Speech delivered at the Festival of Dangerous Ideas, Sydney Opera House, 4 October 2009

Back in 1989, it was so obvious. Socialism had lost, capitalism had won – end of story. When the Berlin Wall was pulled down, it marked the final triumph of liberty over oppression and of capitalism over socialism. The American political scientist Francis Fukuyama even went so far as to proclaim ‘the end of history’.

Back in 1989, it would not have been a dangerous idea to ask people with flat-screen TVs to stop whingeing about capitalism. Not only because nobody actually had a flat-screen TV, but simply because capitalism was celebrated rather than frowned upon.

Fast-forward 20 years. In 2009, socialism has still not recovered from its defeat nor does anybody really harbour nostalgic feelings towards the Soviet Union. But some intellectuals and political leaders are convinced that capitalism, the great winner of 1989, is now just as bankrupt as socialism was back then. They are convinced that the collapse of Lehman Brothers was to capitalism what the fall of the Berlin Wall was to socialism.

This spectacular change in the fortunes of capitalism provokes some obvious questions: Do we have to re-examine the case for socialism? And has capitalism really been thrown on the scrap heap of history?

Let’s begin with a warning: instant answers may land you in the ‘Fukuyama trap’. Francis Fukuyama was perhaps just a bit too early in declaring the end of history because history did not care about Fukuyama.

History continued to be made since 1989 — the Gulf War, Rwanda, 9/11, Afghanistan, Iraq. Our personal lives have also changed, and it’s not only flat screen TVs that we have become used to. Mobile phones were the size of bricks in 1989 , the Internet was still in its infancy, Google had not yet been founded, and when you talked about twittering, you had birds in mind and not social networking.

History never ends.

For this reason alone, we should refrain from delivering premature judgments on the fate of capitalism in the face of the current global financial crisis. It’s only safe to say that we are witnessing an economic crisis, which will hopefully come to an end soon. Whether this crisis will bring capitalism to an end is not a foregone conclusion.

Having said that, I think there are great differences between the failure of socialism in 1989 and the crisis of capitalism in 2009. There are good reasons to believe that capitalism will not meet the fate of Soviet communism.

Despite all the crises that capitalism has gone through, despite all its woes, troubles and iniquities the world has never known a greater wealth creating machine than capitalism. Where markets were allowed to work, where private property rights were secure and freedom of contract was guaranteed, capitalism has delivered spectacular increases in prosperity.

At the end of the 19th century, Sweden was poorer than Congo is today. The enormous increase in living standards in the Western World would not have been conceivable without the joint forces of capitalism, industrialisation and, ultimately, the spread of liberty from the feudal few to the democratic many.

It was the forces of liberty that propelled unprecedented growth: first in Europe and North America, but increasingly throughout all parts of the world that participated in the market economy. The blessings of capitalism have spread far and wide.

Intellectuals often belittle the material progress that capitalism has produced when they reduce it to flat-screen TVs and four-wheel drives as if Sonys and Hummers are the plagues of modern society. But the least our soy-decaf-latte drinking intellectuals can do is concede that capitalism has dramatically improved material standards in poorer countries.

According to the United Nations, the number of people living in extreme poverty fell by 400 million people between 1990 and 2005 – and mind you, this happened while the world’s population kept growing. World Bank data show that between 1980 and 2007, global average income per capita increased from $2,762 to just under $10,000. Over the same period, life expectancy rose from 63 to 69 years.

The biggest improvements in living standards happened in low income countries. Over the 20 years from 1985 to 2005, immunization against measles for example, jumped from 26 per cent to 76 per cent in the world’s poorest countries. And where in the year 2000 there were virtually no mobile phone subscriptions in these countries, only seven years later in 2007 22 per cent of the population in low income countries had a mobile phone. Not bad for an economic order that has allegedly failed.

Capitalism has not only produced prosperity, it has spread wealth from the few to the many. Imagine a meeting between Louis XIV and Bill Gates, the richest men of their times. What would impress Louis XIV the most? That Bill Gates could light up a room by the touch of a button? That hot water would flow from his tap? That he could travel around in a car? That he could watch the news on TV, read foreign papers on his laptop and talk to people in far-away places over the phone? Or maybe Louis XIV would be startled by something completely different, namely that all these luxuries are not only enjoyed by the world’s richest man but by virtually everybody in the developed, capitalist world.

The ‘Sun King’ would almost certainly feel insulted by this lèse majesté, but isn’t this democratisation of luxury capitalism’s greatest achievement?

The empirical case for capitalism is overwhelming. Numerous studies have shown how greater economic freedoms go hand in hand with faster growth, greater wealth, better health and longer lives. Compare this to the practical experiences the world has made with socialism — and you should not have any doubt which economic system actually delivers and which doesn’t.

However, there is not just an empirical, practical argument to be made for capitalism. There is also a philosophical and a moral case. Capitalism simply remains the system best suited to human nature.

Like it or not, human beings aren’t perfect. We are not angels and saints but human beings with flaws and follies, but more importantly vanity, egotism and greed. We better accept this before making economic policy.

But those intellectuals dreaming of a socialist society can never reconcile their theories with human nature. No wonder socialists since Karl Marx fantasized about the creation of ‘The New Man’ – some new species without vices, purged of any bourgeois instincts, free of selfishness, greed, malice, laziness, hate, aggression, envy, fear. It all sounds too good to be true – and too good to be true it was.

An economic system that starts from the assumption that you first have to change mankind’s basic instincts is bound to fail. At best, it will just ruin the economy. At worst, it will kill all dissenters in the process. From the hallucinations of the New Man to the Gulag and Auschwitz lies a slippery slope. As we are talking about dangerous ideas today, the most dangerous idea back in Soviet Russia or Nazi Germany was to believe in liberty and human dignity.

Capitalism, on the other hand, has never been in the business of changing human nature. It has never indulged in illusions of forming a new man. It is just the kind of system that happens when you let people freely deal with each other. In a sense, we are born with capitalist instincts.

These instincts have developed in nature. Even our relatives in the animal kingdom know how to play the capitalist game. A study published in Nature magazine discovered that monkeys have a sophisticated barter system where food is paid in return for work. The scientists observed that capuchins and chimpanzees hunt in groups. When a monkey makes a capture, it shares the prey with all those who took part in the hunt. The scientists also found that once a monkey had been paid in food, he was much more eager to help out in future. So here we have the ingredients of capitalism: cooperation, trade, incentives – it’s all there. And don’t you call this monkey business. This is monkey capitalism.

Capitalism only utilizes what is already within human nature. It takes self-interest and converts it into a greater social good. Adam Smith was right when he observed: ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.’ We can be even blunter than Professor Smith and say it with Gordon Gekko: ‘Greed is good’.

But don’t exaggerate this greed or you risk putting the axe to capitalism itself. Our monkey friends show us what happens if you violate elementary principles of justice. In another experiment with capuchins, scientists from Emory University in Atlanta discovered how monkey capitalism collapses if you don’t treat the animals fairly. The monkeys were given tokens that they could exchange for food. But when some of them received food without having to pay for it, the others were so outraged that they went on a riot in the cage. The whole social order broke down.

So it is not only an instinct for capitalism that we carry with us but an instinct for fairness and justice as well. If you violate this very system of justice, you are in fact endangering the continuity of the beneficial system of exchange and cooperation.

It may not be obvious, but investment bankers and capuchin monkeys have more in common than first meets the eye. The moral of this story is clear: Our business elites are well advised to consider the consequences of their actions for society. They have implications not just for themselves, but for the overall acceptance of capitalism. A bonus payment for a manager whose company just had to be bailed out by the taxpayer may not only be wrong or immoral, it is outright dangerous. It undermines society’s acceptance of capitalism.

There is no use talking around it: 20 years after the end of socialism, capitalism is in crisis. But the difference between socialism and capitalism is this: Where capitalism produces crises, socialism is a crisis. And where capitalism is built to overcome its crises, socialism’s crisis was its ultimate downfall.

If capitalists realise that there is more to doing business than just making money, if they learn the lessons of monkey capitalism, then the market economy, this fantastic engine of creating wealth and prosperity, will survive.

And it should survive. After all, what else should you whinge about when you are watching a French movie on your Japanese flat-screen TV while drinking a good glass of Italian wine?

(You can watch the Question & Answer session here.)