structures and tax-benefit systems becoming less redistributive. The costs of inequality, say the OECD authors, include the stifling of upward mobility, leading to social resentment and potential political instability. It also fuels anti-globalisation and protectionist sentiment.

**** Divided We Stand: Why Inequality Keeps Rising

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Editorial, “Undermining the case for capitalism”

It is now widely accepted that the big increases in pay seen over the past 30 years – the earnings of bosses at FTSE 100 companies have risen as a multiple of median pay from 14 times in 1980 to 75 times – cannot be justified by any measure of performance. As John Maynard Keynes observed, the businessman is “only tolerable as long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society”. Both in the eyes of the public and in fact, many companies have failed this test.

One of the biggest problems concerns the way executive pay is set. Remuneration committees have been captured by a clique of current and recently retired executives, who have little incentive to curb wage inflation.

The government has come forward with a proposal to tackle this by preventing current executives from chairing remuneration committees at other companies. But while this focuses on the right area – such bodies do need to be more independent – it is of questionable efficacy. A better way of changing behaviour would be to bolster the role of shareholders – the ultimate owners of the company. And one way to do this would be for them to sit on remuneration committees.

The government does already accept that investors need to have a bigger say. David Cameron, the prime minister, has just promised legislation to give them a binding vote on remuneration packages.

Some will argue that shareholders have neither the time nor the inclination to assume such responsibilities. Many hold shares for short periods and vote only with their feet. It may be necessary for the state to be more prescriptive in obliging financial intermediaries to use their rights of ownership for the long-term advantage of their beneficiaries. But public confidence in shareholder capitalism can only be restored if owners recognise their responsibility. This is a challenge to which they must rise.

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Editorial, “Capitalism is dead; long live capitalism“

Yet the market economy is not as unchangeable as the laws of the Medes and the Persians in the book of Daniel. It is successful not because it stays the same, but because it does not. The driving force is the desire of all human beings to work for the betterment of themselves and their families. The mechanism is the equally natural search for a better deal. But institutional settings and relationships with political institutions have always been open to change. This very adaptability has ensured the survival of market economies.

What, then, are the challenges that matter today? The libertarian movement in the US, whose standard-bearer is Ron Paul, is clear about the answer: abolish nearly all of these policy innovations and go back, as far as possible, to the capitalism of the late 19th century. Outside the US this current of opinion holds little sway. Even inside the US, it is merely a component of the Republican coalition. It is more than a mere curiosity – but it is not going to shape the future.

More relevant is asking how far the resurgent capitalism that emerged in the 1980s, under the leadership of Ronald Reagan in the US and Margaret Thatcher in the UK, now needs to be reformed. The answer is that it must be, for it has proved not just unstable, but, in important respects, unjust. The result has not only been a devastating crisis, but also a sense that the achievement of extraordinary wealth may not reflect exceptional merit. In societies that rely on consent, this is politically corrosive.

At the heart of the renewed debate are three issues: finance, corporate governance, and taxation. These are the questions raised by the “occupy” movements, which, for all their intellectual incoherence, have altered the terms of the political debate.

The financial sector grew too big, partly because risks were misunderstood and partly because it was encouraged by policymakers to expand. It will need to be better constrained in future, partly by ensuring the risks it creates are internalised. Again, corporate management has too often rigged executive compensation in its own interests, rather than that of shareholders. Finally, a plethora of incentives have allowed many of the most successful people to escape taxation. In all these respects, the modern economy needs reform, to become both fairer and more efficient.

Beyond such reforms, the debate over macroeconomic stabilisation that goes back to the 1930s has been renewed. In the years up to the crisis, the broad consensus was that a monetary policy targeted at inflation was enough. This view has been exploded. After the extended period of desperate improvisation now under way, a new synthesis will be required, one that takes proper account of asset prices, leverage and the role of central banks as lenders of last resort.

Capitalism will endure, by changing. That is the lesson of the past. It is just as relevant today.

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John Gapper, “Promises that proved ultimately empty“

The crisis of legitimacy in capitalism has meanwhile spread since 2008, just as Occupy Wall Street has expanded from its original focus on bail-outs and bankers’ pay to a global reference point for the grievances of the “99 per cent”. Yet it was within banks where the crisis emerged and where its heart still lies.

Today, they are resented for holding taxpayers hostage by having become “too big to fail”. Many argue that banks have drifted from their basic social function – to encourage growth by making loans, underwriting securities and advising companies – into a self-interested drive to make money by any means possible.

The hostile mood is exacerbated by the pay practices that grew up on Wall Street and in the City of London following deregulation in the 1970s and 1980s – the habit of half-mimicking the old partnership structures by paying investment bankers and traders large bonuses. Big financial institutions managed to absorb the gains from trading and risk-taking while socialising their losses. “There is a deep question of legitimacy that banks need to face up to,” says Ranu Dayal, senior partner at Boston Consulting Group. “The under­lying level of dislike of banks is compounded if they are not seen to have reformed and to be playing an important role in economic resurgence – or to have failed as a result of compensation structures or just naked greed.”

Unless they can find a way to demonstrate their usefulness clearly, and to curb the practices that most alienate outsiders, banks face a long, debilitating trench war against new regulation. For economies, this could limit the beneficial aspects of a thriving and focused financial sector.

Postponed and hidden risk

For a long time, banks coasted on a wave of growth in credit markets – driven by the rise of derivatives, the loosening of regulation and capital standards, and a hubristic belief that they had somehow broken their old habit of losing billions of dollars in downturns. This turned out to be, as Andrew Haldane, an executive director of the Bank of England, concluded, “as much mirage as miracle”.

Instead, it transpired that most of the risks had simply been postponed and hidden, even from banks’ own directors. As Adair Turner, chairman of the Financial Services Authority, the main UK regulator, put it last year: “Some financial activities … far from adding value in some complex though difficult to understand fashion, in fact created financial instability and produced economic harm.”

Such dangers went unseen. “There was a massive overconfidence that risk had been transformed and we were in a different banking paradigm,” says Philip Augar, a financial author and former analyst in the City. “It was all egged on by governments who listened to investment bankers and appointed them to high positions. They were told that all they had to do was to get out of the way.”

Banks that had relied on a variety of businesses to make money – from mergers and acquisitions advice to securities underwriting – shifted overwhelmingly towards trading. Foreign exchange trading volumes rose 234-fold between 1977 and 2010, while trading – particularly in bonds and currencies – made up 80 per cent of the biggest banks’ revenues in 2010, according to BCG.

This brought high profits for a while, but it undermined the argument that they did something useful. “The investment banking industry has drifted from its original focus, which was raising capital for industry and providing advisory services,” says Bob Gach, the head of Accenture’s capital markets consultancy arm.

Thomas Philippon, a professor at New York University’s Stern School, estimates that the industry’s share of US gross domestic product rose from about 3 per cent in 1950 to more than 8 per cent in 2010. Instead of the intensified use of information technology increasing efficiency, as it did in retailing, banks simply got bigger.

Prof Philippon says that this growth in trading has not been accompanied either by sharper pricing in securities markets or by better financial insurance for industrial companies. “Bankers such as J.P. Morgan were doing just as much as today’s industry in the past but they were more efficient. The more I look at the rise in trading, the more I conclude that society gets nothing from it. It is empty.”

A balance to restore

That has important implications for governments. Government and central banks were traditionally willing to back deposit-taking institutions in times of crisis – from the UK secondary banking crisis of the early 1970s to the 1980s US savings and loans shake-outs – because of the value of a sound banking system.

The 2007-08 crisis destroyed that delicate balance, not only making European governments rescue large banks but leading to the US Federal Reserve extending the protection of its discount window to Goldman Sachs and Morgan Stanley. The old ambiguity disappeared and the protected club of “systemically important financial institutions” widened.

But just because a bank is systemically important – meaning it would cause severe disruption across financial markets if it failed – that does not make it economically vital. The most important function of banks is also their least glamorous – taking deposits and making loans. This has been mingled with riskier, trading-related activities in ways that are difficult to disentangle.

The sharpest effort has emerged in the UK, where the government has backed the Vickers Commission’s proposal to ringfence retail banking deposits. Elsewhere, banks have fought regulations such as the Volcker rule curbing proprietary trading. “The regulatory agenda was too modest to start with, and the banks’ political power is incredible,” says Simon Johnson, a professor at MIT Sloan School.

A prolonged fight to keep doing the same thing while fighting regulation will do nothing for banks’ legitimacy, however, and little for the economies in which they operate. Nor will it address the need to restructure, which is being driven by a basic economic force – the financial pressure that banks now face. Institutions such as UBS and Citigroup are struggling to recover from their losses during the crisis and the European banking sector as a whole lost 40,000 jobs last year. After a post-2008 bounce, when central banks cut interest rates, trading revenues have fallen sharply.

Banks might be able to argue and delay their way out of their current troubles and wait for memories to fade. But that outcome is by no means assured, and would not be the best one for society as a whole. A healthy banking system – both in size and scope – is vital to a sound economy.

Nor is regulation the only challenge that banks face – the market is exerting even strong pressures for them to change their ways.

Meanwhile, corporate banking suffers from overcapacity that was left unaddressed in the growth years. “At heart, banking is a commodity business and a very mature one,” says Peter Hahn, a professor at City University’s Cass School. “Most industries deal with that through consolidation, but this was an industry that consolidated without taking out capacity. That’s a big problem.”

Banks had avoided having to face a low and shrinking return on assets by taking on more of them – leveraging balance sheets in order to boost their return on equity to historically high levels. While many banks had only single-digit returns on equity in the 1990s, these rose to 20 per cent or more in the mid-2000s.

Reduced returns

Despite the regulatory pushback, central bankers are imposing higher capital and liquidity requirements, preventing them from using leverage as aggressively as before. The market has also imposed tougher discipline on institutions with highly leveraged balance sheets and fragile funding – as the collapse of MF Global, the bond broker, showed late last year.

This is causing big problems for banks, which were able to compensate for falling profitability in their core businesses by taking on more risks and increasing the size of their balance sheets. Now, any bank that tries to do so, even if its regulator allows it, risks its credit rating being cut and its access to funds evaporating.

If banks cannot find new revenues, the alternative is to cut costs, and to shrink and merge as those in other commoditised industries do. Governments, however, are wary of allowing them to become too big to fail, and the generation of executives at the senior levels of banks have never operated in a contracting industry.

“This industry is run by entirely the wrong people now,” says Prof Hahn. “It is not that they are idiots but, for three decades with only small intervals, you succeeded by growing your business and piling on risk. The new regime is about efficiency and cost and none of them knows about that.”

One investment banker says the mood in the industry is sober. “Revenues and capital are both under pressure and that is affecting compensation and the employment outlook, which causes a fair degree of nervousness. There isn’t a depression but neither is there much ebullience.”

Large banks had a strong incentive in the past to invest heavily in new investment banking operations and to hire teams of bankers from others in order to push themselves into the “bulge bracket” of global banks. As Mr Turner notes, activities such as trading and securities underwriting are “natural oligopolies” in which those with a big market share take a large slice of the available profits.

But banks such as UBS have now pulled back from a growth-at-all-costs strategy. They are instead trying to focus on activities where they have an edge, such as domestic retail banking, wealth management and specialist areas such as securities custody.

The combination of lower leverage and curtailed ambition is likely to make banks much less profitable. Mr Dayal predicts that “from being a business of return on equity in the high [percentage] teens, it will go down to high single digits to low double digits”. It will revert to looking more like a utility industry.

If shareholders are willing to accept lower returns, banks may be able to regain some social legitimacy. Those that focus on deposit-taking and lending stand a better chance of being seen by governments as important to the economic system. Even investment banks that focus on securities underwriting and advisory work rather than trading will have a better story to tell.

The question is whether banks can and will transform themselves. Some are sceptical. “I don’t take the view that investment banking is finished,” says Mr Augar. “It will be less profitable and smaller for a period and it will be quite a while before we see so many would-be global banks trying to gain a seat at the top table. But not that long. Five years?”

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David Rubenstein, “A letter to capitalists from Adam Smith“

From: Adam Smith

What has become of my beloved capitalism? Countries teeter, protests rage, unemployed multiply, deficits abound the virtues of capitalism are questioned. Based on a few hundred years of observation, I have some fresh thoughts on how to sustain this system for a few hundred years more, or at least do better in 2012 than it did in 2011.

This triumph has occurred because capitalism’s greatest strength – productive economic activity – has succeeded in creating more opportunities for more people than anyone – including me – ever imagined. And with more wealth, billions of people now in the middle class can secure education for their progeny, purchase necessities and luxuries at once-unimagined levels, pursue leisure activities for a greater part of their lives and retire with higher levels of economic security.

All that is satisfying.

What is not satisfying is the view that capitalism has to work perfectly to justify its presence. I never said it would. I just said it was better than the alternatives, as Winston Churchill famously said about democracy.

I always felt there were two principal flaws – and we saw them come to a head over the past few years. The first is that unfettered exuberance about wealth creation will produce unsustainable booms and inevitable crashes. The great recession, fuelled by cheap credit, is a textbook example of this flaw.

The second is the inequality that results when the charge towards wealth creation leaves behind those less able (in most cases through no fault of their own) to adapt or to compete with the hard-chargers. The income disparity in many wealthy countries is now at its greatest level since I left the scene – and it was not so wonderful then either.

While there is no simple cure to capitalism’s two big flaws, here is what I would do in 2012 to get the system back on its feet and to modulate income disparities.

1. Save the euro and the European Union. A functioning and vibrant EU – the world’s largest economic unit – is essential to global prosperity. The largest countries using the euro – and also those outside the eurozone or those dependent on a thriving EU – must dig deeply into their pockets now to save the euro. If they do not, the pain and cost will be greater in the future. And those of more modest means will suffer the most if the euro is abandoned.

2. Fix the US debt and deficit. To my amazement, when the super committee failed to reach an agreement the markets yawned, undaunted by a $1.4tn deficit and accumulated debt in excess of $16tn. Beware, though. At some point during 2012 the markets will wake up and say: “No! We cannot wait until after the presidential election to fix this problem.” The Obama administration and Congress must quickly cobble a credible debt-reducing package. Otherwise, as in Europe, the markets’ harsh solutions will be borne disproportionately by the low income and disadvantaged. This is not acceptable, nor is it good for capitalism.

3. Integrate the emerged markets. The world needs to acknowledge that the centre of capitalism is shifting to the emerging markets – where most of the growth will occur in 2012. But having emerged, China, India and Brazil, among others, need to be fully integrated into the global economic decision-making process. If they are not, the capital needed to solve many of the developed markets’ current problems, especially residual issues of the great recession, will not be available on tolerable terms. Again, this will hurt the poor more than the wealthy.

4. Educate. Educate. Educate. Perhaps the greatest cause of income inequality is the dismal state of primary and secondary education. The mismatch between job openings and qualified candidates is growing, which leads to reduced economic activity, a greater sense of disparity between the haves and the have-nots, and social unrest. To address these issues, governments need to embrace reform, ensure effective funding and allocate resources more efficiently. By educating all their children, reducing soaring high-school dropout rates, and re-educating and retraining adults, nations can more effectively prepare workers to embrace new technological realities.

Though much time has passed since I last put pen to paper, my faith in capitalism is steadfast. The problems you face – saving the EU, fixing the US budget, welcoming emerged nations as full partners and making education a real priority – are huge challenges that must be addressed now.

It is the only way to continue creating wealth for all nations and people, while giving capitalism the legitimacy it needs to thrive.

The writer is managing director and a co-founder of The Carlyle Group

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Gideon Rachman, “Why I’m feeling strangely Austrian“

Old certainties about the onward march of the markets are collapsing. But no new theory has established ideological “hegemony”, to use the concept that Gramsci made famous. Some ideas are, however, gathering new strength. The four strongest emerging trends that I can spot are, in very broad terms: rightwing populist, social democratic-Keynesian, libertarian-Hayekian and anti-capitalist/socialist.

In post-crisis Europe, however, rightwing populism is on the rise – from the Freedom party in the Netherlands to the National Front in France and the Northern League in Italy. The populists are anti-globalisation, anti-EU and anti-immigration – the common thread being that all these forces are felt to be hostile to the interests of the nation. Hostility to Islam links Europe’s populist right to parts of the Tea Party movement in the US.

There is some overlap between the populists and the libertarian Hayekians – but the two movements have different obsessions. In the US, Ron Paul, the maverick Republican, carries the banner for libertarianism. He fondly recalls dining with Friedrich Hayek himself and watching an inspiring denunciation of socialism by Ludwig von Mises, another economist of the Austrian school. That explains Mr Paul’s otherwise baffling remark, after last week’s Iowa caucus, in which he said: “I’m waiting for the day when we can say we’re all Austrians now.”

The libertarians are unusual because they argue that the current crisis is caused not by an excess of capitalism, but by too much state intervention. As far as the Austrian school is concerned, the Keynesian “cure” for the crisis of capitalism is worse than the disease.

Mr Paul is the purest advocate of a powerful conviction on the American right that the US is afflicted by an over-mighty state. The urge to slash the government back into the 18th century is not a common one in Europe. But Paulite suspicion of central banks that threaten to debase the currency is powerfully echoed in Germany – where the Hayekian right is horrified by the operations of the European Central Bank, and by bail-outs for bankrupt nations. This ideological trend is not confined to the west. In a recent article, Simon Cox of The Economist argued that policy debates in China about the state’s role in reflating the economy also pit Hayekians against Keynesians.

In the west, the fiercest opponents of the Hayekians are the Keynesian-social democrats. Their belief in deficit spending as the key to stimulating the economy often goes hand in hand with a call for a more active and expansive state. In Europe, where there is little scope for more state spending, the social democrats are arguing for much tougher regulation of high finance, a revival of industrial policy – and a renewed stress on tackling inequality. While efforts to label Barack Obama a “socialist” are silly, it is fair to label him a social democrat. The US president does not reject capitalism, but he does seek to soften its edges through a more active state that promises universal healthcare and redistributive taxation. The fact that inequality has become a global concern from China to Chile, and from India to Egypt, suggests that this is another trend that has gone global.

The failure of the hard left to capitalise on the economic crisis testifies to how profoundly communism was discredited by the collapse of the Soviet system. But mass unemployment in Europe might yet produce the conditions for the revival of an anti-capitalist movement. Greece’s two far-left parties are currently at about 18 per cent in the polls. The diverse groups that campaign under the banner of Occupy Wall Street contain some genuine socialists. And China has a powerful “new left” movement that pays lip-service to Maoism.

Events will determine which of these ideological trends sets the tone for the new age. Most people will be buffeted by personal circumstances, and by the news.

Under normal conditions I would probably sign up with the social democratic tendency. The Tea Party is not my cup of tea. But I spent the weekend reading newspaper accounts of the ever more incredible figures that may have to be poured into the bail-outs for banks and countries in Europe. Then I turned the page to read of demands for more protectionism and regulation in the EU. For light relief, I then went to see The Iron Lady – the new film about Margaret Thatcher. The whole experience has left me feeling strangely Austrian.

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John Kay, “Let’s talk about the market economy“

Karl Marx never used the word capitalism. But after the publication of Das Kapital, the term came to describe the system of business organisation which had made the industrial revolution possible. By the mid-19th century that system was central to the economic landscape. Werner Siemens in Germany, Andrew Carnegie and John D. Rockefeller in the US, and in Britain Richard Arkwright’s successors. As individuals or with a small group of active partners, they built and owned both the factories and plants in which the new working class was employed, and the machinery inside them.

The political and economic environment in which Marx wrote was a brief interlude in economic history. Yet the terminology devised by 19th-century critics of business continues to be used by both supporters and opponents of the market economy, although the industrial scene has been transformed. Legislation passed in Marx’s time permitted the establishment of the limited liability company, which made it possible to build businesses with widely dispersed share ownership. This form of organisation did not become popular until the end of the 19th century, but then expanded rapidly. By the 1930s, Berle and Means would write of the divorce of ownership and control. At the same time, Alfred Sloan at General Motors demonstrated how a cadre of professional managers might wield effective control over a large and diversified corporation.

So the business leaders of today are not capitalists in the sense in which Arkwright and Rockefeller were capitalists. Modern titans derive their authority and influence from their position in a hierarchy, not their ownership of capital. They have obtained these positions through their skills in organisational politics, in the traditional ways bishops and generals acquired positions in an ecclesiastical or military hierarchy.

If the first half of the 20th century was a time of fundamental change in the nature of business organisation, the second half was a time of fundamental change in the nature of business success. The value of raw materials is only a small part of the value of the production of a complex modern economy, and the value of physical assets is only a small part of the value of most modern businesses. The critical resources of today’s company are not its buildings and machines but its competitive advantages – its systems of organisation, its reputation with suppliers and customers, its capacity for innovation. These attributes are not, in any relevant sense, capable of being owned by anyone at all.

The typical reader of this article works in front of a computer at a desk in an office block. He or she probably does not know who owns any of these things. It is quite likely that each is owned by someone different – a pension fund, a property company or a leasing business – none of whom is their employer.

People do not know who owns their work tools because the answer does not matter. If your boss pushes you around, exploits you or appropriates your surplus value, the reasons have nothing to do with the ownership of capital. While control over the means of production and exchange matters a great deal to the organisation of business and the power structures of society, ownership of the means of production and exchange matters very little.

Sloppy language leads to sloppy thinking. By continuing to use the 19th-century term capitalism for an economic system that has evolved into something altogether different, we are liable to misunderstand the sources of strength of the market economy and the role capital plays within it.

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Sebastian Mallaby, “You many not want to . . . but it is time to hug a hedgie“

Most critiques of modern finance miss the mark. There is no point hoping, for example, that armies of Dodd-Frank enforcers will ever render finance truly stable. Finance is a system of promises about an uncertain future; barring the advent of some magical prediction machine, regulation cannot change that. Currencies will rise and fall; interest rates will fluctuate; some companies will succeed while others go bust. A good financial system will absorb these risks without taxpayers picking up the pieces. But the risks will still be there; financial firms will still blow up.

If securities markets are useful to nonfinancial companies, it follows that the fashionable contempt for traders makes absolutely no sense. Markets need experts who are paid to judge the value of securities, so improving the chances that society’s scarce capital will be allocated to the companies that use it best. Markets also need buyers and sellers, so that holders of securities can sell them when they need cash. If there were no actively traded market in which to off-load the shares of a new tech company, investors would buy those shares only if they received a discount. The higher cost of capital would mean fewer tech companies, less innovation and less growth.

Some critics concede that traders may be useful, but complain that modern capitalism creates too many of them. We need enough traders to reprice markets at, say, five-second intervals, according to this view; but vast armies of high-frequency paper shufflers represent a shocking waste of human capital. Yet this critique is also pointless. Should government get into the business of deciding how many architects or therapists we need? The socially optimal number of fashion designers is surely a fraction of the number sketching buttons in the Quadrilatero della Moda in Milan.

The fact is that we do need traders, and the market is the best mechanism for deciding how many we should have. Except, of course, that the market is distorted: much trading goes on inside too-big-to-fail behemoths that have an implicit government backstop. If you subsidise the risk in trading, naturally it will be copious and, worse, dangerous. That is why the disasters of 2008 were concentrated inside large, systemic institutions. The problem is not the trading; it lies with the corrupted incentives of the financial hypermarkets in which trading is done.

Hedge funds provide at least part of the answer to this distortion. With the half-exception of Long-Term Capital Management, which got regulators’ attention but still received no government bail-out, hedge funds rise and fall without threatening taxpayers. Because their creation and destruction are not subsidised, their risk-taking tends to be more prudent – in the years before the crisis, hedge funds cut leverage while the big investment banks went nuts. Even when they do go wrong, hedge funds generally pose little risk to creditors, limiting the risk of financial contagion. Failing hedge funds almost always close before their equity goes negative. Creditors get all their money back.

And yet, despite these virtues, hedge funds remain unpopular, a phenomenon that speaks volumes about the confused critique of capitalism in the rich world. Yes, hedge-fund moguls are absurdly wealthy and doubtless should be taxed more – as should Wayne Rooney of Manchester United, for that matter. However, the unequal distribution of the fruits of growth must be separated from the question of how to secure growth. When it comes to the second challenge, the rich guys can be the good guys, however strange that sounds.

The writer is a senior fellow at the Council on Foreign Relations and the author of More Money Than God: Hedge Funds and the Making of a New Elite

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Samuel Brittan, “The market still has no rivals“

There is no need to pretend that market rewards reflect personal merit. As Lord Melbourne said in another context: “There is no damn’d merit about it.” Redistribution is best carried out by a (preferably unified) tax and social security system, and not by interfering with prices and wages.

My central case for competitive capitalism is that it promotes personal and political freedom. A businessman outside the financial sector will prosper by providing what adults wish to have – even if that is pop records, candyfloss or nude shows rather than what their supposed elders and betters think is good for them. Above all, the individual is free to use his abilities in line with his own choices. He or she can concentrate on personal pleasure, social service at home, the relief of poverty abroad or any combination of these and other activities.

Early in the 20th century Ludwig von Mises, an Austrian economist, challenged socialists to say how to determine what should be produced and by what methods in the absence of capitalist markets. The most interesting response came from “market socialists”, who asserted that state-owned enterprises could mimic capitalist ones in using market prices to guide their activities. Indeed they could with a known set of products, a known technology and known and static public tastes. The matter is wholly different when it comes to inventing new products or discovering low-cost methods. And who should be the managers and who the managed and how is a limited amount of investment funds to be allocated to everyone with a bright idea? Above all there is the political consideration enunciated by John Stuart Mill: “If the roads, the railways, the banks, the insurance offices, the great joint stock companies were all of them branches of government … If the employees of all these enterprises … looked to the government for every rise in life, not all the freedom of the press and popular constitution of the legislature would make this or any other country free otherwise than in name.” The importance of private capital for freedom of expression was demonstrated by its role in the launch of the critical and satirical periodical Private Eye, or by the way in which supposedly subversive US writers in the 1950s found refuge from McCarthy-inspired persecution by taking jobs in the private sector.

There are some attractions in worker-owned enterprises (to which Mill was sympathetic) and there have been some successes here – for instance, the Mondragon group in Spain; and I write as a satisfied customer of the John Lewis Partnership. But there is simply not enough evidence or analysis to support a politically ordained wholesale transfer of enterprises to such entities.

Jesse Norman, the Conservative MP, has listed some of the numerous ways in which capitalism can be corrupted by cronyism. These include old-fashioned monopoly; Russian-type capitalism symbolised by oligarchs who have gained control over natural resources; khaki capitalism in states dominated by the military and narco-capitalism based on dealings in illicit drugs. The last is aggravated by over-intrusive western legislation akin to US prohibition in the 1920s. There is, however, no need to say that these are not “real capitalism” or to claim a Conservative patent on the genuine variety.

The real shortcoming of my book was that, like many others, I did not discuss the financial sector and how its activities could undermine the capitalist order even if there were no overt inflation or deflation of consumer prices. Any working market order requires there to be some way of marrying savings with the desire to borrow; a market for investible funds and some way of insuring against the vicissitudes of life as well, of course, as a better way of keeping ready cash than storing it under the mattress. But none of this justifies the threat posed by masses of invented money to institution after institution and country after country. Capitalism is a means to freedom and prosperity, not an end in itself. Improvement here may justify not merely international regulation but the retention for quite a long time in public ownership of banks and other institutions that have had to be rescued by government.

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Update 1:

Edward Luce, “Caught between apathy and anger“

If the campaign rhetoric is any guide, the US is in the throes of a Marxist change in consciousness. In spite of belonging to a party that draws much of its cash from Wall Street, rival Republican contenders for the presidential nomination have ripped into Mitt Romney’s past as a private equity executive. Without any help from the left, the former chief executive of Bain Capital stands accused of being “a vulture”, “looting”, “greed” and “profiting from other people’s misery”. If it carries on like this, the Democrats will have nothing left to say when it comes to the general election.

Is the US seeing a backlash against capitalism? A visit to any of the country’s now 50,000 or so storage houses – places where people rent space to keep their surplus belongings – gives an eerie sense of a country in a continual flux of insecurity. These centres, which according to industry data have grown roughly tenfold since the 1980s, hold frequent auctions of the belongings of those who have failed to pay the rent. In recent years, such auctions have exploded. “We call it the five Ds – Debt, Divorce, Displacement, Death and Disinterest [uninterest],” says the branch manger at ezStorage, one of the chain groups, in Glen Burnie, near Baltimore. “If we’re auctioning your unit, then you’re going to be one of those Ds.”

There is nothing, however, in the atomised discomfort of middle-class America that would suggest a revolution in the making. People do talk about a new age of populism. Perhaps “age of transition” would be more accurate – although to what is not yet clear. Earlier periods of economic turmoil, most notably during the robber baron decades of the late-19th and early-20th century, did turn populist. Then, like now, both parties tended to go to the same sources for money. In Mark Twain’s novel The Gilded Age, the deepest well of election finance was the railroad capitalists. Today it is Wall Street. Then, as today, was a period of electoral volatility – the last time Congress changed party control as often as it has in the past six years was in the last two decades of the 19th century.

Both eras were also driven by disruptive technologies that upended settled patterns of work and pushed the winners into stratospheric new levels of wealth: what the internet and financial globalisation has done for the net worth of America’s superclass since the 1990s finds its closest parallel in the income effects the railway, electricity and the internal combustion engine had 100 years ago. The vast concentrations of wealth in the economy in turn produced growing in­equalities of influence in the political arena. Mark Hanna, the late-19th century electoral manager, famously said: “The three most important things in American politics are money, money and I forget what the other one is.” Rahm Emanuel, the mayor of Chicago and former White House chief of staff, said much the same thing in 2006 when he helped engineer the Democratic party’s handsomely bankrolled midterm congressional victory.

So much for the parallels. The differences between now and then are also instructive. Unlike the “progressive era”, today’s America is shaped as much by apathy as it is by anger. The early 1900s were characterised by the “prairie populism” of the small farmer and the rise of an organised working class. They tended to meet around the small town “cracker barrel” and in the industrial workplace. Today’s squeezed middle classes share no obvious gathering place. They are economically diffuse and geographically scattered. “The largest squeezed group today are people with high-school diplomas working in the service sector,” says Michael Lind, author of a forthcoming economic history of America. “Most of them are living in the suburbs and watching TV.” When the politicians appear, they tend to switch channel.

The two exceptions are the Tea Party and Occupy Wall Street. Taken at face value, the Tea Party represents a rebellion against the nexus between bankers and Washington. It first began to stir during the $700bn Wall Street bail-out in October 2008 – a package Congress enacted only on its second vote. On closer inspection, however, the Tea Party is driven as much by demography as ideology. Surveys of Tea Party supporters show an overwhelmingly white and middle-aged or elderly support base. Their biggest flare-up came during the angry town hall protests against President Barack Obama’s healthcare reform in August 2009. Instead of opposing government in general, the protesters claimed Mr Obama’s reform would rob from Medicare to fund healthcare reform – transferring federal dollars from retired people to working-age Americans. “Keep government hands off my Medicare!” was the totemic – if oxymoronic – slogan of the moment.

A recent survey of Tea Party supporters showed that more than three quarters wanted to leave untouched Medicare and Social Security, the public pension system – the largest items in the federal budget. When Paul Ryan, the House budget chairman, unveiled a fiscal roadmap last year that would have rapidly slashed Medicare’s largesse, fellow Republicans rapidly distanced themselves from his plan. Newt Gingrich, the Republican former speaker of the House of Representatives and now improbable anticapitalist rival to Mr Romney, attacked the Ryan plan as “rightwing social engineering”.

Polls explain the direction of Mr Gingrich’s apparent tangent. “If you study public opinion, Americans are deeply ambivalent,” says Lawrence Jacobs, author of Class War? What Americans Really Think About Economic Inequality. “They hate government in the abstract. But they love government programmes that benefit them in particular.”

The Tea Party’s demography also helps to explain why the only cut the Republican-controlled Congress has so far pushed through is a freeze on the so-called “domestic non-defence discretionary budget”. This excludes the far costlier Medicare and Social Security programmes but targets education, infrastructure, research and development, and other items that matter to the younger generations.

Eschewing an ideological lens, Ronald Brownstein, editor of the National Journal, a Washington weekly, says we have entered a new political age of “grey versus brown” – an increasingly elderly “Anglo” Republican party is squaring off against a youthful rainbow coalition of other races supporting the Democrats. The era of grey-haired Smith against twentysomething Sanchez perfectly mapped Mr Obama’s 2008 strategy, where he exploited America’s changing make-up to win the traditionally Republican states of Virginia and North Carolina.

Mr Obama is supported by large majorities of America’s black people, Hispanics and Asians. Fewer than 40 per cent of blue-collar whites now approve of him. That divide has grown stronger since 2008, even while voter “intensity”, or depth of support, has shifted back to working-class white people. This year, Mr Obama will hold his nominating convention in Charlotte, North Carolina, and home of a young and educated multi-ethnic population. The Republicans, meanwhile, have settled on the white retirement zone of Tampa, Florida. If there is a political war brewing, it will be between generations and ethnic groups rather than between classes.

According to the latest US Census, in 2010, white people will become a minority by 2040. The decennial survey also revealed that 46.5 per cent of Americans under the age of 18 were non-white – up from 39 per cent in 2000. Between those years, the number of white children shrank by 4m while the number of American children in total grew by 6m. This was almost all because of the growth in the Hispanic population. As the age of fiscal austerity begins to bite, the grey-brown divide is likely to become more political. “At some stage we are all going to realise that we only have about 80 per cent of the wealth we thought we had before 2008,” says Mr Lind. “When that happens, politics will get uglier as each group fights to defend its piece of the federal pie.”

In spite of last year’s battle over the debt ceiling, that moment of fiscal reckoning is yet to hit Washington. Mr Obama is doing his best to rekindle the enthusiasm that swept him to office in 2008, however. Some of the president’s rhetoric has been supplied by the Occupy protesters, who have helped to rebrand American politics as a fight between the richest 1 per cent and the rest.

However, unlike the Tea Party movement, the Occupy movement has no institutional apparatus. The former is Republican and rooted in towns. The latter is drawn more from the fringe of left activists, students and anarchists. They seem to be as unenthusiastic about Mr Obama as most Tea Partyers are about Mr Romney. “It is a strange thing that at this moment we are likely to get two presidential candidates who completely lack any populist touch,” says Jacob Hacker, a political scientist at Yale University. “Yet both feel obliged to adopt the rhetoric of populism, however unnatural it might sound in their mouths.”

Early in his candidacy, Mr Romney launched an advertisement depicting the “invisible” middle class of Mr Obama’s America. In turn, allies of the president – and now Mr Romney’s Republican rivals – depict the former Massachusetts governor as a greedy plutocrat who speaks only for the elite. Both candidates’ super-political action committees, which can take unlimited donations but are not allowed to co-ordinate with the campaigns, are funded by wealthy donors, many of them from Wall Street. Both super-Pacs – the pro-Romney Restore Our Future and pro-Obama Priorities USA – are headed by former senior aides. The contrast between the populism of their messages and the source of their money is hidden in plain view.

Facing a disillusioned electorate, Mr Obama is spending a lot of time trying to enthuse his original support base. Among other “outreach” efforts, he is already meeting more Hispanic groups and talking about immigration reform (having largely avoided the subject in his first two years in office.

Meanwhile, Mr Romney will surely try his best to make America’s older voters forget that he embraced Mr Ryan’s fiscal roadmap last year. And he is proposing far deeper domestic spending cuts than the president. “Candidates often say that 2012 will be the most important election of our lifetimes,” says Mr Jacobs, the author. “But an Obama-Romney election could easily drain the passion from national politics – it is more likely to turn activists away.”

Whatever transpires in 2012 is unlikely to be populist – although it will often be packaged to sound as though it is. Some observers speculate about the disruptive possibility of a third-party candidacy. The likeliest would come from the gold-obsessed “Austrian” candidacy of Republican Ron Paul, who provides the closest echo to the rhetoric of Williams Jennings Bryan, the late-19th century populist. Others foresee a dirty general election campaign – a “war of the super-Pacs” – followed by a low turnout in November.

Yet America’s mood remains far too mercurial for clear-cut predictions. When an electorate conveys this degree of disaffection, it is prone to unexpected swings. “We seem to be living in an age of disenchantment with democracy,” says Mr Jacobs. “Trust in the system has almost entirely vanished.”

Sidebar: Income inequality frames the terms of debate

At one of the Republican debates last month, Mitt Romney extended his hand to Rick Perry and offered a large bet on an arcane subject of dispute. “Rick, I’ll tell you what, $10,000,” Mr Romney said to the Texas governor. Dumbfounded, Mr Perry said he was not in the “betting business”.

Mr Romney, whose personal wealth is estimated at $250m, may be headed for the Republican nomination as presidential candidate. But Democratic operatives believe he has already given them a trove of material they can use to reinforce the impression that he is out of touch with ordinary Americans.

The rhetorical dress rehearsals suggest a November election that will revolve around questions of privilege and opportunity – with Barack Obama calling for fairness and railing against inequality, while Mr Romney attacks the president’s support for a European-style “entitlement society”.

In any event, the two candidates will square off against the backdrop of the most acute income inequality in almost a century. Over the past 30 years, the top 1 per cent of Americans have seen their incomes grow by almost 300 per cent in real terms – and the top 0.1 per cent by an even greater proportion.

Median household income has, meanwhile, risen by a more modest 40 per cent, according to the Bureau of Labor Statistics – and much of that is inflated by many households having turned dual-income with the entry of women into the workforce. Male real median earnings have stayed flat.

Polls show a large majority of Americans believe their country is “going in the wrong direction” and resentment is evident against the titans of finance. Yet the widening disparity has not translated into a backlash against capitalism. There is little sign of a revolt against wealth itself if it is seen to have been earned fairly.

The prosperity of Lloyd Blankfein, the Goldman Sachs chief executive, attracts disapproval. But the late Steve Jobs, who worked his magic on Apple, is something of a folk hero.

Bracketing Mr Romney’s personal fortune with that of people such as Mr Blankfein will thus be one of the Obama campaign’s main objectives.

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Update 2:

Arundhati Roy, “Beware the ‘gush-up gospel’ behind India’s billionaires“

Is it a house or a home? A temple to the new India, or a warehouse for its ghosts? Ever since Antilla arrived on Altamount Road in Mumbai, exuding mystery and quiet menace, things have not been the same. “Here we are,” the friend who took me there said, “pay your respects to our new ruler.”

Antilla belongs to India’s richest man, Mukesh Ambani. I’d read about this, the most expensive dwelling ever built, the 27 floors, three helipads, nine lifts, hanging gardens, ballrooms, weather rooms, gymnasiums, six floors of parking, and the 600 servants. Nothing had prepared me for the vertical lawn – a soaring wall of grass attached to a vast metal grid. The grass was dry in patches, bits had fallen off in neat rectangles. Clearly, “trickle down” had not worked.

But “gush-up” has. That’s why in a nation of 1.2bn, India’s 100 richest people own assets equivalent to a quarter of gross domestic product.

The word on the street (and in The New York Times) is, or at least was, that the Ambanis were not living in Antilla. Perhaps they are there now, but people still whisper about ghosts and bad luck, vastu and feng shui. I think it’s all Marx’s fault. Capitalism, he said, “. . . has conjured up such gigantic means of production and of exchange, it is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells”.

In India, the 300m of us who belong to the new, post-“reforms” middle class – the market – live side by side with the ghosts of 250,000 debt-ridden farmers who have killed themselves, and of the 800m who have been impoverished and dispossessed to make way for us. And who survive on less than 50 cents a day.

Mr Ambani is personally worth more than $20bn. He has a controlling majority stake in Reliance Industries Limited (RIL), a company with a market capitalisation of Rs2.41 tn ($47bn) and an array of global business interests. RIL has a 95 per cent stake in Infotel, which a few weeks ago bought a major share in a media group that runs television news and entertainment channels. Infotel owns the only national 4G broadband licence. He also has a cricket team.

RIL is one of a handful of corporations, some family-owned, some not, that run India. Some of the others are Tata, Jindal, Vedanta, Mittal, Infosys, Essar and the other Reliance (ADAG), owned by Mukesh’s brother Anil. Their race for growth has spilt across Europe, central Asia, Africa and Latin America. The Tatas, for example, run more than 100 companies in 80 countries. They are one of India’s largest private-sector power companies.

Since the cross-ownership of businesses is not restricted by the “gush-up gospel” rules, the more you have, the more you can have. Meanwhile, scandal after scandal has exposed, in painful detail, how corporations buy politicians, judges, bureaucrats and media houses, hollowing out democracy, retaining only its rituals. Huge reserves of bauxite, iron ore, oil and natural gas worth trillions of dollars were sold to corporations for a pittance, defying even the twisted logic of the free market. Cartels of corrupt politicians and corporations have colluded to underestimate the quantity of reserves, and the actual market value of public assets, leading to the siphoning off of billions of dollars of public money. Then there’s the land grab – the forced displacement of communities, of millions of people whose lands are being appropriated by the state and handed to private enterprise. (The concept of inviolability of private property rarely applies to the property of the poor.) Mass revolts have broken out, many of them armed. The government has indicated that it will deploy the army to quell them.

Corporations have their own sly strategy to deal with dissent. With a minuscule percentage of their profits they run hospitals, educational institutes and trusts, which in turn fund NGOs, academics, journalists, artists, film-makers, literary festivals and even protest movements. It is a way of using charity to lure opinion-makers into their sphere of influence. Of infiltrating normality, colonising ordinariness, so that challenging them seems as absurd (or as esoteric) as challenging “reality” itself. From here, it’s a quick, easy step to “there is no alternative”.

The Tatas run two of the largest charitable trusts in India. (They donated $50m to that needy institution the Harvard Business School.) The Jindals, with a major stake in mining, metals and power, run the Jindal Global Law School, and will soon open the Jindal School of Government and Public Policy. Financed by profits from the software giant Infosys, the New India Foundation gives prizes and fellowships to social scientists.

Having worked out how to manage the government, the opposition, the courts, the media and liberal opinion, what remains to be dealt with is the growing unrest, the threat of “people power”. How do you domesticate it? How do you turn protesters into pets? How do you vacuum up people’s fury and redirect it into blind alleys? The largely middle-class, overtly nationalist anti-corruption movement in India led by Anna Hazare is a good example. A round-the-clock, corporate-sponsored media campaign proclaimed it to be “the voice of the people”. It called for a law that undermined even the remaining dregs of democracy. Unlike the Occupy Wall Street movement, it did not breathe a word against privatisation, corporate monopolies or economic “reforms”. Its principal media backers successfully turned the spotlight away from huge corporate corruption scandals and used the public mauling of politicians to call for the further withdrawal of discretionary powers from government, for more reforms and more privatisation.

After two decades of these “reforms” and of phenomenal but jobless growth, India has more malnourished children than anywhere else in the world, and more poor people in eight of its states than 26 countries of sub-Saharan Africa put together. And now the international financial crisis is closing in. The growth rate has plummeted to 6.9 per cent. Foreign investment is pulling out.

Capitalism’s real gravediggers, it turns out, are not Marx’s revolutionary proletariat but its own delusional cardinals, who have turned ideology into faith. They seem to have difficulty comprehending reality or grasping the science of climate change, which says, quite simply, that capitalism (including the Chinese variety) is destroying the planet.

“Trickle down” failed. Now “gush-up” is in trouble too. As early stars appear in Mumbai’s darkening sky, guards in crisp linen shirts with crackling walkie-talkies appear outside the forbidding gates of Antilla. The lights blaze on. Perhaps it is time for the ghosts to come out and play.

The writer is author of ‘The God of Small Things’. Her newest book is ‘Broken Republic’