One type of capitalism has failed: ours

We hear a lot of talk at the moment of the failure of capitalism. Certainly, this is the failure of a version of capitalism, the one that, in an environment of world-wide transfers of capital, emphasises consumption as the engine of growth rather than production. The idea was that if you have easy credit, low interest rates and low income taxes, especially for the rich, this stimulates growth. It stimulates spending, but unlike in the 50’s, the money does not stimulate industrial production at home to anything like the same degree. In an era of untrammelled free trade with global movements of capital and people, the extra money in peoples’ pockets goes in large proportion on foreign goods, rather than supporting home-grown industrial jobs; low interest rates have stimulated a housing bubble an incentive to borrow; cheap borrowing with weak credit controls have encouraged a culture of debt, much of the spending siphoned off to an overpriced asset, the housing market or to increasing the balance of payment surpluses of other (non-western) countries. Laissez-faire economists will say that it is the best of all possible worlds for everyone – well, it is good for those countries who are selling to us: they make money, which enables their companies and their governments (SWFs) to invest in their own countries and to buy up large chunks of ours. We are lifting millions of people out of poverty, they say. Yes, but we cannot keep spending more money than we earn: that is a recipe for impoverishment of the West, and for a decline in our power and prestige, even our ability to defend ourselves. Military capacity needs money and an industrial base.

Just as the political and social project of exporting liberal democracy floundered in Iraq, so the economic liberalism of Bush, McCain, Blair and Brown has struck aground on bad debt and over-reliance on the benefits of globalisation, not enough care for its dangers.

As for those who say Capitalism itself has failed, well look at China's more nationalistic, state-controlled, production-based version.