Wednesday, May 21, 2008

Business and Capitalism

In recent months there has been an extensive debate in the NewsCloud (I'm fed up with talking about newspapers, media, the press, the blogosphere - the NewsCloud will suffice) about capitalism; where it is going, where it now, and how it got here.

Two articles in the Cloud today highlight two different issues:

1) Luke Johnson writing in the FT comments:

"Innovation and progress come from embracing markets and encouraging entrepreneurs. The world is more competitive than ever; we cannot rely on old industries and the state to maintain our standard of living."

I happen to agree with this. When commentators go on about how awful the credit crunch is and how evil all these userous capitalists are in dragging us into this mess they always fall foul of the fact that they do not have a coherent alternative strategy.

I also agree with Peregrine Worsthorne that a squeeze on the financial industry might lead to an egress of talent away from finance and towards more useful things like medicine, pharmaceutical research, and entrepreneurism.

Johnson goes on to say:

"Markets are naturally dynamic, whereas governments resist change and fresh thinking. According to the Global Entrepreneurship Monitor, overall early-stage entrepreneur activity in Britain involves about 5.6 per cent of the population, a much lower rate than in the US, Brazil or China."

An Entrepreneur

A nation of shopkeepers? I think not. However Johnson makes the point that:

"A slowdown in the economy and rising unemployment might just stimulate more to start their own business as an alternative. This would be the silver lining of the credit crunch cloud."

Although the UK is not openly hostile towards entrepreneurs, they are not afforded the same respect as accountants, physicians, architects, or academics. Johnson describes entrepreneurism as just as much a calling as these respected professions but (partly because of our confused and irritating emphasis on class) in the UK "entrepreneur" is not listed on the job sheet.

2) The second article is from Edward Pearce in The Guardian:

"Modern capitalism has become etiolated. It has flourished lately upon deals ever more remote from raising capital investment for steel mills and biscuit factories, upon leverage and derivatives, upon credit and the ghost of credit, upon financial rice paper."

Speculation seems to be endemic to capitalism. Fortunately all this credit crunch nonsense seems to be having a negligible effect on actual global economic growth. China makes things.

From a science fictional perspective there is something reassurring about this. Times change, technologies change, but wherever there are financial markets there are speculative bubbles, and crashes and crunches.

The two ends of capitalism: the rarified ivory tower of deriveratives of deriveratives (George Soros et al) and the coalface of business and wealth-creation (Felix Dennis, Richard Branson) and the inbetweeners of capital allocators like Warren Buffett.

How it worked in the good old days

The whole wagon will continue rushing into the future. If it all breaks down completely (a situation where "end of the world" insurance would come into play, from Pearce:

"The existence of such manic trade created secondary explosions (or do I mean secondary deposits?) in the insurance world. Here the rule is the greater the likelihood of damage, the higher the premium. But the least probable horrors may be insured against at modest cost. The top point is called "end of the world" insurance, the unthinkable: Hugo Chávez takes over the White House, the moon coming perceptibly nearer. It's so remote it's cheap, $2,000-$3,000 a year rents $10m worth. Or it did. That volume now sets you back $20,000-$30,000."

I know! WTH?) then at least capitalism, or at least the concept of trade, will survive.

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