Davos funeral of free-market capitalism has China in mind

This year's Davos meeting of the mighty is focusing on the failures of capitalism and looking favourably upon Asian-style state capitalism.

It has been many years since the word capitalism was on so many lips. For the past two decades capitalism seemed to be part of life, and raising the slogan "down with capitalism" was as bizarre as calling for the abolition of food or sex.

Of course, there have always been thinkers on the Left who have kept faith with Marx's prediction that capitalism was a permanent revolution that would destroy everything in its wake. Eric Hobsbawm, the British Marxist historian, has written that "capitalism would end by sawing off at least one of the branches on which it sat". Intriguing as they seem now, these ideas were strictly for intellectuals.

Now they have joined the mainstream. Nowhere is this more clear than at the World Economic Forum, the talk-fest for bankers, business people and politicians that meets every January in the Swiss ski resort of Davos. The theme this year is transforming capitalism, and the founder and guiding spirit of Davos, Klaus Schwab, has declared that "capitalism no longer fits the world around us".

Instead of the blood-red free market ideology that has been dominant at Davos in the past, Mr Schwab wants a more "holistic" approach. The capitalist system is outdated, crumbling and immoral, Mr Schwab told his guests. "We have neglected to invest in the future, we have undermined social coherence, and we are in danger of completely losing the confidence of future generations." It is all a long way from the old laser-like focus on shareholder value.

If Mr Schwab has stolen the rhetoric of the Occupy protesters (who are living in igloos and yurts not far from the conference centre), it is no surprise. The protesters, by highlighting the wealth gap between the 1 per cent currently enjoying the Swiss mountain air and the 99 per cent of economic losers, have reframed the debate on political economy.

But the protesters have not actually come up with a clear agenda for change. The rich have rushed into this vacuum, shouting their mea culpas from the mountain tops in the hope of avoiding, in the case of the bankers, regulation of their business practices and pay.

A dose of scepticism is in order when assessing the mood of penitence among the 1 per cent. But that does not detract from a more fundamental debate: the developed countries that thought they had the magic formula of wealth creation are intensely worried that state capitalism, as practised by the Chinese Communist Party, is becoming a real threat to their standard of living.

It has been accepted for years at Davos that globalisation is the tide that raises all the world's boats. But it now looks more like a real tide - it raises the boats in the East and lowers them in the West.

It may help to look at globalisation from the perspective of the middle classes in the developed world, those whose voices are loudest. They did not care much when the working class lost their factory jobs to Asia. Everyone gained from the low prices of imported manufactures. Nor were they worried in the US when the poor lost their homes in the subprime mortgage bust. That tragedy was just one of those things that happens in the economic cycle. But they certainly are concerned when they see that their expensively educated children cannot find jobs in a global talent market. Globalisation is now seen to benefit not the many but the few.

Hence the focus on Asian state capitalism, and the growing view that this is somehow breaking the rules. From an Asian perspective, of course, this looks like the West is rewriting the rule book when it has lost its advantage. Every country, even the US, has protected its industries at some stage. The East India Company did not get to dominate India in a free market. It had a monopoly granted by the English monarch.

In the debate over the political economy of the West, the guiding hand of the state is gaining on the hidden hand of the market. This change may be dressed up with words like "holistic" but in effect it will mean that the US and Europe will steal a page or two from the rule book of state capitalism, in seeking to ensure that national industries have a greater chance of survival. This may not work. The British motor industry did not collapse due to lack of state support: it died due to poor management, militant trade unions and financial short-termism.

The Economist magazine, in a special report, has gone into battle to defend the tattered standard of globalisation, arguing that state capitalism suffers from fatal flaws and is destructive of liberty. The report highlights two issues that gnaw at state capitalism: rent-seeking by the corporate elite - the tendency of managers to run companies for their own interests; and the noxious union of business and politics that is a breeding ground for corruption and cronyism.

These two flaws, however, look remarkably similar to some of the charges laid against the globalised corporate elite: managers have been paying themselves vast sums even when they fail. And thanks to well-funded lobby groups and the political contributions of major corporations, the voice of the voter and the small-business person in western democracies is drowned out by the roar of big business and banking.

The milk-and-water version of capitalism being promoted in Davos should be seen as an extravagant piece of corporate PR. Behind this facade there is a real problem. It is not new that capitalism is ruthless. What has changed is that the honeymoon of globalisation for western elites is over.

The danger is that in retreating from that goal, the world slips back into the 1930s when it was divided into hostile blocs and slipped to war. There are plenty of suggestions that lead in that direction - such as a US-European Union free trade area that might set itself against Asia. What is required is something different: the penitent globalists and the rampant state capitalists should not retreat behind high walls. They have to learn from each other and keep trading.

Follow on Twitter @aphilps