Geoff Mulgan is Chief Executive of the National Endowment for Science Technology and the Arts (NESTA) and Visiting Professor at University College, London, the London School of Economics, and the University of Melbourne. He is a member of our European advisory board and author of the forthcoming The Locust and the Bee, which offers the key to understanding capitalism: Why it works, why it falls into crisis, and why it generates such anger and resentment. According to Mulgan, the capitalism that has made our nation wealthy has entered a new and harder phase that the candidates now struggle to address. Read his assessment of the situation after the jump:

Election 2012 and the Challenge of Capitalism

Geoff Mulgan

Four years ago Barack Obama’s election was an ominous contradiction.  It scaled the heights of exhilaration and hope.  But it also plumbed the depths of bad luck, coming amidst the worst crisis in several generations.  Over the succeeding months the contradiction then deepened, as an immensely clever, pragmatic moderate found himself face to face with an extreme situation demanding extreme measures.

Once installed the money flowed; vast sums bailed out Wall Street; and the worst possibilities didn’t materialise.  But four years on it seems almost impossible for the candidates to persuade voters that they are simultaneously in tune with their lives and their values, and possessed of the key to a brighter future.

Instead all the candidates are struggling. The fire and fury on Tea Party issues and Obamacare seem like symptoms of a deeper, unspoken malaise.  From afar it looks as if none of the candidates wants to face up to the big issues – the continued decline of US influence, the scale of its fiscal crisis, and above all its failure to offer opportunities and growth to the majority of its citizens.

The US is not alone in this respect. Nowhere has a post-crash politics yet crystallised.   Everywhere the left still promises more debt, more education, more infrastructure and more science, while the right still promises that growth will come from scaling government back.  Neither side has come to terms with the bigger problem now faced in all developed societies.  The capitalism that made them wealthy has entered a new and harder phase.   For the first few decades after 1945 it provided not only jobs but also rising wages, and rising standards of living for the great majority.  Now it appears to benefit only the very top layer of society, but does little or anything for the middle or bottom.  The result is a hollowing out of the economy that is visible everywhere, including the statistics showing that US median earnings appear to be continuing their long stagnation and even decline.

You might have expected politics to change, as it did in previous periods when capitalism’s operating model for a time produced more losers than winners.  But we’re still in a transitional moment.  For a start the 1% provide a high proportion of the cash for running campaigns and can’t easily be faced down.  Then there’s the uncertainty over who to trust. In his first period in office Barack Obama put his trust in insiders to guide the perilous decisions over who to bail out and how.   Given the scale of the crisis and his own inexperience it’s understandable that he thought bankers might be best placed to understand how to solve problems caused by bankers. But in retrospect he was far too soft on Wall street and far too influenced by its alumni;  a little bit more of the spirit of FDR, who surrounded himself with a group of radical outsiders, might have paid off by now.

The deeper structural problem is also one that’s becoming more visible.    Finance has become as much a predator on the rest of the economy as a source of wealth.   It circulates money, but doesn’t actually do much to provide investment in new ideas, technologies or firms, despite soaking up a much larger share of GDP than in previous decades.   None of the major financial markets plays any serious role in investing in future products and services.  Venture capital has almost opted out – even at the beginning of the 2000s it was only providing 2% of investment in innovation and now the figure is even smaller.  Meanwhile big firms are now sitting on unprecedentedly large cash piles rather than investing it in new ideas, and even the highest tech have chosen share buybacks over investment.

In my book I show that these are symptoms of what has always been the challenge of capitalism – it can be immensely productive, good at rewarding inventors and entrepreneurs. But it has always also rewarded predators, speculators and non-productive activity.  Adam Smith saw this all too clearly.   And for much of the last 150 years legislators and governments have tried to rein in the predators and give more encouragement to the creators.  Over the last generation they lost the will to do this, and were much more likely to end up fawning over billionaires than challenging their wealth and power.

To fix the imbalances and flaws radical new settlements will be needed, that will involve rethinking how we create wealth, what we value, and how we use wealth.  These settlements will have to reshape capital markets to more directly serve the public interest rather than predation;  they’ll have to reshape welfare and education to promote resilience and self-reliance; and they’ll have to recast health not just as a right but as a public good that depends for its realisation as much on the individual and their circles of support as it does on the state or the medical profession.  Some countries are now well down the road of reimagining their social contracts, and shaping a capitalism that can serve the many not just the few.  But Obama’ misfortune may have been to be elected a couple of terms too early, before the landscape is ready.

Some Presidential elections in retrospect made the weather and set the nation on a decisive course. Others were, in the bigger scheme of things, beside the point.  It’s not too late for this one to get real.   But the odds are lengthening.