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The pendulum will swing back


By Sir Martin Sorrell


Published: April 8 2009 20:22 | Last updated: April 8 2009 20:22


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Every era of financial or irrational exuberance ends with the shutters coming down. Tulip mania, the South Sea bubble, the panic of 1825 and the first internet bust were all part of the same ebb and flow. We should not expect it to be different now, but that does not make it any easier to accept the cyclical nature of economies.


In good times, collective human psychology and self-reinforcing experience convince us that we are living in a new era, where the old oscillations of boom and bust have been banished. Then comes catastrophe and bankruptcy, and a fresh consensus emerges from the debris of the last great party. That new orthodoxy says that Anglo-Saxon liberal market economics is dead and globalisation discredited. Even capitalism itself, it seems, is on life support under the watchful eye of the prison hospital staff. The former giants of finance are pariahs. Right now it would probably be more acceptable to confess at a dinner party to having stolen Christmas presents, than admit you dabble in investment banking.


This too shall pass and things will change. There will be a recovery of sorts, not this year but perhaps next – just by dint of the scale of fiscal stimulus in the US, UK and elsewhere and even by the atmosphere surrounding Gordon Brown’s seemingly triumphant Group of 20 nations summit.


Not that we should be complacent about our current pain. Some have said that, intellectually, recessions are exciting or fun. That is callous nonsense. Telling someone who has lost their job or business that their troubles are merely part of a cycle will provide little comfort. It remains essential that money is spent to cushion the worst effects of the recession – although it was the same spending and lending that got us here in the first place.


It must be said plainly that capitalism messed up – or, to be more precise, capitalists did. We – business, governments, consumers – submitted to excess; we got too greedy. Life was easy in the late 1990s and early 21st century. With a seemingly benign interest rate regime, and cheap goods from China keeping inflation at bay, all you had to do was go into the office – moderation was out.


Just as the crash was inevitable, so will be the pendulum swinging the other way. The teeth and claws of capitalism will be blunted, and we will see the return of forms of state corporatism familiar to those of us who lived and worked in the 1970s. We in business need to be philosophical: if taxpayers are required to bail out banks or other businesses, they should expect a say. The devolved Wales and Scotland were already operating on a Scandinavian model; we should expect more of the same. It is part of the hangover from the party, but probably not the cure for a punishing headache.


Just as business is poor at government, so government is feeble at running business. The Keynesian model espoused 40 years ago by Harold Wilson, and backed by the Hungarian economists Nicholas Kaldor and Thomas Balogh, all but wrecked Britain. This time, a swift exit from the UK’s state banking investments is essential.


If that does not happen, I fear an exodus of talent from Britain. In a world of overcapacity, the one thing in short supply is human capital. Our best brains will not work for British banks if they are under the dead hand of the Treasury for too long – or if the tax system is skewed against them being rewarded for hard work and success. Moreover, widespread departures from failed banks make them harder to rebuild. Given modern technology, it is relatively easy for people and company headquarters to shift to more welcoming jurisdictions. Equally, high-flyers may change disciplines, join a boutique operation or a start-up.


At some point, the cycle will begin afresh. Henry Kravitz of the private equity house KKR recently said that at least $300bn–$400bn of private equity money is waiting for deals. Eventually, low stock market valuations will become irresistible, and the gears of mergers and acquisitions will again crunch into action – albeit with considerably less leverage than before. Then the pendulum will begin to swing back.


At the same time, another change is playing out. The geographic balance of power is reversing – returning to the east and south, from where it came two centuries ago. The new capitalism will have an Asian-Pacific, Latin American flavour – more orderly, more pragmatic and more flexible. Where General Motors cannot go, India’s cut-price Nano and China’s Geely will. Despite the rise of other regional economies, US innovation and ability to raise capital will be undiminished. The City can flourish again, too, if it is not hobbled by modern-day Keynesians and regulators – the same people who, in good times, were not voluble about capitalism’s excesses. I am less optimistic about western Europe, where structural change seems difficult, if not impossible.


Countries previously viewed as suitable only for charity will become the new powerhouses. Africa, long seen as the continent of war, poverty and disease, will become a continent of opportunity. Witness the 800,000 or so Chinese managing and working there.


Older technologies, however, may be permanently wounded by the recession. Mainstream print journalism is going through traumas in the US and will probably never fully recover. Free to air television also faces challenges.


So capitalism will escape from its deathbed but with a more human face. Corporate responsibility is key. Some suggest that in straitened times such touchy-feely, tree-hugging notions are expensive fripperies. I disagree. Any business that fails to engage with government, green activists, charities and the press imperils its future because consumers know it is important.


Conspicuous consumption will be frowned upon. Women will no longer buy a handbag as a mere badge of affluence. Men may be more self-conscious about extremely expensive cars. Luxury goods will still be with us but they will be judged by their authenticity and craftsmanship, not price tag.


Eventually, globalisation will cease to be a dirty word. It remains – within sensible social and environmental constraints – the most efficient way to enrich the most people around the world. Yet we have never successfully articulated globalisation’s advantages. Nor has everyone felt the benefits. In that respect, the G20 protesters have a point, but aggressive slogans and shattered windows in Morningside are the wrong way to show discontent.


Democracies always have a propensity towards ugly protectionism in a recession. Any politician facing election will want to protect specialist skills and industries, as Labour did with Rover in 2005 and as a fiercely redistributive Barack Obama will do as he faces mid-term Congressional elections in 2010. But the nihilistic voices raised against the disgraced masters of the universe will eventually cease. It is possible to imagine that one day investment bankers may again be welcome at dinner parties. It might take a little rebranding, though.



Sir Martin Sorrell is chief executive of WPP. To join the debate, go to www.ft.com/capitalismblog




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