Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

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Sunday, 27 January 2013

The past, present and future of capitalism

Capitalism 4.0

One of my favourite ever books was Capitalism 4.0 by Anatole Kaletsky. In it, the author describes the first three stages of capitalism thus:

Capitalism 1.0: up to the First World War, which kept democratic politics and economics very much separated;

Capitalism 2.0: the Keynesian form of capitalism which turned Capitalism 1.0 on its head and incorporated, for example, Roosevelt’s reforms and the rise of the welfare state; and

Capitalism 3.0: the era of Reagan and Thatcher and their monetary policies – it was all about the free markets!

The free market approach was all seemingly going swimmingly until BANG! Lehman Brothers collapsed and the world was plunged into financial crisis.

Kaletsky’s central argument was that capitalism would re-invent itself as it always has, and would come up with a new system being Capitalism 4.0 – a more pragmatic and watchful version of the Reagan-Thatcher free market era.

Contrary to the popular prevailing view that the world was ending and we were all doomed, Kaletsky argued that governments would print money, spend stimulatory billions and turn things around faster than most believed possible.

We would, he said, solve a problem caused by debt through…more debt! You can imagine the outcry of the time, and yet, to date at least, he seems to have been mostly just about right (not so much in Europe).

Kaletsky spoke of the myth of national bankruptcy: a country which controls its own currency can hardly go bankrupt given that it can simply print more money (albeit at the risk of high inflation or a flight from the currency).

Feeling armed with a new raft of information I recommended the book to others, conveniently overlooking - or at least neglecting to realise - that I would fail the ‘6 year old test’ on the subject of capitalism, starting with the obvious question: what is it?

“Well, it’s…you know…kind of like where you have…sort of…”

What is capitalism?

A series of events which included the collapse of the Berlin Wall and the collapse of the Soviet Union seemed to prove once and for all that market economies are the best way to run a country. Communism had failed. But what, really, is capitalism?

Marxists could tell you what they didn’t like about capitalism: the “cult of the individual”, the dream of profit maximisation at all costs, the exploitation of the working classes. Indeed, the term capitalism was initially meant to be a disparaging one.

The reason that capitalism is so hard to define is that it is a hybrid or mongrel system within which capital (such as companies, factories, plant and equipment, goods and services etc.) are owned by individuals rather than the state.

In fact, come to think of it, I still can’t think of an eloquent description! Here’s the modern bluffer’s saviour, Wiki:

“Capitalism is an economic system that is based on private ownership of capital goods and the means of production, and the creation of goods and services for profit.

Right, got it! As a result, it is people like you and me – private individuals – who, through buying shares in companies, effectively control the means of production, although we are often individually only minority stakeholders.

Now you might say to me that you “don’t do shares” but I’d challenge whether that is actually true. Even if you take no interest in your pension fund and never bother to involve yourself in its management other than to look at the statement once a year, I’ll bet you ten dollars to your nickel it is invested in shares.

In effect, today, we are all capitalists of one sort or another.

At the one extreme of capitalism are the pure free market economies, what we used to call laissez-faire from the French to leave alone, before talking in French became seen as a posh person's affectation. 

And at the other end of the scale we have capitalist economies where governments manipulate, intervene and meddle. Most developed world countries sit somewhere along this spectrum.

The evolution of capitalism to today

In the middle ages, Europe operated under a feudal system where most worked in agriculture under the rule of nobility, but gradually as exploration and shipping developed this gave way to mercantilism and trade between countries.

Adam Smith described the key interacting forces in mercantilism: the drive for profits, trade between countries, tariffs on imports and monopolies, all of which set the stage for modern capitalism as the Industrial Revolution got underway.

In the 18th and 19th centuries merchants ceded economic power to the factory owners and industrialists, and the economic system as we know it today saw its birth. 

It was only as a World War and then the dreadful Great Depression through the 1930s came to impact capitalism that we began to see a major shift in the way people thought of those less fortunate. The welfare state was born and governments began to intervene heavily on the market economies.

British economist E. Conway notes how in 1929 US government spending accounted for only around a tenth of the country’s economic output, whereas 40 years later this figure had increased by a third. Today, more than one third of the country’s entire economic output is accounted for by government expenditure.

What comes next for capitalism?

I’ve already alluded to Kaletsky’s belief that capitalism will remain a free market phenomenon, but one with a more watchful eye. The regulations of Basel III will, quite rightly, put greater restrictions on our major financial institutions.

In Australia, each of our major banks receives an implicit guarantee from the government. They are seen to be “too big to fail” and we know that the entire financial system would seize up if we allowed a major bank failure, and as such it can never be allowed to happen.

An implicit guarantee is worth billions to banks for they are seen to more 'creditworthy' (ha!) - and thus can borrow more - and can also take greater risks with their capital than they otherwise might. The cost of this, in my opinion, must be tighter regulation.

Sorry guys, a key law of economics, right there – no free lunches. Welcome to the real world.

What else? Well, until 2007 there was a commonly held view that asset bubbles should be left to inflate and then burst - and central banks and governments should simply concentrate on cleaning up the mess afterwards.

It’s the survival of the fittest, they said, get rid of the weak and the wasteful, the cleansing gust of Schumpeter’s Gale, creative destruction and all that.

I don’t think too many people think that way any more. Instead, central banks will take a necessarily more active role in the controlling and deflation of genuine asset price bubbles.

And what for China? Well, capitalism by its very nature is a democratic system. It promotes the interests of the individual - the invisible hand of capitalism acting in self-interest ultimately operating for the common good. Companies owned by shareholders are all about self-determination and voting rights.

China’s surging economy will begin to promote a free market economy and, eventually, I believe, this will see the gradual or sudden end of the Communist regime.

Economics is an on-going battle between free markets and state intervention, and as China’s great boom flourishes there will be a strong and perhaps irreversible push towards democracy.

Overall, capitalist economies have developed faster, created greater technological expertise and created more wealth than their state-controlled counterparts. The state of Germany, in being split down the middle until the Wiedervereinigung* of 1990, demonstrated perfectly how capitalist democracies prosper more than state-controlled Communist regimes.

So, for all of its foibles and flaws, capitalism is the best we got…so we’d just as well better make the most of it!


*Apologies, as a young twerp of a language student I lived in Germany for a bit in 1991, so I...well you know…it just means re-unification, alright?