23 Things They Don't Tell You About Capitalism

We can drive our cars fast only because we have brakes. If cars had no brakes, even the most skilful drivers would not dare to drive at more than 20–30 miles per hour for fear of fatal accidents. In the same way, people can accept the risk of unemployment and the need for occasional re-tooling of their skills more willingly when they know that those experiences are not going to destroy their lives. This is why a bigger government can make people more open to change and thus make the economy more dynamic.

Thing 22 Financial markets need to become less, not more, efficient

What they tell you

The rapid development of the financial markets has enabled us to allocate and reallocate resources swiftly. This is why the US, the UK, Ireland and some other capitalist economies that have liberalized and opened up their financial markets have done so well in the last three decades. Liberal financial markets give an economy the ability to respond quickly to changing opportunities, thereby allowing it to grow faster. True, some of the excesses of the recent period have given finance a bad name, not least in the above-mentioned countries. However, we should not rush into restraining financial markets simply because of this once-in-a-century financial crisis that no one could have predicted, however big it may be, as the efficiency of its financial market is the key to a nation’s prosperity.

What they don’t tell you

The problem with financial markets today is that they are too efficient. With recent financial ‘innovations’ that have produced so many new financial instruments, the financial sector has become more efficient in generating profits for itself in the short run. However, as seen in the 2008 global crisis, these new financial assets have made the overall economy, as well as the financial system itself, much more unstable. Moreover, given the liquidity of their assets, the holders of financial assets are too quick to respond to change, which makes it difficult for real-sector companies to secure the ‘patient capital’ that they need for long-term development. The speed gap between the financial sector and the real sector needs to be reduced, which means that the financial market needs to be deliberately made less efficient.

Three useless phrases

Visitors to Iceland in the 1990s reported that the official tourist guide handed out at Reykjavik airport had, like all other such guides, a ‘useful phrases’ section. Unlike them, I was told, the Icelandic guide also had a ‘useless phrases’ section. Apparently it contained three phrases, which were, in English: ‘Where is the railway station?’, ‘It’s a nice day today’, and ‘Is there anything cheaper?’

The railways thing is, surprising though it may be, true – Iceland does not have any railways. About the weather, the guide was perhaps being overly harsh. I haven’t lived there, but by all accounts Iceland does seem to have at least a few sunny days a year. As for everything being so expensive, this was also pretty accurate and a consequence of the country’s economic success. Labour services are expensive in high-income countries (unless they have a constant supply of low-wage immigrants, as the US or Australia), making everything more expensive than what the official exchange rate should suggest (see Thing 10). Once one of the poorest economies in Europe, by 1995 Iceland had developed into the eleventh richest economy in the world (after Luxemburg, Switzerland, Japan, Norway, Denmark, Germany, the United States, Austria, Singapore and France).

Rich as it already was, the Icelandic economy got a turbo-charged boost in the late 1990s, thanks to the then government’s decision to privatize and liberalize the financial sector. Between 1998 and 2003, the country privatized state-owned banks and investment funds, while abolishing even the most basic regulations on their activities, such as reserve requirements for the banks. Following this, the Icelandic banks expanded at an astonishing speed, seeking customers abroad as well. Their internet banking facilities made big inroads in Britain, the Netherlands and Germany. And Icelandic investors took advantage of the aggressive lending by their banks and went on corporate shopping sprees, especially in Britain, its former adversary in the famous ‘Cod Wars’ of the 1950s to 1970s. These investors, dubbed the ‘Viking raiders’, were best represented by Baugur, the investment company owned by Jón Jóhanneson, the young business tycoon. Bursting on to the scene only in the early 2000s, by 2007 Baugur had become a major force in the British retail industry, with major stakes in businesses employing about 65,000 people, turning over £10 billion across 3,800 stores, including Hamleys, Debenhams, Oasis and Iceland (the temptingly named British frozen-food chain).