Introduction
This is a well written book from a few years ago, which is still highly relevant today. Above all the author addresses two inherent dilemmas when it comes to capitalism:
Its unstable nature, typically driven by the following cycle: profits, speculation, then irrational exuberance, followed by stock market panic, and, finally, recession.
Its ethics, perhaps above all when it comes to its reinforcement of a widening gap between boardroom and workplace rewards. Greed is indeed a key element in capitalism!
Also, the author offers an impressive set of quotes from key literature sources throughout history. This remarkable collection of scholarly quotes from relevant literature references makes the book itself a primer when it comes to history of ideas around capitalism.
The twelve chapters
The book is organized into twelve chapters, each pinpointing key dilemmas that have come to be associated with modern capitalism. In chapter one, “The Root of all Evil”, the author discusses various dimensions of ambivalence towards moneymaking, in a market-based capitalist system, fundamentally built on private ownership. Many leading thinkers over the decades behind us have expressed reservations. Still, the author points out that our capitalistic system, in general, has largely been successful.
In the next chapter, “Animal Spirit”, the author stresses how the instinct to make money typically is a key driver for an entrepreneur. Keynes had reservations here, but Schumpeter basically liked it. Excesses, as exemplified by robber barons, does not seem to be ok, in the end.
“Hijacked by Bankers” is the third chapter. Here the author discusses the basic business model for operators within this industry, lending out money that for the most belong to a bank’s depositors. Regrettably, there are plenty of examples of “sloppy” lending – too risky, too “expensive”, even though capital reserve requirements on banks have now been introduced: stress tests, capital reserve requirements (Basel I, II and III), new legislations, new overseeing bodies, …
In chapter four, “Industrial Shrinkage, Financial Excess”, the author discusses the stressful shift of going from a predominantly manufacturing-based economy to now more services, to a large extent driven by shifting financial conditions. Successful banks have indeed been profiting from supporting the shift!
“Sophisters, Economists and Calculators” is the name of chapter five. Why is it so hard to predict economic crises? Are we seeing a shift towards behavioral economics here, away from more traditional market-economy thinking?
Trade has indeed become a key driver for global economic success, discussed in chapter six, “Trade and the Fatal Embrace”. The author points out that trade does indeed seem to stimulate price, as long as a basic balance is maintained among trading partners. China’s recent successes, coupled with US demises, may increasingly lead to trade problems and political instability!
Chapter seven, “Speculation – the Missing Shame Game” discusses how speculations around price/market cycles may impact trade. To take advantage of such cycles is indeed key when it comes to most products and businesses central to trade, raw materials and shipping above all: in/out, long/short.
Debt/leveraging is of course key here, discussed in the following chapter, “The Dynamics of Debt”. There is of course a profound ambivalence about debt imbedded in many of us. Still, to take advantage of high leverage is a key part of capitalism, as pointed out by many leading economists, including Schumpeter. The element of speculation associated with increased debt, and the risk of when taking on too much debt does represent a stark reality, of course. Modern rules in our capitalist system may however make leveraging slightly less risky.
“Gold: The 6000-Year-Long Bubble”, chapter nine, is seen by many as creating a “safety”, by having a counter-cyclical effect, i.e. representing value in offsetting risks of high leverage. However, there is more gold now, and it is becoming cheaper, driven by more effective mining and refining. There are indeed many sceptics of gold, including Warren Buffett.
Another asset class that might ameliorate excessive leverage-related risk-taking is art, discussed in chapter ten, “High-Minded about Art”. The key here seems to be that investing in prominent artists (such as Warhol, Koons and/or Hirsch) and to store/hold these assets is it! In contrast to buying art because of personal satisfaction of “having such pieces hanging on the wall”. It seems beyond doubt that art as an investment class does indeed tend to be rather non-cyclical.
But then there are taxes. In his chapter eleven, “Tax and the Division of the Spoils” the author discusses the redistribution effect of taxes. Many economists do indeed seem to find this acceptable, including David Ricardo, and there are no taxes on gold or art! Taxes are, of course, needed as a means of financing the public sector. But there are indeed global restrictions when it comes to how high a given country’s taxes can be, before becoming uncompetitive! So-called tax farming, i.e. outsourcing of tax collection to various private institutions (such as banks in Italy, until 2006) may clutter up this assessment of how to maintain a country’s competitiveness.
In the final chapter, “Capitalism, Warts and All” the author summarizes the key arguments of the book in a brilliant way: he points out that the inherent challenge of economic instability associated with capitalism is still with us. And key ethical conundrums are still present, such as increased income differentials and underinvestment in a cleaner/safer environment. However, despite all of these dilemmas, capitalism is indeed the best system we have.
Conclusions This is an impressive and clear book, and timely when it comes to discussing what seem to be the key dilemmas associated with capitalism. Above all, the book reflects insightfulness! Complex issues are dealt with in a way that even readers such as this reviewer can understand! And, as an “extra bonus”, the many quotes from earlier generations of experts are illustrative of the author’s raised points and are enjoyable to read! I therefore enthusiastically recommend this book!
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