French President Nicolas Sarkozy’s freehand sketch of a new capitalism for the 21st century astonished more than a few of the delegates at the 40th World Economic Forum held at the ski resort of Davos. What Sarkozy is against came through a good deal clearer than what he is for. He is against rampant “bad” capitalism as epitomised by the greed of global bankers, but then again, who isn’t these days? The details of what he was for got a little washed out by the blinding light of his vision of humanity marching shoulder to shoulder on the road to a glorious future. Nevertheless, what came across pretty clearly in his keynote speech was his sense that capitalism requires the firm hand of the “state” (not just the French state, but a kind of cooperative, supra-super state) to guide it and keep it from doing harm.
In some ways this is not surprising, even from a supposedly right wing French politician. The idea that nothing runs right if the state doesn’t control or organize it seems to be embedded in a large number of Sarkozy’s fellow citizens. It is not an idea that free market capitalists are that fond of. They were not at the podium, however - he was. This was Sarkozy’s moment, and he gave it to them hot and strong. Bad accounting techniques, the dominance of speculators playing fast and loose with other people’s money, insane amounts of leverage and a maniacal focus on profits now and to hell with tomorrow were what led us to the crash:
“It gave rise to a world in which everything was given to financial capital and almost nothing to labour, in which the entrepreneur gave way to the speculator, in which those who lived on unearned income left the workers far behind, in which the use of leverage, to an unreasonably disproportionate extent, created a form of capitalism in which taking risks with other people’s money was the norm, allowing quick and easy profits but all too often without creating either prosperity or jobs.
“... The same depreciation of the future could be seen in accounting practices which valued assets at the prices set by a marketplace fluctuating constantly to keep up with the ups and downs in share values. When the markets were on a high, balance sheets were reassessed, and the very same artificially boosted figures would feed a new high. When confidence fell, the balance sheets would suffer as a result and bring share prices down.
“During the financial crisis we saw, up close, the damage done by that kind of accounting, when the collapse of the markets led to a collapse in the banks’ capital reserves and further tightened the credit crunch.”
So it wasn’t all those rubbishy property loans that sank the banks, after all. Just bad accounting. Actually, there isn’t any accounting technique under the sun that can make the property portfolios of the Irish banks look OK, view them from whatever angle you please. Sarkozy is not alone, of course, in detesting mark-to-market accounting. It has been said many times that once the economy becomes turbulent, then mark-to-market is the equivalent of “mark-to-mayhem”. The point has been taken and committees are working on this. It is not a simple matter, since the whole idea of making accounts transparent to end users means allowing the real risks that companies are running to be seen by the users of accounts. Price “smoothing” devices can equally well be seen as obfuscating devices, adding to the opacity of accounts and giving real scope for “gaming” the rules. Of course, politicians do not have to worry about details like this when they want to give a “trumpets and bugles” speech.
How we get from this, to the notion that somehow politicians can run markets better than the markets themselves, is a bit of a leap. Nevertheless, the French President was up to the job. The next target he went after was volatility in commodity prices. It seems Sarkozy would like to ignore the lessons of history, where governmental price-fixing of key resources has always ended extremely badly, and is keen to give it a go:
“We will never put an end to hunger, poverty and misery in the world if we do not succeed in stabilizing the prices of raw materials, which at present are completely erratic.”
Hello, hello? The only way the global stabilization of prices could be achieved is if the world switched to a completely planned economy, where pricing information went out the window and some committee of bureaucrats set the “fair” price for, say, steel. I for one, really do not want to go down that road. It’s a classic! Define “fair price” in this context in no more than 1000 words - then try to see where individual liberties and property rights finish up. Hint, it does not end well...
Having drifted into nonsense, nothing could hold Sarkozy back:
“Whether the venue is the ILO, the IMF, the World Bank, the FAO or the G20, at bottom we are always talking about the selfsame thing, seen from different points of view: how can we return the economy to the service of mankind? How can we act to ensure that the economy no longer appears as an end itself, but as a means to an end? How can we move towards globalisation in which the development of each will assist the development of others? How can we build a more cooperative, less conflictual form of globalisation? Let us be clear about this: we're not asking ourselves what we will replace capitalism with, but what kind of capitalism we want."
Where are we going with this? The answer is already clear. It is plain that Sarkozy’s new capitalism is nothing other than a kind of supra state socialism with the new planetary government’s hand firmly guiding what remains of the market.
“Either we change of our own accord, or change will be imposed on us by economic, social and political crises. Either we are capable of responding to the demand for protection, justice and fairness through cooperation, regulation and governance, or we will have isolation and protectionism. The G20 foreshadows the planetary governance of the 21st century. It symbolises the return of politics whose legitimacy was denied by unregulated globalisation."
A cynical English person would say: “This is what you get when you let the French run the G20 for a day”, namely wild talk of planetary government. Committees bereft of market pricing information cannot get a fix on the dynamics of pricing. Market mechanisms generate pricing through the activities of millions of people buying and selling. Government intervention is always done on a wing and a prayer, with the actors involved pretty clear that they simply do not have control over which of the many possible outcomes of their intervention will actually come to pass or what the unintended consequences might be. They know what they want to happen, but not whether it actually will. Unfortunately, when politicians get Messianic they lose track of this simple fact.
Further information on pricing, commodities and regulation:
- Commodities set to shine in 2011, by Anthony Harrington (blog)
- Review of 2010: Russia and commodities, by Ian Fraser and Anthony Harrington (blog)
- Coping with the Crisis: Risks, Options, and Priorities for Developing Countries, by Justin Yifu Lin
Tags: Davos , free market capitalism , Nicolas Sarkozy , planetary government , price fixing , socialism , World Economic Forum