What Golden Age?

Another reviewer has noticed that there is currently some trouble in capitalism, which may have big implications for our hopes for a golden age of philanthrocapitalism. This time, a blogger at Foreign Policy magazine is worried that philanthrocapitalism may prove to be a passing fad, as “the financial and political situations have changed/are changing in such way that this ‘new’ Golden Age may already be on its way out.”

In particular, the blogger highlights our argument that “Each of the past philanthropic golden ages ended with the state ratcheting up its role in society, crowding out some the philanthropists. In part, it is the recent attempt in many countries to roll back the borders of the state through privatization, deregulation, tax cutting, and attrition that has made space for the philanthrocapitalists of the fifth golden age.” Then the blogger asks “If these actions helped to create a new Golden Age, what are we to make of the recent financial bailouts, government buying stock in banks, moves to re-nationalize public service and upcoming tax increases for the wealthy? If Golden Ages are relatively short and fleeting moments in time – is the newest on its way out? And then what?”

These are important questions. This is clearly shaping up to be a generational moment for capitalism and for government, in which decisions by political and private-sector leaders over the next few months may define the nature and scale of wealth creation and the borders of the state for several decades.

What is not clear is whether the underlying trends that drove the wealth boom of the past 25 years are really going to be fundamentally changed. So far, all we know is that finance is in the midst of a period of rapid change – though nobody could possibly characterise this as an industry that has operated without a strong government role during the boom years. What is going on now is best characterised as a reform of regulation rather than the introduction of it. The acquisition of equity stakes by governments may be far less significant in terms of future wealth creation than how governments choose to regulate, and in particular, their attitude towards and (the greatest unknown of all) their ability to control leverage.

It seems a safe bet that finance will be less of a source of billionaires in the near future, though history suggests it would be wrong to conclude the same about longer-term billionaire creation. A few wealthy philanthropists will be forced to cut back or abandon their giving due to the meltdown, as they are after every financial crash. (In the book, we tell the story of Alberto Vilar, whose fortune was hit by the dotcom crash, but who was unable to contain his generosity – as one friend said, “asking Alberto for money was like offering an alcoholic a drink”.) However, provided governments decide they want to continue to have private wealth creation, they are sure to want to take steps to encourage investing in companies, from venture capital to initial public offerings, which will create plenty of opportunity to make fortunes – which, hopefully, will then be given away.

Moreover, as the Foreign Policy blogger noted, we said that governmental changes were responsible only “in part” for the wealth creation of the past 25 years. None of the other forces that gave rise to the huge fortunes of that period seem likely to disappear. Information technology, biotech, globalisation and global brands, and super-celebrity, all seem likely to continue to benefit from innovation and growth, though they will no doubt suffer from short-term recessionary pain. So, too, the phenomena of “winner-take-all” markets, where the most successful practitioners do disproportionately well.

And the new era of bigger government may not be as all-powerful as some pundits now think. Even today’s relatively low rates of tax on capital and the income of the wealthy may prove surprisingly robust, both because of governments’ need to get wealth creation going again, and because of international tax competition, which gives the wealthy the credible threat of taking their money elsewhere if the government of the country where they are based tries to take too much of it. Already, President-elect Barack Obama is taking a softer line on tax increases for the wealthy than he was during the election, and we would not be surprised if other political leaders do the same when confronted with the potential mobility of capital that they need invested in their country.

Economic downturns are inevitable. They should not be confused with fundamental shifts in the direction and nature of economic activity. It may well prove premature to call an end to the global golden age of wealth creation that has been under way for 25 years – though it has certainly suffered a setback that politicians may yet manage to deepen severely, as they did in the 1930s. Equally, therefore, it is too soon to write off our hoped-for golden age of giving.