The Economist on Unrest in China

A dangerous (but exciting) year

Economic conditions and social media are making protests more common in China—at a delicate time for the country’s rulers

Jan 28th 2012 | CHENGDU, DONGGUAN AND WUKAN VILLAGE | from the print edition

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IN AN industrial zone near Chengdu, the capital of Sichuan province in south-west China, a sign colourfully proclaims the sprawl of factories to be a “delightful, harmonious and happy district”. Angry steelworkers must have winced as they marched past the slogan in their thousands in early January, demanding higher wages. Their three-day strike was unusually large for an enterprise owned by the central government. But, as China’s economy begins to grow more sedately, more such unrest is looming.

China’s state-controlled media kept quiet about the protest that began on January 4th in Qingbaijiang District, a 40-minute drive north-east of Chengdu on an expressway that crosses a patchwork of vegetable fields and bamboo thickets. But news of the strike quickly broke on the internet. Photographs circulated on microblogs of a large crowd of workers from Pangang Group Chengdu Steel and Vanadium being kept away from a slip road to the expressway by a phalanx of police. Word spread that police had tried to disperse the workers with tear gas. In the end, as they tend to—and undoubtedly acting on government orders—factory officials backed down, partially at least. The workers got a raise, albeit a smaller one than they wanted. Managers’ wages were frozen.

Strikes have become increasingly frequent at privately owned factories in recent years, often involving workers demanding higher wages or better conditions. Private firms, like state ones, are usually strong-armed by officials into buying off strikers. The thinking is that capitulating keeps a lid on news coverage and helps to prevent unrest from spreading. Yet the explosive growth in the use of home-grown versions of Twitter has made it easy for protesters to convey instant reports and images to huge audiences. The Communist Party’s capacity to stop ripples of unease from widening is waning—just as economic conditions are making trouble more likely.

Anger at the bottom

At a cheap restaurant in Qingbaijiang, opposite a dormitory compound for Pangang employees, grimy steelworkers complain that the government’s promise of an extra 260 yuan ($41) a month is hardly enough. Many of the lowest-paid earn as little as $190 monthly. But the workers know that the steel industry is struggling—and that vengeance on persistent troublemakers can be fierce. A police notice warns of legal action, including imprisonment, against any strikers who continue “disrupting public order”. Security agents follow your correspondent in an unmarked car.

All this is partly a result of the curb on China’s stimulus spending and carefree (reckless, many would say) bank lending in the wake of the global financial crisis of 2008. There are fewer new construction projects; demand for steel has flattened. Pangang’s plant in Qingbaijiang is running at a loss. The number of steel firms in the red rose from nine in September to 25 a month later. Even though the government is less worried about inflation now than it was a few months ago, and is releasing the economic brakes a little, the steel industry is expecting a lean period. Some firms might have to close.

Overall economic growth is still looking robust. In the final three months of 2011 China’s economy grew by 8.9% compared with the same period a year earlier—enviable by almost anyone else’s standards, though still the slowest since the second quarter of 2009. The slowdown has so far been gentle, and in line with government efforts to prevent overheating. But this does not stop officials worrying that the coming year could be unusually difficult.

Europe is the biggest buyer of Chinese products—and the euro zone’s travails have plunged many manufacturers into despair. Depressed demand in both Europe and America has taken its toll on factories. The steelworkers’ strike was one of many in recent months, most of them in China’s export-manufacturing heartlands near the coast (see map).

Chinese exporters do not face as big a shock now as they did in late 2008, when the financial crisis caused a sudden collapse in demand and the loss of as many as 20m migrant-labour jobs. But that time China’s recovery was rapid, helped by stimulus spending of 4 trillion yuan (more than $630 billion at today’s exchange rate), as well as developed economies’ own stimulus projects. The impact on migrant workers was further mitigated by the coincidence of the worst of the downturn with the lunar new-year holiday, when most migrants go home for lengthy periods.

This time exporters face protracted slow growth in developed economies, and the risk that the euro zone’s difficulties might worsen. China’s policymakers do not want another lending spree that might burden the financial system with more bad debt, on top of the borrowing accumulated during the previous binge. The country’s relatively low budget deficit (about 2.5% of GDP in 2010) gives it room to spend more on social housing, social security, tax cuts for small firms and consumer subsidies. These could help promote private consumption—eventually.

Nerves at the top

The long-term plan is for China to wean itself off its reliance on exports and investment projects such as roads, railways and overpriced property developments, and for domestic consumption of goods and services to play a much bigger role in fuelling growth. But this rebalancing will be a long, hard slog. Officials do not want shock therapy because it could threaten the jobs of many of the 160m migrants who come from the countryside to provide the cheap labour behind China’s exports.

This economic quandary has become more acute at what is a delicate political moment for the Communist Party. Later this year (probably in October or November), the party will hold its five-yearly Congress, the 18th since its founding in 1921, at which sweeping changes in the country’s top leadership will begin to unfold.

The Congress will “elect” a new 300-member central committee (in fact it will be hand-picked by senior leaders). This will immediately meet to rubber-stamp the appointment of a new Politburo, a body that currently has 25 members. All but two of the Politburo’s nine-member inner circle, the Politburo Standing Committee, will be replaced. Two appointments are all but certain: Vice-president Xi Jinping to take over from President Hu Jintao (as party chief after the Congress and as president next March); and Li Keqiang to replace his boss, the prime minister, Wen Jiabao, also next March. There will be much jockeying for the other slots.

It is a decade since China experienced a leadership changeover on this scale—and the first time since the late 1980s that the advent of a new generation of leaders has coincided with such a troubled patch for the economy. The previous time, in 1988, an outbreak of inflation threw Deng Xiaoping’s succession plans into disarray, giving conservatives ammunition with which to attack his liberal protégés. The party’s strife erupted into the open the following year as students demanding greater freedom gathered in Tiananmen Square.

The threats to the party today are very different, but fear of large-scale unrest still haunts the leadership. The past decade has seen the emergence of a big middle class—nearly 40% of the urban population, as some Chinese scholars define it—and a huge migration from the countryside into the cities. The party takes no chances. Large numbers of plainclothes police are on permanent watch in and around Tiananmen Square. (Since 2008, visitors to the vast plaza have had to undergo airport-type scanning and searches.) Early last year, when anonymous calls began circulating on the internet for citizens to gather in central Beijing in sympathy with the uprisings that were breaking out in the Arab world, the location specified was not Tiananmen but Wangfujing, a shopping street nearby. The police responded by flooding that area with officers too.

In the Pearl River Delta, which produces about a third of China’s exports, there are plenty of signs of malaise. Outside a Taiwanese-owned factory in Dongguan, a dozen or so police officers wearing helmets and carrying clubs watch a small group of angry workers complain that the owner has run away. The factory (which makes massage seats) is unable to pay its debts. They are afraid that, this time, after the lunar new year break they will have no jobs to come back to. A plainclothes policeman tries to silence them. Then a uniformed officer moves in with a video camera, and most of the workers retreat, keeping a prudent silence.

Others in the delta have been less reticent. In November thousands of employees at a Taiwanese shoe factory in Dongguan took to the streets in protest against salary cuts and sackings, purportedly caused by declining orders. Protesters overturned cars and clashed with police. Photographs of bloodied workers circulated on the internet. There have been further protests in recent weeks.

Guangdong province also saw a wave of strikes in 2010. At that time workers—mainly in factories supplying the car industry—were demanding only higher pay and improved conditions. Most of those disputes were quickly and peacefully settled, and rarely involved action on the streets. The latest spate of confrontations looks different. The steelworkers at the state-owned factory near Chengdu wanted a raise; but, these days, rather than bidding to improve their lots, workers are mostly complaining about wages and jobs being cut. The strikers seem more militant.

A report published this month by the Chinese Academy of Social Sciences (CASS) says that, compared with those in 2010, the strikes of 2011 were better organised, more confrontational and more likely to trigger copycat action. “Workers are not willing this time to accept that they have to make sacrifices for the national good because firstly they have already made enough sacrifices, and secondly, fewer are willing to just pack up and go home,” says Geoff Crothall of China Labour Bulletin, an NGO in nearby Hong Kong.

Where the heart is

The government hopes that jobless migrants will return to their home villages, where they or their families still enjoy a tiny land entitlement on which they can subsist, or find work closer to their hometowns. Many will: job opportunities in the interior have grown in the past few years, thanks to a surge of government investment in central and western areas, aimed at evening out economic growth.

Last year Chongqing, a region in south-west China which had long exported large numbers of workers to the coast, for the first time employed more of its surplus rural workforce locally than it sent to other areas. Chongqing’s party chief, Bo Xilai, is believed to be a contender for the Politburo Standing Committee. He has been trying to turn Chongqing into a model for the absorption of rural labour into cities, a project that has involved vast spending on low-cost housing to accommodate the region’s migrants.

But rising numbers of migrant workers in big cities—more than 60% according to the National Bureau of Statistics in 2010—are themselves the offspring of migrants and have no experience of agricultural life. They regard themselves as urbanites, even if they are excluded from many of the welfare benefits to which city-dwellers are entitled. They are better educated than their parents’ generation, and more assertive. A riot by migrants last June in Dadun, another factory town in Guangdong where many of the country’s jeans are produced, hinted at the problems China could face if second-generation migrants lose hope. The manhandling of a pregnant woman by security guards prompted two days of violence, with thousands of migrants setting fire to vehicles and government buildings. Strikes in coastal factories now mainly involve second-generation migrants, according to the report by CASS.

Such unrest is not about to topple the party. As Chinese officials nervously digest the implications of unrest in the Arab world, demonstrations in Russia and an easing of repression in Myanmar, they draw comfort from the consistency of Chinese opinion polls. These appear to show high levels of trust in the central leadership and of optimism about the future under party rule. Many ordinary Chinese are contemptuous of local authorities, but still believe that leaders in Beijing are benign.

The power of weibo

But according to Victor Yuan of Horizon, a polling company in Beijing, citizens’ satisfaction with their own lives and confidence in the government, though high, experienced a “big drop” in 2010 and didn’t recover last year. Confidence in the government has fallen by about 10 percentage points, to around 60%.

Mr Yuan says the rapid spread of microblogs has contributed to this decline. By the end of last year, weibo, as Chinese versions of Twitter (itself blocked in China) are known, were used by nearly half of the 513m Chinese who had accessed the internet in the previous six months (see chart). This was slightly more than the number who used e-mail and a rise of nearly fourfold over the year before, according to the government-affiliated China Internet Network Information Centre. Li Chunling of CASS estimates that 90% of urban internet users under 30 are microbloggers.

Weibo have transformed public discourse in China. News that three or four years ago would have been relatively easy for local officials to suppress, downplay or ignore is now instantly transmitted across the nation. Local protests or scandals to which few would once have paid attention are now avidly discussed by weibo users. The government tries hard, but largely ineffectively, to control this debate by blocking key words and cancelling the accounts of muckraking users. Circumventions are easily found. Since December the government has been rolling out a new rule that people must use their real names to open accounts. So far, users seem undeterred.

In the build-up to the 18th Congress, China’s leaders will become especially anxious to prevent embarrassment to the party. Weibo are likely to make their lives a lot more difficult—at least that was the lesson from a ten-day stand-off in December between police and residents of the coastal village of Wukan in Guangdong.

The villagers’ protest was typical of thousands that roil the Chinese countryside every year: a complaint about the seizure of agricultural land by local officials for private redevelopment. Unusually, however, in Wukan citizens took control of their village and drove out party hacks and police. Officials were alarmed by images that circulated onweibo of triumphant residents rallying in the centre of their village, like students in Tiananmen Square 22 years ago (see the picture at the start of this piece). They tried, unsuccessfully, to stop news spreading by ordering a block on the village’s name and location.

The villagers gave up their protest on December 21st after a rare, high-profile intervention by the Guangdong party leadership, which promised to look into their complaints. Remarkably, on January 15th the protest leader, Lin Zuluan, was appointed as the village’s new party chief (the previous one having disappeared, it is thought into custody). Even the party’s main mouthpiece in Beijing broke its silence on the issue, saying it showed that local officials should stop treating citizens as adversaries. Wang Yang, Guangdong’s party chief, who is believed to be a contender for a senior Politburo position this year, said the incident demonstrated how people’s “democratic consciousness” was getting stronger. He called on officials not to ignore citizens’ concerns.

Few regard the Wukan episode as a turning point for the party. At least one protester on Tiananmen Square has since been seen being dragged away by police in the usual fashion. But it has stirred debate, online at least, about how the party should respond to protests and other forms of public pressure. And villagers in Wukan warn that they will not be satisfied until they have reclaimed their land. One protest leader says there could be another, “even bigger” uprising.

Not everyone has a home to go to

The new leadership that will take over after the upcoming Congress will quickly face tests of its ability to handle social unrest. Even if the country does not appear on the brink of an Arab-style upheaval, many Chinese academics say the next few years could see burgeoning instability, exacerbated by slower economic growth and a widening gap between rich and poor. China’s outgoing leaders have tried to suppress debate about ways of reforming the political system to allow the public to voice their grievances more freely. But many analysts believe there is a pressing need for such reform. Today’s “China model”, as some in China and abroad were tempted to call it after Western economies fell into disarray three years ago, appears increasingly unsustainable.

Chinese roulette

An intriguing glimpse of how at least some in the party elite might see things was offered last April when Zhang Musheng, a prominent intellectual, published a book calling for a revival of the one-time Maoist goal of building a “new democracy”. General Liu Yuan, the son of Liu Shaoqi who was China’s president during the Mao era, openly backed the idea. Mr Zhang (himself the son of a late senior official, as are several of the new leaders-to-be) said a new democracy would involve continued party rule but with much greater freedom.

Few of China’s liberals believe there is much chance of any leader pursuing this idea in the near future. But Mr Zhang’s description of China today has struck a chord (and has been circulated widely by weibo users). A well-known economist, Wu Jinglian, picked up a phrase of Mr Zhang’s in an essay in Caijing, a Beijing magazine, in which he attacked the notion of a “China model” and called for political reform. The phrase of Mr Zhang’s that made an impression was one describing China as “playing pass the parcel with a time bomb.”

NY Times: In Fight Over Piracy Bills, New Economy Rises Against Old

January 18, 2012
By JONATHAN WEISMAN

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WASHINGTON — When the powerful world of old media mobilized to win passage of an online antipiracy bill, it marshaled the reliable giants of K Street — the United States Chamber of Commerce, the Recording Industry Association of America and, of course, the motion picture lobby, with its new chairman, former Senator Christopher J. Dodd, the Connecticut Democrat and an insider’s insider.

Yet on Wednesday this formidable old guard was forced to make way for the new as Web powerhouses backed by Internet activists rallied opposition to the legislation through Internet blackouts and cascading criticism, sending an unmistakable message to lawmakers grappling with new media issues: Don’t mess with the Internet.

As a result, the legislative battle over two once-obscure bills to combat the piracy of American movies, music, books and writing on the World Wide Web may prove to be a turning point for the way business is done in Washington. It represented a moment when the new economy rose up against the old.

“I think it is an important moment in the Capitol,” said Representative Zoe Lofgren, Democrat of California and an important opponent of the legislation. “Too often, legislation is about competing business interests. This is way beyond that. This is individual citizens rising up.”

It appeared by Wednesday evening that Congress would follow Bank of America, Netflix and Verizon as the latest institution to change course in the face of a netizen revolt.

Legislation that just weeks ago had overwhelming bipartisan support and had provoked little scrutiny generated a grass-roots coalition on the left and the right. Wikipedia made its English-language content unavailable, replaced with a warning: “Right now, the U.S. Congress is considering legislation that could fatally damage the free and open Internet.” Visitors to Reddit found the site offline in protest. Google’s home page was scarred by a black swatch that covered the search engine’s label.

Phone calls and e-mail messages poured in to Congressional offices against the Stop Online Piracy Act in the House and the Protect I.P. Act in the Senate. One by one, prominent backers of the bills dropped off.

First, Senator Marco Rubio of Florida, a rising Republican star, took to Facebook, one of the vehicles for promoting opposition, to renounce a bill he had co-sponsored. Senator John Cornyn of Texas, who leads the G.O.P.’s Senate campaign efforts, used Facebook to urge his colleagues to slow the bill down. Senator Jim DeMint, Republican of South Carolina and a Tea Party favorite, announced his opposition on Twitter, which was already boiling over with anti-#SOPA and #PIPA fever.

Then trickle turned to flood — adding Senators Mark Kirk of Illinois and Roy Blunt of Missouri, and Representatives Lee Terry of Nebraska and Ben Quayle of Arizona. At least 10 senators and nearly twice that many House members announced their opposition.

“Thanks for all the calls, e-mails, and tweets. I will be opposing #SOPA and #PIPA,” Senator Jeff Merkley, Democrat of Oregon, wrote in a Twitter message. Late Wednesday, Senator Charles E. Grassley of Iowa, the senior Republican on the Senate Judiciary Committee, withdrew his support for a bill he helped write.

The existing bill “needs more due diligence, analysis and substantial changes,” he said in a statement.

Few lawmakers even now question the need to combat pirates at Web sites in China, Russia and elsewhere who have offered free American movies, television shows, music and books almost as soon as they are released. Heavyweights like the Walt Disney Company secured the support of senators and representatives before the Web companies were even aware the legislation existed.

“A lot of people are pitching this as Hollywood versus Google. It’s so much more than that,” said Maura Corbett, spokeswoman for NetCoalition, which represents Google, Amazon.com, Yahoo, eBay and other Web companies. “I would love to say we’re so fabulous, we’re just that good, but we’re not. The Internet responded the way only the Internet could.”

For the more traditional media industry, the moment was menacing. Supporters of the legislation accused the Web companies of willfully lying about the legislation’s flaws, stirring fear to protect ill-gotten profits from illegal Web sites.

Mr. Dodd said Internet companies might well change Washington, but not necessarily for the better with their ability to spread their message globally, without regulation or fact-checking.

“It’s a new day,” he added. “Brace yourselves.”

Citing two longtime liberal champions of the First Amendment, Senator Patrick Leahy and Representative John Conyers Jr. of Michigan, Mr. Dodd fumed, “No one can seriously believe Pat Leahy and John Conyers can be backing legislation to block free speech or break the Internet.”

For at least four years, Hollywood studios, recording industry and major publishing houses have pressed Congress to act against offshore Web sites that have been giving away U.S. movies, music and books as fast as the artists can make them. Few lawmakers would deny the threat posed by piracy to industries that have long been powerful symbols of American culture and have become engines of the export economy. The Motion Picture Association of America says its industry brings back more export income than aerospace, automobiles or agriculture, and that piracy costs the country as many as 100,000 jobs.

The House response, SOPA, was drafted by a conservative Republican, Representative Lamar Smith of Texas, with the backing of 30 co-sponsors, from Representative Debbie Wasserman Schultz of Florida, the chairwoman of the Democratic National Committee, to mainline Republican Peter King of New York. The Senate’s version, written by Mr. Leahy, the Vermont Democrat who is chairman of the Senate Judiciary Committee chairman, attracted 40 co-sponsors from across the political spectrum and cleared his committee unanimously.

Then the Web rose up. Activists said the legislation would censor the Web, force search engines to play policemen for a law they hate and cripple innovation in one of the most vibrant sectors of the American economy.

Mr. Smith, the House Republican author, said opposition Web sites were spreading “fear rather than fact.”

“When the opposition is based upon misinformation, I have confidence in the facts and confidence that the facts will ultimately prevail,” Mr. Smith said.

Google, Facebook and Twitter have political muscle of their own, with in-house lobbying shops and trade associations just like traditional media’s. Facebook has hired the former Clinton White House press secretary Joe Lockhart. Google’s Washington operations are headed by Pablo Chavez, a former counsel to Senator John McCain, Republican of Arizona, and a veteran of the Senate Commerce Committee.

And for all the campaign contributions, Washington parties and high-priced lobbyists the old economy could muster, nothing could compare to the tentacles the new economy can reach into Americans’ everyday lives through sites like Wikipedia. Aides to Senator Harry Reid, the majority leader, say he will press forward with a vote Tuesday to open debate on the Protect I.P. bill. Negotiators from both parties are scrambling for new language that could assuage the concerns of the Internet community, but expectations are that the bill will now fail to get the 60 votes to move forward — a significant setback.

“The problem for the content industry is they just don’t know how to mobilize people,” said John P. Feehery, a former House Republican leadership aide who previously worked at the motion picture association. “They have a small group of content makers, a few unions, whereas the Internet world, the social media world especially, can reach people in ways we never dreamed of before.”

Stephen Fry on GNU

In the YouTube video embedded below, in celebration of GNU's 25th birthday, Stephen Fry explains what an operating system is and the two titans in the Free and Open Source Software world: GNU and Linux. This video that I stumbled upon the other day serves as a perfect introduction to Linux and GNU for those who only know about Microsoft Windows. Check it:

XTerm CLI colour change

So today I was running a relatively fresh install of Slackware in using virtualbox on Linux Mint and I wanted to change the background colour of my xterm from white to black, making it easier on the eyes to read. So I Googled configure xterm background colour. One of the first links was this site. Here was the solution:

For all [xa]term, put something like the following in your
~/.Xdefaults or ~/.Xresources:

! Defaults for all xterm clients
XTerm*background: yellow
XTerm*foreground: darkblue
XTerm*highlightColor: red

Then run

xrdb ~/.Xresources

"man xrdb" and "man X" and search for "Resources" for more
information.

Financial Times on Gramsci + American politics

January 9, 2012 7:21 pm
Why I’m feeling strangely Austrian

By Gideon Rachman

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The old is dying and the new cannot be born: in the interregnum a great variety of morbid symptoms will appear.” That statement from the Prison Notebooks of the Italian communist Antonio Gramsci was a favourite of student Marxists when I was at university in the 1980s. Back then it struck me as portentous nonsense. But Gramsci’s observation does resonate now – in an age of ideological confusion.

Old certainties about the onward march of the markets are collapsing. But no new theory has established ideological “hegemony”, to use the concept that Gramsci made famous. Some ideas are, however, gathering new strength. The four strongest emerging trends that I can spot are, in very broad terms: rightwing populist, social democratic-Keynesian, libertarian-Hayekian and anti-capitalist/socialist.

Each of these new trends is a reaction against the dominant ideas of 1978-2008. Back then, for all the nominal differences between communists in China, capitalists in New York and the soft left in Europe, their agreements were more striking than their arguments. Political leaders from all over the world talked the same language about encouraging free trade and globalisation. Increasing inequality was embraced as a price worth paying for faster growth. Deng Xiaoping set the tone when he declared: “To get rich is glorious.” Ronald Reagan or Margaret Thatcher could not have put it better.

In post-crisis Europe, however, rightwing populism is on the rise – from the Freedom party in the Netherlands to the National Front in France and the Northern League in Italy. The populists are anti-globalisation, anti-EU and anti-immigration – the common thread being that all these forces are felt to be hostile to the interests of the nation. Hostility to Islam links Europe’s populist right to parts of the Tea Party movement in the US.

There is some overlap between the populists and the libertarian Hayekians – but the two movements have different obsessions. In the US, Ron Paul, the maverick Republican, carries the banner for libertarianism. He fondly recalls dining with Friedrich Hayek himself and watching an inspiring denunciation of socialism by Ludwig von Mises, another economist of the Austrian school. That explains Mr Paul’s otherwise baffling remark, after last week’s Iowa caucus, in which he said: “I’m waiting for the day when we can say we’re all Austrians now.”

The libertarians are unusual because they argue that the current crisis is caused not by an excess of capitalism, but by too much state intervention. As far as the Austrian school is concerned, the Keynesian “cure” for the crisis of capitalism is worse than the disease.

Mr Paul is the purest advocate of a powerful conviction on the American right that the US is afflicted by an over-mighty state. The urge to slash the government back into the 18th century is not a common one in Europe. But Paulite suspicion of central banks that threaten to debase the currency is powerfully echoed in Germany – where the Hayekian right is horrified by the operations of the European Central Bank, and by bail-outs for bankrupt nations. This ideological trend is not confined to the west. In a recent article, Simon Cox of The Economist argued that policy debates in China about the state’s role in reflating the economy also pit Hayekians against Keynesians.

In the west, the fiercest opponents of the Hayekians are the Keynesian-social democrats. Their belief in deficit spending as the key to stimulating the economy often goes hand in hand with a call for a more active and expansive state. In Europe, where there is little scope for more state spending, the social democrats are arguing for much tougher regulation of high finance, a revival of industrial policy – and a renewed stress on tackling inequality. While efforts to label Barack Obama a “socialist” are silly, it is fair to label him a social democrat. The US president does not reject capitalism, but he does seek to soften its edges through a more active state that promises universal healthcare and redistributive taxation. The fact that inequality has become a global concern from China to Chile, and from India to Egypt, suggests that this is another trend that has gone global.

The failure of the hard left to capitalise on the economic crisis testifies to how profoundly communism was discredited by the collapse of the Soviet system. But mass unemployment in Europe might yet produce the conditions for the revival of an anti-capitalist movement. Greece’s two far-left parties are currently at about 18 per cent in the polls. The diverse groups that campaign under the banner of Occupy Wall Street contain some genuine socialists. And China has a powerful “new left” movement that pays lip-service to Maoism.

Events will determine which of these ideological trends sets the tone for the new age. Most people will be buffeted by personal circumstances, and by the news.

Under normal conditions I would probably sign up with the social democratic tendency. The Tea Party is not my cup of tea. But I spent the weekend reading newspaper accounts of the ever more incredible figures that may have to be poured into the bail-outs for banks and countries in Europe. Then I turned the page to read of demands for more protectionism and regulation in the EU. For light relief, I then went to see The Iron Lady – the new film about Margaret Thatcher. The whole experience has left me feeling strangely Austrian.

Financial Times on Capitalism in crisis: The code that forms a bar to harmony

By John Plender
The enrichment of bankers, corporate chiefs, flash traders and their cronies is testing tolerance of inequality, argues John Plender in the first part of an FT series
January 8, 2012 9:15 pm
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Greedy bankers, overpaid executives, anaemic growth, stubbornly high unemployment – these are just a few of the things that have lately driven protesters on to the streets and caused the wider public in the developed world to become disgruntled about capitalism. The system, in all its different varieties, is widely perceived to be failing to deliver.

Business in the leading English-speaking countries attracts misgivings. Fewer than half of the American and British people sampled in the 2011 Edelman Trust Barometer have faith in business to do what is right. The survey rates the US and the UK only marginally ahead of Russia on this score. So there is talk of a crisis of legitimacy and an erosion of business’s “licence to operate”


This article, the first in a series on rethinking capitalism after the financial crisis that began in 2007, argues that popular acceptance – which is a basic condition for business success – has waned in the Anglosphere for good reason. At the heart of the problem is widening inequality. In a recent study, the Paris-based Organisation for Economic Co-operation and Development, the club of developed nations, declared that the wealthiest Americans “have collected the bulk of the past three decades’ income gains”. Much the same is true of the UK. In both cases, most of the spoils have gone to finance professionals and top executives.

As Stewart Lansley, author of a recent book on inequality*, puts it, the modern economy appears to consist of two tracks: a fast one for the super-rich and a stalled one for everyone else. Those in the slow lane enjoyed rising living standards before 2007, despite stagnant real incomes, thanks to increased borrowing on the security of their homes. Since the crisis, however, American and British homeowners have faced a long and deep squeeze on real living standards, while struggling to service an unprecedented level of indebtedness. At the same time, says Mr Lansley, finance has come to play a new role as “a cash cow for a global super-rich elite”.

In continental Europe, the increase in inequality is less pronounced and the legitimacy problem has more to do with the way imbalances in the eurozone are being addressed. Northern Europeans resent a monetary union that has permitted southern Europe to engage in what they see as fiscally profligate behaviour, while southern Europeans and the Irish are required to submit to extreme austerity programmes that exacerbate their sovereign debt problems.

As the German-led policy elite inches towards “more Europe” as a solution to the fissures in the eurozone, it is far from clear that more Europe is what the citizens of Europe want. Democratic legitimacy has been largely lacking from the outset of this gigantic monetary experiment. On both sides of the Atlantic there is now a risk that reasonable aspirations to equality of opportunity are being undermined, accompanied by a growing threat of political instability. Support for open trade and free markets is also being adversely affected.

Misery and money motive

The problem of consent in relation to capitalism is nothing new. In fact, it returns with nagging frequency. In the early years of the industrial revolution, average per capita incomes were slow to rise and the contrast between the plight of the working population and the lifestyle of rich manufacturers prompted savage diatribes such as that of Charles Dickens in Hard Times. Even when living standards did rise, David Ricardo and Karl Marx worried whether the free markets trumpeted by Adam Smith could produce an income distribution that was politically tolerable.

By the late 19th century the debate turned more heavily on the moral question posed by the unedifying behaviour of the American robber barons at a time of spectacular economic growth. The centrality of the money motive in wealth creation appeared to detract from capitalism’s legitimacy unless there was an implicit social contract between the rich and the rest of society, whereby the wealthy tempered ostentation and engaged in philanthropy.

Then, in the unstable 1920s and the Depression of the 1930s, the efficacy as well as the moral basis of capitalism was once again called into question. While F. Scott Fitzgerald chronicled the moral vacuity of jazz age capitalism in The Great Gatsby, John Maynard Keynes, who provided a theoretical basis for the mixed economy and a more humane form of capitalism, was notably acerbic on what he called “individualist capitalism” and the money motive. Such questioning was sharpened by the existence for the first time of a seemingly successful alternative to capitalism in the Soviet Union; also of competing models, such as the corporatist approaches developed in Germany and Italy.

What, then, is different about today’s outbreak of disaffection? Perhaps the most important difference is that it is not the product of despair. The people in Manhattan’s Zuccotti Park and on the steps of St Paul’s Cathedral in London had no need of soup kitchens and took to their tents out of choice, unlike many in the 1930s US who slept in cardboard box colonies – Hoovervilles – out of necessity.

If there is no proliferation of soup queues, it is because in all the economies of the developed world capitalism has been humanised to a greater or lesser degree by forms of social democracy and by bank bail-outs. Unemployment in the US has gone nowhere near the 25 per cent rate that prevailed in 1933. While there are exceptionally high rates of youth unemployment, especially in southern Europe, there is more of a safety net for the victims than in the Depression. And if today’s protesters articulate no coherent programme, it seems clear that underlying frustrations are to do with perceptions of unfairness, not immiseration.

Much of that frustration relates to the banks. In contrast to the 1930s, when banking was about deposit-taking and lending, modern bankers engage in complex trading that they themselves do not always understand and whose social utility is not apparent to ordinary mortals – or even to the likes of Lord Turner, head of the UK Financial Services Authority, who famously declared that many parts of the banking business had “grown beyond a socially reasonable size”. Many have shown a disregard for their customers, while fiduciary obligation has become a casualty of deregulation and the shareholder value revolution. There is a widespread conviction that these bankers constitute a protected class who enjoy bonuses regardless of performance, while relying on the taxpayer to socialise their losses when they have taken excessive risks. At the same time, the public is aware that top executive rewards more generally are poorly related to performance and tend to go up even when profits fall.

Human capital or ‘hand’

Such resentment is not completely new. It bears some resemblance to the hostility towards profiteers after the first world war, which prompted Keynes to remark: “To convert the business man into the profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards. The businessman is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society.”** On that basis, no one can be surprised that the legitimacy of capitalism is currently in question. And it would be wrong to call it a “winner takes all” form of capitalism, because privileged losers appear to be making off with the prizes too.

What is unquestionably novel is the ferocity with which US business sheds labour now that executive pay and incentive schemes are more closely linked to short-term performance targets. In effect, the American worker has gone from being regarded as human capital to a mere cost, or what was known in the 19th century as a “hand”. Yet this pursuit of a narrowly financial conception of shareholder value may destroy value for the ultimate pension beneficiaries – because of the disruption that slashing and burning causes, and the cost and time involved in hiring and retraining when conditions improve.

That underlines the “agency problem” at the heart of the banking and boardroom pay sagas. The accountability of management – the agent acting on behalf of the highly dispersed beneficiaries of equity ownership – is fundamentally flawed. While the public may not be aware of the details of the weak chain of accountability, or the growing number of investors such as high-frequency traders or hedge funds that have no interest in playing a stewardship role, it sees the outcome, which contributes to the wider inequality story.

So what to do? It is not as if there are attractive alternative models. While the west is chastened by the rise of Asia, few would wish to adopt the communist Chinese mixture of state ownership, red-in-tooth-and-claw private markets, wholesale corruption and even greater inequality than the US. As for the cleaner authoritarian approach of Singapore, despite delivering high economic growth, it has started to lose its appeal with the island’s electorate. Nor would many in the west find free-market Hong Kong a comfortable environment.

The real question, as Keynes argued in the 1930s, is therefore how to improve the existing model of capitalism. The snag is that there is minimal flexibility in macro policy after the crisis, especially in the US where broadly centrist politics have been replaced by a polarised, stalemated debate. And in both the US and UK there is a greater mistrust of big government, according to the Edelman Trust Barometer, than of business. Efforts to re-regulate the banking system, meantime, have failed to convince many experts that an even larger financial crisis can be avoided.

From distribution to decline

If Hyman Minsky, the expert on financial market fragility, provided the best route map for understanding events before the crisis, and Keynes offered the best guide to crisis management, Mancur Olson, a theorist on institutional economics, could now be a posthumous beacon on how to manage the aftermath. Olson argued that nations decline because of the lobbying power of distributional coalitions, or special-interest groups, whose growing influence fosters economic inefficiency and inequality.***

When he was writing, the main interest groups were trade unions and business cartels. Today, the pre-eminent interest group consists of finance professionals on Wall Street and in London. Through campaign finance and political donations, they have bought themselves protection from proper societal accountability. And they pose a continuing obstacle to the de-risking of banking of the kind recommended by the Vickers commission in the UK.

Tackling such interest groups both in the US and Europe is one of the biggest post-crisis tasks for policymakers and a key to addressing concerns about systemic legitimacy. The inchoate nature of the public’s complaints is another. Not the least of the difficulties, to reformulate Winston Churchill’s famous remark on democracy, is that capitalism is the worst form of economic management except for all those other forms that have been tried from time to time. The public relations problem implicit in that pale endorsement is an underlying reason why legitimacy crises recur.

* The Cost of Inequality, Gibson Square, 2011
** Quoted in Keynes and Capitalism, Roger E. Backhouse and Bradley W. Bateman, History of Political Economy, 2009
*** The Rise and Decline of Nations, Yale University Press, 1982