Has Western capitalism failed?

Click here to listen to the programme on Business Daily on BBC World News. Click here to read the letter on the BBC site.

 The triumph of consumption based capitalism in the West has created the crisis of the 21st century: massive environmental damage, depletion of natural resources, a growing gap between the rich and poor and most recently an awareness that it is dependent on facilitating people and nations to live beyond their means, thereby creating unmanageable debt and banks too big to fail.

The drivers for economic growth have for the past several decades been grounded in the promotion of free markets and the globalisation of finance to apparently deliver endless prosperity to all through consumption led growth. But this is now unraveling as the hidden costs are surfacing everywhere. The economies that had practiced this are now finding that the coupons are all coming in and the debt issues in the US and Europe should leave every one in no doubt that living beyond your means and planetary limits is simply not an option.

In Asia, often seen as the saviours of the global economy because of  its potential markets ( mega-consumption) the high price being paid can be seen everywhere in ravaged landscapes, a highly degraded environment , the rapid depletion of precious resources and erosion of the most basic of social nets for the disenfranchised. This will inevitably lead to social unrest on a large scale unless governments wake up.

All of this has its roots in the almost religious belief in the West that took hold globally about three decades ago: that ultimately free markets, technology, finance and democracy can offer everyone every freedom and fulfill all aspirations, at the same time solving all the problems of the world. Then in a strange distortion of economics and politics an ideology was born and packaged as the cornerstone of a Western narrative about capitalism which could not be challenged.

There was and continues to be denial about two key lies at the heart of this Western economic view of the world and upon which capitalism is dependent. The first is that human beings are rational, which is clearly hubris. The second is that markets account for what people value by giving it a proper price. This too is fantasy. It should be clear to all, except those in absolute denial that capitalism thrives on under-pricing resources. The growth paradigm which thrives on under-pricing externalities was fostered at the time of the Industrial Revolution, and then extended worldwide via colonization and then the mantra of free markets, without ever acknowledging any limits to growth. This is the most critical failing of Western capitalism.

The developing world which sadly then subscribed to this ideology should reject this model and its false premise that wealth will trickle down and that it is the only way to create more equitable and prosperous societies.

The consumption led model of capitalism is well past it sell by date and one could go so far as characterising its current challenges as analogous to the death throes of a sick old man: one born in an era of privilege and plenty, whose tribe enjoyed global dominance, and thus accustomed to arrogance and overconsumption.

Western nations steeped in this form of capitalism will find it difficult to change and the transition will be painful. They will thus look towards international consensus via the institutions they continue to dominate to preserve the old order based on rules the developing nations of the world were not authors of. This is often an attempt to shift responsibility, whilst at the same time looking to and inherently expecting Asian economies to continue to subscribe to and fuel this model, as most recently voiced by the EIU in their report on Asian consumption.

The developing world, intellectually subservient for the last two centuries, has sadly sought to ape and emulate this model and thereby unwittingly helped bring the harsh realities much more to the fore, but not enough to overcome the deniers and vested interests.

The leaders of the Western world need to make the hard decision now to change the expectation within their economies. Rhetoric about short term austerity plans with suggestions that the good times are around the corner or a quarter away a will not help. The brutal truth needs to be outlined that short term fiscal and monetary polices will only postpone the inevitable reality check. The developing nations aspiring to emulate the Western model should take dramatic steps to reverse course. It will be their key to remaining legitimate and not creating a bleak future, not just for their citizens but for the world too. Needless to say Asia with its large population will be at the heart of this 21stcentury struggle to redefine and reshape capitalism.