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Nigel Farndale: Capitalism isn't broken ... it just needs a little tweak

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Shortly after the fall of the Berlin Wall in 1989, the political economist Francis Fukuyama declared that we had reached the end of history. Communism had failed. Liberal democracy, and the capitalism that underpinned it, had triumphed. There were no more arguments to be had on the subject of how man should best govern himself.

The only trouble was, history carried on going, first throwing the world into convulsion on 9/11 and then, with the financial meltdown of 2008-09, pulling the ideological rug from under all those triumphant liberal democracies. We were used to a "natural" cycle of boom and bust, but this bust was something different and more profound. It seemed to be a bust of capitalism itself.

After all, when taxpayers have to bail out banks because they are "too big to fail", that, surely, is a contradiction of capitalism -- the survival of the fittest part, anyway.

But if capitalism is failing, is there a viable alternative?

That word 'viable' is critical here because you can ask any of the anti-capitalist protesters living in tents around the world as part of the 'occupy' movement and they will give you 'alternatives'. But a vaguely Leftish grievance does not a solution make.

Press the more articulate among them and the answers boil down to tax: make sure big companies don't avoid it, and make the super-rich pay lots of it. One group demanded that capitalism "should be replaced by something nicer".

Perhaps for "something nicer" we need to look to schools of economic thought outside the mainstream. One idea that has traction in France is the 'décroissance', or decrease movement. This group want to decrease economic growth, which they believe is damaging the planet. For the décroissance movement, gross domestic product (GDP) is an inadequate yardstick for economic performance, not least because it doesn't measure the degradation of the environment as lost wealth.

Another idea doing the rounds is that old-style capitalism is failing because we don't understand how human psychology drives the economy. According to George A Akerlof and Robert J Shiller, we need to factor human emotions, such as overconfidence, into economic theory. "Animal spirits", as they call this, challenges the received wisdom that markets should operate free of government because they are rational. On the contrary, they believe that irrational animal spirits influence market behaviour, which is why governments must keep them in check.

But perhaps we're getting ahead of ourselves. Before we ask if there are any alternatives to capitalism, we ought to say what it is. Karl Marx more or less invented the term in the 19th century to describe something that had existed since the end of feudalism. Capital for him was all about the private ownership of the means of production. And exploitation, of course, what with all those hardened mill-owners and their grim, smoke-spewing factories.

Marx decreed that capitalism carried the seeds of its own destruction. But as the philosopher Karl Popper argued, the communism that Marx thought would replace it was even more doomed to failure -- because it required the arrival of a "New Man", one who would embody freedom. And this New Man would be the end that justified the means, which, in the case of Stalinist and Maoist communism, meant not only denying freedom but committing genocide on a scale that would have made even Hitler gasp.

But if capitalism's supposed nemesis failed, were there any worthwhile ideas that could be rescued from its ashes? Well, one post-communist movement is called Participatory Economics. Parecon, as it is known, has four elements: solidarity, self-management, diversity and equity. Solidarity means encouraging people to work for the benefit of others as well as themselves. Self-management means that everyone has a say in decisions which affect them. Diversity means giving people more options for how they work and what they consume. And equity is about fairness and equality -- nobody should have substantially more wealth or power than anyone else.

See what they did there? It all sounded reasonable, right up until equity, which is back-to-basics communism.

But the other three perhaps amount to a new, more responsible capitalism, and this idea is very much in the air. Paul Ormerod, author of 'The Death of Economics', says: "The capitalism we have today is not the same as capitalism in 1910. Then there wasn't the same idea of a welfare state or state intervention, except for defence. The great strength of capitalism is that it is not static, it's dynamic. It evolves."

Perhaps, I say, its real problem is its name -- it needs rebranding. And perhaps there is something that can be borrowed from Marxism here, the coming of a New Man? "Yes, I do think there needs to be a shift in attitude and a change in values. Something like the Big Society, or one-nation conservatism. If you are wealthy you ought to give something back through a sense of noblesse oblige. You have an obligation to the rest of society."

And this chimes with the views expressed by Margaret Thatcher. She believed that people would have a more heightened sense of responsibility the wealthier they became. Ultimately it would lead to the sort of philanthrocapitalism we are seeing today, at least among Bill Gates's circle in America. The Microsoft founder and 39 other American billionaires have pledged to give at least half of their money to good causes.

Mr Ormerod again: "When the state attempts to take on that role it can have the opposite effect to the one intended, making people dependent on the state. Thatcher was trying to liberate people from that. It's not a matter of pulling levers but more of values needing to change. It's like these directors of companies awarding themselves raises in the past year when their companies haven't been performing well. Their behaviour is damaging to capitalism."

Adam Fergusson's book 'When Money Dies: the Nightmare of the Weimar Hyperinflation', has become a modern classic. I ask for Fergusson's take. "I don't think there are any serious alternatives to capitalism," he says, "not if we hope for growth and recovery, because capitalism represents the competition and enterprise that produces these things."

He dismisses quantitative easing. A shortage of money is not the problem. The problem is that the money is in the wrong place. It's in China where people, for reasons that seem enigmatic to us, like to save. What we are witnessing, then, is the "creative destruction" of the heavily indebted Western economies by the emerging economies of the East. Darwinism at its purest. And a very capitalist idea.

Perhaps the alternative to capitalism is already here, or rather, there. Perhaps their version of capitalism is working at the moment because China is a totalitarian state, not despite it being one.

Mr Ormerod again: "It was only when China moved towards a type of capitalism that it started becoming wealthy. But can its one-party state evolve into something sustainable? Will it allow dissidents, which is what capitalism needs, to evolve? Without differing ideas, their version of capitalism will die."

So where does that leave us? Churchill said that democracy is the worst form of government, except for all the others that have been tried. He could have said the same of capitalism. (© Daily Telegraph, London)

Irish Independent