THE BEAR'S LAIR Capitalism: Getting it right
By Martin Hutchinson
Germany's success in 2010 has surprised most United States analysts, who tend
to start every sentence about Europe with "sclerotic". However, it is by no
means the only country that is recovering from the great recession in a
remarkably healthy fashion. China, Chile and Singapore are also stand-outs in
this respect, while the United States, Ireland and southern Europe have done
poorly. This year's economic events can teach us again about which models of
capitalism can be successful.
Germany's success should not have been surprising. The country had a remarkably
successful economy in Wilhelmine times before 1914 and again from 1949 to 1990.
The absorption of East Germany was an immense problem for the German economy,
largely because it was done in the most expensive way possible, with a 1 to 1
conversion between the Ostmark and the
Deutschemark, horribly overvaluing East German labor.
However, it was obviously a problem of finite duration, given the language and
cultural commonality between the two former countries. By about 2005,
symbolized by the accession of the East German Angela Merkel to the
chancellorship, East Germany was ready to play a full part in the united whole.
At that point, with the massive subsidies to the former East Germany declining,
the traditional German model of capitalism was able to reassert itself and
propel the economy forward.
The German economic model works very well for a country with perpetually high
labor costs. Education and training are of great importance, as are engineering
skills - engineers have a much higher social position in German societies than
in Anglo-American ones - while housing finance is given a low priority, since
it is correctly regarded as unproductive.
Finance plays little role in the system - it was notable during the 2008
debacle to what extent the German banks were helpless victims of Anglo-American
shenanigans, with little creative role of their own. The typical successful
German company is both smaller and longer-established than its US counterpart,
with powerful shareholders who prevent management from engaging in self-dealing
and mindless empire-building.
In very fast-moving innovative markets, the German model works less well than
the Anglo-American Silicon Valley model of innovation. Thus the German
enterprise software company SAP appears to have stolen technology from Oracle,
not the other way around - to the tune of US$1.3 billion in damages (a figure
that may be reduced on appeal).
However, the vast majority of economic activity is not particularly
fast-moving, and once a technology has become established the Germans have
shown time and again that they are more than capable of playing a major role in
the market with their skills of engineering and very high-quality
manufacturing. They are much more of a threat in the Internet-related
technology market than they were 15 years ago, for example.
The Chinese model of capitalism has shown remarkable growth, but it has not yet
been shown to work well in a world where its citizens don't enjoy an immense
labor cost advantage over its competitors. It combines the US approach to
entrepreneurship with a high level of government control and a relatively low
level of systemic integrity. In the very long run, it will need to reform
itself, and may find moving to the US approach difficult because of the lack of
integrity in the system and the government's distortion of investment
decisions. However, the US system hasn't recently been notable for its
integrity or its efficient allocation of investment either, so maybe China will
do (relatively) fine.
Singapore is a model of where the Chinese economy may end up if it gets really
lucky. Unlike China, it has integrity that is ranked at the very top of global
league tables. It also has a degree of government control that would not work
in the United States, but with a wise and honest government appears to work
quite well. Singapore has achieved the miraculous result of having a government
that is nearly as efficient as the private sector, and directly absorbs only
15% of Singapore's gross domestic product - welfare, pensions and health are
handled by the separate Singapore Provident Fund. The combination of a small
entity overall and the minimum possible direct footprint on the economy appears
to be necessary for Singapore's capitalism to work at a high income level - it
may not be a reasonable model for the United States or China.
Finally, Chile has found a model of a resource-based economy that works,
something that has eluded resource-based economies for a century or more. Here
the state is small as in Singapore, with health and welfare privatized as in
Singapore. However, it acts as a buffer for the volatility of resource prices,
accumulating a "stabilization fund" large enough to absorb the shock and
cushion the downturn when resource prices turn down.
Again, the integrity of the system is very high by Latin American standards -
indeed Chile ranks above the United States on Transparency International's
Corruption Perceptions Index. Resources can potentially be controlled by the
state (in Chile the largest copper company, Codelco, is so controlled although
mining in general is private) but they must be managed without featherbedding
and the royalties from those resources must not be allowed to tempt the local
government into excessive expansion.
The successful examples of capitalism outlined here account for well under half
world GDP, even including China, whose success is partly due to low wage costs.
There are far more examples of capitalism with serious weaknesses that make it
deeply inefficient. In Japan, for example, the state has expanded considerably
over the last 20 years, weakening the economy's competitiveness, building up an
immense overhang of government debt and stalling the growth of the previous
four decades. However, it retains Germany's strengths of excellent education
and long-term orientation, and an effective government austerity program might
well solve its problem quite quickly.
In Canada, the government is no larger than in the United States but is prone
to whimsical and unpredictable decisions, such as its refusal to allow the BHP
takeover of Potash and its extraordinary decision to refuse permission to
Taseko Mines' Prosperity gold mine project, blowing off over $5 billion in
economic value. As the endlessly prolonged recession in the United States is
demonstrating, freedom from arbitrary changes of regulation and re-writings of
the rules is an essential component of a successful capitalist society.
In Latin America, corruption levels far higher than Chile and governments that
regard booms as an excuse for mad state sector expansion have condemned the
continent to a century of economic stagnation. It remains to be seen where
Colombia and Peru, which are showing signs of following Chile in a free-market
direction, will continue doing so or whether the example of Brazil, which has
relapsed into corrupt big-spending socialism, will be more potent.
In Europe, Germany's economics is enjoying something of a renaissance. Whereas
in 2007 Germany's then finance minister, Peer Steinbruck, was regarded as an
outrageous socialist for his attack on hedge funds, his later assault on the
"crass Keynesianism" of fiscal stimulus showed his heart was in the right
place, and today he is regarded as prescient rather than eccentric.
Germany's economic model has fared much better than the Anglo-American one in
2008-2010. Indeed it is still not clear whether Britain and the United States
will pull themselves out of recession without entering into a painful "double
dip" outbreak of inflationary recession when their over-stimulative monetary
policies are reversed. Sweden today looks much more capitalist and much more
German than it has in many decades, and many east European countries, notably
the Baltic states, have realized the hard way that Anglo-American finance
capitalism can lead their vulnerable economies into appallingly painful
boom-bust cycles.
The overall lesson is thus clear. If, like Chile and Singapore, the state is
held to no more than 15-20% of the economy, then it may be able to act to
stabilize the economy and set up pension fund operations without compromising
economic growth or imposing its inferior standards of probity on the rest of
the economy. The US government under the presidents up to Calvin Coolidge was
similarly modest, and similarly effective in promoting economic growth.
If however as in the United States, Canada, Japan and Europe, the state has
been allowed to grow to 40% of the economy, then it must be much more
circumspect. Because its own activity represents such a large portion of
output, it must at all costs avoid the kinds of cronyism that characterized the
George W Bush administration's later years, with ex-Goldman Sachs chief
executive officer Hank Paulson at the Treasury.
Still more important, it must maintain the highest standards of integrity, an
area in which the US has also slipped recently. It must also avoid subsidizing
unproductive activities such as housing, agriculture, ethanol and charities,
which can grow to inordinate size and undermine both the remainder of the
economy and the ethical foundation of the society. Through its mastery of the
tax system, the government must ensure as far as possible that economic actors
remain oriented towards the long term, with "financial engineering" severely
discouraged and rent-seeking through the financial system prevented.
Germany does not need a "Tobin tax" on financial transactions; the United
States does. Economically, the ideals should be the austere German chancellor
Konrad Adenauer, the 1958 Bundesbank and the stern Austrian school of
economics, not the sloppy economic self-indulgence of Messrs Bush, Barack
Obama, Ben Bernanke and Keynes.
Finally, the United States should consider privatizing both social security and
healthcare provision, either through a "Provident Fund" system like that of
Singapore or directly as in Chile. By doing so, it could reduce its public
sector drastically, while maintaining modern welfare provisions through
independent funding. As Singapore and Chile have discovered, that would make
maintaining a healthy capitalist system very much easier.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found at www.greatconservatives.com.
(Republished with permission from PrudentBear.com.
Copyright 2005-10 David W Tice & Associates.)
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