The end of capitalism

Published in Insights, The New Zealand Initiative’s newsletter, 19 February 2016


Bank of United States crash 1931

“Will capitalism and globalisation survive the next Global Financial Crisis?”

That was the question I put to a panel of international investment strategists at a PortfolioConstruction Forum conference in Sydney this week.

To be more accurate, I only passed it on. It had originally been asked by the London Daily Telegraph’s Allister Heath.

In a provocative column, he wrote that “no developed nation today could possibly tolerate another wholesale banking crisis and proper, blood and guts recession.”

Heath fears that another GFC would lead to a populist backlash. This would threaten “the very survival of free trade, of globalisation and of the market-based economy. There would be calls for wage and price controls, punitive, ultra-progressive taxes”.

The panel in Sydney did not succumb to such apocalyptic visions. One after one found reasons why Heath was wrong.

To begin with, there was not much of capitalism and globalisation left anyway, two of the discussants told the audience. And indeed, how could one call a world increasingly run by central bankers a free market? Or a world that has given up on genuine free trade and resorts to managed trade instead?

Such sophistry, however, missed Heath’s real point: that whatever is left of free markets now might be swept away by the next financial crisis.

On that point, the rest of the panel was decidedly more optimistic. They just could not imagine how our world, globalised as it is, would give up on the blessings of trade. Would it even be possible given the way countries are now linked by technology? And would anyone really want to turn back the clock?

But just because it is stupid does not mean it will never happen. In fact, it has happened before.

Before the Great War, the world was already a globalised place. It was a time with passport-less travel, blossoming international commerce and global supply chains. You can read about it in John Maynard Keynes’ book The Economic Consequences of the Peace.

What happened afterwards were two World Wars and one Great Depression, which triggered a wave of nationalisation, protectionism and regulation. It took until the 1980s until the damage to trade was repaired.

Perhaps investment strategists are a more optimistic bunch than your average columnist or economist. Or maybe they are just so steeped in the present and the future that they have forgotten about history.

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