BOOKS: The Capital System Skewed

BOOKS: The Capital System Skewed - Going off the Rails; By John Plender; John Wiley pounds 19.99

by Philip Augar
Last Updated: 31 Aug 2010

Going off the Rails; By John Plender; John Wiley pounds 19.99

Despite US rhetoric, the market is no longer free. Philip Augar is convinced by this plea for the reform of the Anglo-American model.

These days, you have to move fast to bring out a timely business book, and John Plender has done just that. Going off the Rails cleverly links globalisation and Anglo-American capitalism, themes that have been tarnished by problems in the emerging markets and the corporate crisis in the developed world. The issues are connected by free-market thinking, which, after a promising start in the '80s, has gone off the rails.

The original doctrine prescribed capital markets, shareholder value, deregulation, tight budgets and free trade as the keys to the efficient allocation of capital. Gradually, central bankers and corporate managers manipulated it, so that the market is no longer truly free.

The Federal Reserve set the climate, intensively managing the economic and financial cycle and providing a safety net, despite its free-market rhetoric. Interest rates were cut and liquidity was pumped in whenever markets were felt to be at risk - for example, in the crash of 1987, the banking crisis of 1991, Asia in 1997, the LTCM rescue in 1998, the Y2K millennium panic and 9/11. The regularity of such intervention eroded capitalism's immune system.

It seemed as though the net would always be there to break the fall whenever anything went wrong. Recklessness ensued, further encouraged by Alan Greenspan talking the market up with his New Economy zeal, when a more prudent banker would have tried to talk it down.

In this climate, Anglo-American capitalism was stretched beyond its limit, and Plender provides a compelling account of the breakdown and its causes. The usual cast is here: rapacious investment bankers, incompetent auditors and greedy CEOs fired up by share options, all playing to a backdrop of lax corporate governance, short-termism and value-destroying takeovers. The denouement was the bursting of the high-tech bubble, business failures and corporate corruption.

In contrast to the relaxation of market economy principles in America, they were applied rigorously to dependent developing economies. Unpalatable medicine was dished out with damaging consequences for some patients, especially those in Asia after the crisis of 1997-98. Free-market investment flows have not produced the efficient allocation of private capital that was expected.

The same five countries regularly get a disproportionate share by virtue of liquidity rather than merit, and the world's poorest countries end up subsidising the richest.

Plender's two themes are skilfully interwoven, although after Joseph Stiglitz's recent book on globalisation, it is the material on Anglo-American capitalism that is the freshest. This is one of the first books to look at the post-Enron corporate world, and if you want to understand what business is going through, it is an excellent place to start.

But if you are looking for a radical cure for capitalism's problems, you'll be disappointed. Having gone to the brink with some feisty criticisms, Plender steps back in his conclusion to endorse a reformed version of the Anglo-American model.

The reason for this is that the harder you look, the harder it is to find a better alternative. Plender is at heart a free-marketeer and believes there are limits to what governments and international institutions can do because they cannot build private businesses. For him, the key is for policymakers to put a more persuasive case for the capital-market model and to restore trust in corporate behaviour.

Although some of us would prefer business to be supervised more closely, it is hard to disagree with Plender's closing words. Capitalism will be better managed as a result of the bubble, he tells us, 'until, of course, the next bubble comes along'.

With that to look forward to, the best we can hope for is a smoother, longer economic cycle. Perhaps that's not such a bad prospect after all.

Philip Augar is a visiting fellow at Cranfield School of Management. His latest book is The Rise of the Player Manager: How professionals manage while they work (Penguin).

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