Which Capitalism for the Twenty-first Century? |

Which Capitalism for the Twenty-first Century?

An interview with Lord Adair Turner:
“Which Capitalism for the 21st Century?”

by Alvin Lee

As part of our 10th Anniversary Celebrations, the LKY School hosted a lecture by Lord Adair Turner asking the question, “which capitalism for the twenty first century?” Global-is-Asian sat down with Lord Turner, also an LKY School Distinguished Visitor, to discuss economic research and its relevance to public policy. He challenges the self-confident Washington Consensus that capitalism, unfettered, was a superior economic system. He raised problems such as the difficulties of developing economies playing “catch-up”, the dangers of too much credit in the financial markets, to the long-run challenges to meaningful growth.

GIA: What kind of economics should we be doing as a public policy school?

AT: There are several things that interest me in economics, some of which are public policy, and some of which are fundamental economics, theoretical economics. It’s interesting that there are some, where in order to do good public policy, you also need to do a sort of theoretical rebuilding of economics. There are others where the economic theory is well understood and you simply need to apply it. Let me give you three examples.

The first, where I think we need to rethink the some fundamental aspects of economics, relates to the financial system and its relationship to macroeconomics.  Here, over the 30 years before the global financial crisis, there was not only a rapid growth of the financial system, a rapid growth of credit, leverage, credit-to-GDP ratios, a rapid growth of the complexity of the financial system; there was also a very strong policy belief that liberalization of the financial markets was undoubtedly a good thing. And that related to a strong tendency in the dominant stream of modern macroeconomics, which either asserted that the financial system was not important, or to the extent that it did think about it, thought about it as axiomatically beneficial because more liberalization completed more markets, and as a result was bound to make us more allocatively efficient.

I think these assumptions were profoundly wrong and inadequate. The nature of finance, which is a set of contracts which links present to future, under conditions of inherent uncertainty, is very specific. Financial markets work differently from other markets. Therefore, some understandings of financial markets and credit markets in particular which are just not there in economic theory. Undergraduate textbooks of economics either do not adequately deal with the financial system, or describe what banks do in a way that is just not true. They say that banks take deposits from households and lend it to businesses to do capital investment and this is a completely inadequate definition of what the financial system does.

The interesting thing is that an earlier generation of economists–Wicksell, Hayek, Fisher, Keynes, Minsky–had looked at these issues, but those understandings got lost in the mathematization of economics, and the basing of economics on theses efficient markets and rational expectations which dominated after the seventies and eighties. I think this is an issue which is interesting and important to this region and links back to basic theory. For instance, when we look at the Chinese economy, about whether we should be worried about the growth of leverage in the Chinese economy, or the pros and cons of rapid or slow financial market liberalization, in order to do that well, which must be an issue of interest to people at the LKY School, because it’s a huge regional economy facing potential huge challenges, I think one needs to relate it to some fundamental thinking about economic theory.

GIA: What about other policy areas that don’t involve a rethinking of fundamental theory, but nevertheless are interesting to think about?

AT: Let me suggest two extremely interesting public policy issues. The first is, “where are jobs going to come from in the future”? There is a tendency in economics to think that there is a continued flow of new technology which we seize by doing research, finding new ideas and then investing in them–and that this flow will continually provide new opportunities for growth. Broadly speaking, I think that’s right, there will be new flows.

But I don’t think we can assume that each wave of technology is the same in its economic impact. I think that there are some inherent natures of technology which have different impacts. In particular, the continual innovation and deepening and application of information communications technology, the digital economy is likely to have a different impact on our economics, than the earlier electro-mechanical technology. The way to sum it up is, when Henry Ford had designed the model ‘T Ford’, it took hundreds of thousands of workers to produce the millions of those that the American society bought. And that created lots of lots of skilled working class jobs, in semi-automated rather than fully automated factories. And that is fundamental to why although the electro-mechanical revolution, the internal combustion revolution, destroyed huge amounts of agricultural jobs; they created a set of new jobs.

Creating a new software or a new app like Facebook or Microsoft Office is different;  a relative small number of people are clever enough to design it. Once it is designed, it is applicable across the world with a relatively small number of people employed by the thing that created it. That is because software copies itself, it is replicable at zero marginal cost. And this is why you have the phenomenon that the huge firms of the information technology world, Microsoft, Google, Amazon, are huge in market capitalization but not huge in employment.

Take Facebook. They have 5000 employees but they are a huge company. And I think this then poses a challenge. I absolutely do not believe in the lump of labour fallacy that there won’t be new jobs created, but I think that the balance of where jobs come from is highly unequal in its distribution of income effect. There is huge economic value to be created by a relatively small number of people who have the IT skills and the creativity to create new applications, or to apply ICT to the ‘internet of things’  the interconnectivity of appliances and improvements in productivity that could come from that. I’m sure there will be new jobs, but they may be relatively low-skilled jobs, or low-paid jobs, and they won’t be jobs in ICT itself, they may be face-to-face service jobs. Now this is not so much a challenge for the lower income areas of Southeast Asia, but for developed economies like Singapore, I think it is an issue.

The third one, which I do hope people in the region will increasingly engage with, is climate change. I recognise the region in total is still a relatively low income area, therefore there is a priority on the growth per se, but I think at the global level, I am personally convinced that the science is clear that by putting carbon dioxide and other greenhouse gases into the atmosphere we are warming the world. I think that has a relatively unpredictable set of consequences for regional climates. I think the uncertainty of it is an argument for action rather than inaction. If we knew for certain what the impacts were region by region, there could be an argument that we should adapt by the appropriate sea defences and air conditioning in this place but not the other. But it’s the unpredictability of it, and the fact that it could have dramatic regional effects, which is actually a strong reason for taking action.

I’ve been a pessimist on the ability of the world to agree on a global deal. But there are some things which are optimistic. There are some technologies which are rolling forward at an extraordinary pace, such as solar photo voltaic electricity generation, and the possibility of electric cars etc. These create the real possibility that with some vision, we can drive towards low-carbon economies, at a relatively small economic cost. The UK is now legally committed to reduce our emissions to 80% below 1990 levels by 2050. It’s highly likely that in the next couple of years the UK level of emissions will fall below China on a per capita basis. I think we need an engagement globally on programmes to deal with the falling emissions among developed economies and the rising emissions among developing economies. I think the Stern Report on the economics of climate change illustrated that there is a way for all of the world to enjoy advanced economy standards of living but do it in a low-carbon way. I think in particular for some emerging markets, they should be thinking about whether there are leapfrog possibilities. We know in some countries they have essentially employed mobile telephony as a leapfrog technology. They may never push into the ground those copper wires by which we did technology in the developed world. Now Solar PV has similar possibilities, in that we can deploy them off the grid.

It would be appropriate for the LKY School to be an energizer and interest people from around the world to see that this isn’t just an issue for Europe, Japan and America, but an issue for the region as well.

is a researcher and manager at the Case Study Unit.  An abstract of this interview appears in the next issue of Global-is-Asian, #19 Oct-Jan. This will be part of a spread featuring events as part of LKY School’s 10th anniversary. Follow all events on Twitter @LKYSch.

See all of Global-is-Asian issues available here.


The 1990s saw the emergence of a self-confident Washington Consensus, convinced that capitalism had been proved a superior economic system and that market liberalisation, including of financial markets and capital flows, was the universal key to economic growth and increasing human welfare. That free market formula was, it seemed, equally relevant to advanced economies operating at the frontier of technology and prosperity, and to developing countries relentlessly converging towards advanced economy standards. That self-confidence is now challenged. The global financial crisis posed questions about the merits of financial liberalisation; China’s growth model breaks many of the supposed rules for success; some emerging economies appear caught in a middle income trap; and in already rich countries many people now question whether further economic growth truly serves human welfare, or whether other objectives are more important.

Lord Turner’s lecture will consider which elements of the case for free markets are robust and universally relevant, and where we need a more nuanced understanding of the role markets can play in advancing human welfare.


Lord Adair Turner, Senior Fellow, Institute for New Economic Thinking; LKY School Distinguished Visitor

Wednesday, 23 October 2013
5:15 p.m. - 6:30 p.m.

Level 3, Block B,
Faculty of Law,
469G Bukit Timah Road,
Singapore 259776

Seats are limited and will be available on a first-come, first-served basis. Kindly register your interest in attending at to avoid disappointment.

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