The great lesson of history...

As stockmarkets continue their volatile passage downwards one seemingly safe haven investment would appear to be the printing rights to Das Kapital - global sales have been soaring of late, with the likes of Nicolas Sarkozy seen palming his way through the minutiae. The whole viability of Capitalism is being called into question within popular media, and to some extent in government policy response. What is certainly true and is self evident in the events of the past few weeks, is that poorly regulated capitalism is bankrupt and the the banking elite who ran the show were inept.

What is also true is that there is a human tendency to latch onto systems and processes and label them unwittingly as better than they actually are, or in the sudden case of their failure to totally discredit them. In other words it's part of the human condition to overreact. There are plenty of cases throughout history to demonstrate that what we think as societies makes us strongest is also likely to lead to our precipitous demise. Nothing is perfect, and thinking things are typically limits our ability to see the wood from the trees - or as Leonard Cohen put it more eloquently:

Ring the bells that still can ring
Forget your perfect offering
There is a crack in everything,
That's how the light gets in.

The laissez faire, free-market approach isn't perfect...what is surprising is that people are thinking that this is surprising. The alternatives are worse.

What is (with hindsight) easiest to pinpoint is the fact that people, governments, bankers, regulators etc. overestimated the ability of the Monetarist approach to economic management to lead us to the promised land. As the Keynesian dogma was ushered out, the Chicago school ushered in an era of central banks aggressively fighting inflation, led by Paul Volcker at the Fed through the early 80s. Once his credibility was achieved in this area, with considerable pain in the early years (interest rates of 18% in 1982, and similar in the late 80s in the UK) global interest rates stabilised at extremely low levels never previously seen. Credit creation flourished and business investment shot up rapidly, global growth started to move above long term trends and the ruling powers of the world convinced their populaces of how smart they were, as they advocated their "light touch" approach to regulating capital markets, trade and business investment.

Military historians should be a compulsory member of any powerful decision making body, as they can likely point to the cycles of history to forewarn of likely problems when things are plain sailing...there is so much evidence in their field. In an article called the "Victory Disease" by Major Tim Karchner of the US army he outlines a whole host of major battles lost throughout history where the consequence of past battles having been won, was the likelihood of losing the next one increasing. It paints a nice parallel to the hubris of wealth creation over the past 25 years leading to where we are heading today.

The British military experience during the Zulu wars of the late 19th century illustrates the symptoms of the "Victory Disease" as Karchner calls it. The native Zulu population of Southern Africa was just another indigenous people for the British Army to defeat in the British Empire's colonization of Africa. Before fighting the Zulus, the British Army had fought the Boers over areas in southeastern Africa, but most of the British army's experience had been in battles with various indigenous tribes - the Xosas, Pedis and Gcalkas.

The British defeat at the Battle of Isandlwana on 22 January 1879 illustrates the danger of military force using established patterns. When planning the campaign that led to the Isandlwana defeat, the British commanding officer Lord Chelmsford (a good Essex boy) planned to fight the Zulus in the same manner in which he had "fought a messy little war on the Cape frontier to a successful conclusion". Unfortunately those battles were fought in a guerilla warfare mode, and instead the Zulus just produced an enormous army. The dialogue taken from the 1964 film "Zulu" has a comic sadness to it:

Adendorff: The classical attack of the Zulus is in the shape of a fighting bull buffalo, like this (he uses a bayonet to draw a diagram in the dirt): the head, the horns, and the loins. First the head moves forward and the enemy naturally moves in to meet it - but it's only a feint. The warriors in the head then disperse to form the encircling horns, and the enemy is drawn in on the loins, and the horns close in on the back and sides. (He stabs the bayonet into the ground.) Finish.
Lt. Bromhead: It looks, uh, jolly simple, doesn't it?
Adendorff: Oh, it's jolly deadly, old boy.
Lt. Bromhead: Good show, Adendorff, we'll make an Englishman of you yet!

In both the cinema and reality the Zulu army attacked one of the unsuspecting British regiments while it was encamped and killed virtually every man.

This week saw perhaps the greatist advocate of the monetarist doctrine, Alan Greenspan, admit that in truth (and with the benefit of hindsight) that the system wasn't perfect, even though for long periods it appeared to be.
The congressional committee's Democratic chairman, Henry Waxman, pressed him: "You found that your view of the world, your ideology, was not right, it was not working?" Greenspan agreed: "That's precisely the reason I was shocked because I'd been going for 40 years or so with considerable evidence that it was working exceptionally well."

The great strength of Monetarist economics - it's success over a long period of time - runs the risk of now becoming its greatest weakness. The world collectively was so confident in it that now that it has been proven fallible, that fallibility will cause gigantic fall-out. The human overreaction condition will likely kick in on the same scale. We may now embark a grand reworking, or perhaps even a complete destruction of capitalism as we have seen it work for the past 30 odd years, and blame the current failure on the concepts themselves. The truth is that the system is still the best available, but its practitioners need some work. This same scenario repeats itself over and over in our history.

But then the great lesson of history is that we never learn the great lesson of history.