Capitalists – not socialists – are killing capitalism

The hubris of capitalists will be capitalism’s downfall

Hubris kills and ever since the Berlin Wall fell – at the end of the decade in which Thatcher and Reagan reset global politics – capitalists have been dangerously hubristic. It has taken many forms. Notably the widespread sense just before the 2008 crash that boom and bust had been abolished. Only a year before the global economy began to tumble, The Economist magazine, the go-to publication of the rich and cosy Davos summiteers, reported with zeal that: “having grown at an annual rate of 3.2% per head since 2000, the world economy is over halfway towards notching up its best decade ever…Market capitalism, the engine that runs most of the world economy, seems to be doing its job well”. Not that well as it turned out.

However, the real problem for capitalism is not the hubris shown before 2008, but that shown since. Too many free market thinkers have continued seeing only the upsides of capitalism, blaming everything else on the state and the crash, in particular, on central banks and government subsidy of the housing market. Overlooking the greed of too many on Wall Street and in the City of London.

There’s too much defence of chief executive pay – even when it bears no relationship to company performance. There’s too little understanding among supposed friends of the system about the differences between free markets and big businesses. Adam Smith – who wrote powerfully about the underhand instincts of business – would be appalled at the way think tanks that purport to understand his teaching are so ready to defend large companies because they mistakenly see private commerce as nearly always good and attempts to limit corporates as nearly always bad.

This rosy view of business behaviour is most un-conservative, most un-Smithian and pretty socialistic. Accepting that capitalism has flaws is not a sign of weakness: it is what can make capitalists, unlike supporters of state-directed economies, look grounded in the real world rather than aspiring to reach an unattainable utopia via tractor production targets and other failed signposts of communist glory.

Realism is the first step to saving capitalism

First, there’s history. While markets have existed for centuries, technological and other forms of progress were, until recently, slow and sporadic. Prosperity requires something more than free enterprise. The effectiveness of markets depends on a series of factors that vary across time and across countries. That includes not only trust but also the extent to which society is free and open: where societies are tolerant of people who push boundaries and try new things, markets will be far more successful at delivering economic improvement. Culture matters as much as markets themselves.

Second, is creative destruction. We need to recognise that the very same forces that drive economic improvement within the capitalist economy also bring disruption. Unless people have the coping mechanisms needed to deal with this disruption, the forces that are pushing us forward will be resisted by the weight of those left behind. While this necessarily requires state intervention, it is intervention of a very particular kind: that empowers individuals, rather than interfering with our freedoms.

It points to an agenda of supporting individuals in ways that allow them to both keep up with change, such as through adult education, and to be creators of change, rather than mere responders to it. Had appropriate policies been in place to help those in deindustrialising England or rust belt America in the 1980s, as opposed to dumping whole communities on welfare, the huge protest votes of Brexit and Trump might never have happened. And with the robot revolution imminent – threatening even more disruption to the labour market – these issues are far from mere historical interest.

Third, is instability. Along the path of continued improvement, instability is inevitable. The Cambridge economist John Maynard Keynes was right to point out that boom and bust is an intrinsic part of capitalism. The ever unknowable future means there is little firm basis on which to “pin down” investment decisions, meaning investors have a tendency to copy each other, falling prey to fads that generate waves of optimism and pessimism that destabilise the economy.

Unfortunately, many capitalists refuse to accept that markets contributed to the events of 2008 and, imitating Milton Friedman’s analysis of the Great Depression, load all blame on to the state. We need to look to the underappreciated Austrian School of thought, one built around figures such as Hayek, who like Keynes but unlike Friedman, see instability as inevitable. But who also doubt whether the state is any more capable of judging the future than are private individuals, making the economy to some extent “untamable”.

Capitalists themselves need to reset the rules

While capitalism has been oversold, there is also an important sense in which it has been undersold. Too much terrain has been foolishly handed over to the Left when it comes to big modern-day issues that spark popular debate: equality and freedom. Ha-Joon Chang has famously argued that there is no such thing as a free market economy. That markets cannot properly function without the state establishing the “rules of the game”, and that, as such, the rules can be rewritten to deliver a more equitable outcome.

Alex Marshall similarly argues that modern markets are far from “natural”: that the markets that we find in rich economies are a result of law and order and state-funded infrastructure, and that the businesses that operate within these markets benefit from certain legally granted rights, such as limited liability. As I’ve argued elsewhere, this should be the rightful ground of Conservatives, not socialists. Rather than childishly rejecting anything that tampers with the idea of a perfectly competitive market – one that only exists in textbooks – Conservatives need to take ownership of sensible, albeit limited, forms of economic intervention.

It is notable how much 19th century Classical Liberals engaged with debates surrounding, for example, patent rights, bankruptcy law, limited liability and the role of Central Banks. They engaged not just with efficiency but with freedom and fairness. Rethinking the foundational elements of capitalism – the “rules of the game” – is precisely what’s needed today if we are to stem the tide of socialism by tackling “crony capitalism”.

People have lost faith in crony capitalism, not free enterprise 

While people have lost faith in capitalism, it is striking that support still exists for free markets, entrepreneurship and small government. The Reason-Rupe Millennial Poll of 18 to 29-year-old Americans found that whilst college-aged Americans had a less favourable view of capitalism than socialism, 72% supported the free market system. And, in the YouGov global poll of seven countries, conducted for the Legatum Institute, more people agreed than disagreed with the statement that “free enterprise is better at lifting people out of poverty than government”.

If it’s not the free market entrepreneurial element of capitalism that people dislike, what is it? It’s the very thing that can make capitalism akin to communism: the state and business being in each other’s pockets. It’s the lack of independence between the state and big business: government and business sucking up to one another, creating a layer of power that seems impenetrable to anything other than established elites, or, as in 2008, the big banks.

The ability of business to fund politicians has created a back door for established firms to unfairly influence policy. Occupational licensing – what Morris M. Kleiner calls “the fastest growing labor market institutions in the United States since World War II” – has effectively granted incumbent firms and practitioners monopoly rights, increasing the wages of skilled workers by around 15%, exacerbating income inequality.

Then there is the fact that while the state has been cozying up more and more to big business and skilled workers, they have cut their ties with trade unions. That leaves the public wondering why one and not the other is deserving of the ear of power. And, rightly or wrongly, the rescue of the banks made the state look like it was an instrument of the banks, rather than representative of the democratic will of the people. In the words of Joseph Stiglitz, “it was going to the assistance of the victimizer, and leaving the victims to take care of themselves”. Of course, people accept that within a free market free enterprise system, they face risks of bankruptcy and job loss. What they don’t expect is that such risks will be alleviated for those at the top.

Rebuilding support for capitalism requires a Reformation for the 21^st century

Five hundred years ago, the process began of cutting the ties between church and state. Now it’s time to cut the ties between the state and big business, though this time through less bloody means. As Stiglitz himself argues, “much of the inequality that we can see today is the result not of true market forces but of ‘ersatz capitalism’”. Capitalism needs to be redesigned for a new age, guided by what was once the priority of all Conservatives: not special interest groups, business or otherwise, but individual freedom. Doing so will show that it is not the market that is inimical to equality and freedom; it is socialism.

If capitalists want to save capitalism, they need to stop blaming socialists for overselling socialism. We need to look critically at the ways we both oversell and undersell what we would do best to call the free market, free enterprise system. Let’s get Michael Jackson playing.

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Dr Victoria Bateman is Fellow in Economics at Gonville and Caius College, Cambridge. She writes regular economic commentary for Bloomberg View and CapX, and is known for her stance on Brexit and for using art to explore perceptions of the female body.

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