PASCHAL DONOHOEreviews Capitalism 4.0, The Birth of a New EconomyBy Anatole Kaletsky, Bloomsbury, £20 (€24)

CAPITALISM DOES not break because it bends. This elasticity is ultimately its saviour. Crises are a source of reinvention and reinvigoration, not collapse. When the global economy faces profound challenges, “a new version emerges that is better suited to the changing environment and replaces the previously dominant form”.

This is the thesis of Capitalism 4.0, The Birth of a New Economyby Anatole Kaletsky. It argues that "every few decades, the institutions of capitalism have had to be dismantled, carefully examined, and then, where necessary, replaced".

With the Irish taxpayer now having financial stakes or a keen interest in department stores, insurances companies and hotels, it is thought-provoking to see this as a journey to a very different role for the state within a firmly capitalist economy.

The book contends that economic history consists of very different phases of capitalism punctured by revolutions in thinking regarding the role of the state in economic and business life.

It starts with the period of the American War of Independence, the French Revolution and the Napoleonic wars.

This period ended with the first World War and was characterised by the philosophy of laissez-faire. Government, it was thought, should be confined to basic responsibilities. Protectionist policies were seen as temporary aberrations on the march to unfettered free trade.

The next period, in the aftermath of the Great Depression, saw active involvement in the economy driven by the belief that unguided capitalism was inherently ruinous and self destructive.

What it terms Capitalism 3.0 was spurred by the phenomenon of stagflation, where both unemployment and inflation increased. The governments of Thatcher and Reagan were inspired by the work of Milton Friedman and his Chicago school.

They believed that free and competitive markets would always deliver economic stability and full employment.

Kaletsky savagely demolishes the economic theory behind this embrace of free markets with no significant role for government or regulation.

The first cornerstone of this academic edifice was known as rational expectations. This is the belief that due to the ability of individuals and businesses to predict the future effect of economic decisions, governments and central banks can play no meaningful role in stabilising economies.

This was supported by the Efficient Market Hypothesis. This theory stated that competitive finance will always allocate resources in the most efficient manner possible as markets have access to all the best information and forecasts about the future.

The author argues that not only common sense but the stock market collapse of 1987, the demise of long-term capital management hedge fund in 1998 and our current crisis refutes this philosophy.

The greatest ire is reserved for Henry Paulson, the man who led the US response to the collapse of Lehman Brothers. His policies were forged by a commitment to absolute and complete free market principles.

Due to this, it claims Paulson came “closer to destroying capitalism than Marx, Lenin, Stalin, and Mao Tse Tung combined”.

All of this leads to the definition of the fourth phase of capitalism. Elements of this new era include the recognition that a market economy can only exist with a competent and active government, but that both are imperfect and prone to error. This new settlement will include the need for governments and central banks to manage economic demand.

The tone of this phase is the need for business and regulation to be adaptive and agile. Rules will need to be altered frequently and market incentives tweaked to promote economic and political priorities.

The heart of this approach is the contention that, “the most distinctive feature of the capitalism’s next era will be a recognition that governments and markets can both be wrong and that sometimes their errors can be near fatal”. However, the state must be a tougher referee, as suspicious of public monopolies as it is of unfettered private markets.

This book, at times, does suffer from a weakening of direction. The thesis is interspersed with subjects such as economic theories of boom and bust cycles, the difference between cyclical and secular forces and short essays on the future of the dollar and the long-term trends in currencies and interest rates. Less of this and far more on how our institutions and business life will evolve would have made for a more effective argument.

However, at a time of year when a more suitable read could be the ease of a gentle novel this is a genuinely exciting read. It is rich in ideas, passionate in the denunciation of how bad ideas govern bad policy and written with dry elegance.

While not an obvious beach side book, these qualities make it a gripping read.

Senator Paschal Donohoe is formerly the commercial director for Procter Gamble Ireland