Ctrl + Alt + Del. Conservatives must reboot capitalism

The world’s economy has many fathers; Adam Smith, the father of capitalism; Richard Arkwright, the father of the industrial revolution; John Maynard Keynes, the father of modern macroeconomic theory; David Ricardo, the father of international free trade; Henry Ford, the father of mass production.

For me, one man has done more to revolutionise trade, raise global wealth, reduce costs, bring goods to new geographic markets – and to the affordability of average households – than any other. His name is Malcolm McLean and he’s a ‘father’ too. He’s the father of the shipping container.

The son of a North Carolina farmer who grew up during the great depression, Malcolm McLean worked at a petrol station to save enough money to buy a second-hand truck. The ‘McLean Trucking Company’ was born. Waiting at docks one evening for a pickup, he realised how long and labour-intensive it was to load and unload ships. It took days for even a medium sized vessel to leave port. It was messy and dangerous – men had to take individual items from trains or trucks and put them on pallets, transfer them to the ship and pack the belly tight enough to ensure no destabilising movement at sea. Accidents and deaths were a regular occurrence. Theft or damage was commonplace.

According to McLean “a ship earns money only when she’s at sea” and he viewed those long waits on the dockside as an impediment to purpose. What if dockers didn’t need to handle, pack or unpack goods at all? What if a standard, lockable box containing those goods could smoothly transition from truck to ship to truck, from point of production to point of sale?

McLean applied for the patent for the world’s first sea container in 1956. He sold his trucking company (by then, the fifth largest in the US) and bought a tanker – the Ideal X – to start a shipping company instead. The Ideal X carried 58 containers on its maiden voyage. Today, container ships can carry over 19,000 and there are 20 million containers at sea at any one time. Before containerisation, loading cargo cost $5.86 per ton and only 1.3 tons could be loaded per hour. Today, cargo can be loaded at a rate of 10,000 tons per hour and at a cost of just $0.16 per ton.

90% of all purchased goods are now shipped inside a container and 90% of the world’s nations have at least one container port.

The container revolution means exporters can send a jumper the 3,000 sea miles from Scotland to Russia at a cost of just 2.5 American cents. When calculating international trade, economists will often assume the shipping costs to be zero. The biggest beneficiaries of this revolution have been the developing nations – their farmers, entrepreneurs and industries.

At the same time as containerisation, the world has grown far richer. Post war rebuilding, advances in health, greater literacy and, yes – cheaper and freer trade – has lifted millions out of extreme poverty. According to the World Bank, in 1981 some 42% of the world’s population were extremely poor (the definition of such being measured at a person consuming less than $1.90 a day at 2011 purchasing power parity). By 2013 – the most recent year for which reliable data is available – that figure had dropped to 10.7%. A billion people across the globe, lifted out of extreme poverty in less than a generation.

It is a huge achievement, and three-quarters of it is down to China. It is no coincidence that in recent decades China has become the largest exporter of containerised goods, shipping nearly three times more than its nearest rival, the US.

Containerisation is just one example of an innovation that has helped the world’s poor.

As market competition has driven down smartphone costs, farmers in sub-Saharan Africa have skipped the interim technologies used by their western predecessors to decide whether to go to market and can now receive pricing directly to their handset. Mobile technology is transforming the industry further, with weather forecasting, apps to chart the gestation cycle of individual cows as well as the provision of micro-insurance on a pay-as-you-plant basis. To date, there are more than 650 million mobile phone subscriptions in Sub-Saharan Africa.

So if capitalism has achieved demonstrable success, and continues to help many poorer nations grow faster than richer ones, why are people losing faith in the ability of capitalism to make their lives better?

In the UK, just 19% of people agree that “the next generation will probably be richer, safer and healthier than the last”. That figure falls to 15% of Germans and 14% of Americans. Markets might work but they aren’t seen to be working for everyone.

Speaking as a Scot, and one that grew up just a few miles from Adam Smith’s home in Fife, it’s worth returning to this particular ‘father’. Because Adam Smith wasn’t just an economist, he was also a moral philosopher. And while his famous tract, An Inquiry into the Nature and Causes of the Wealth of Nations might have dissected the nature of self-interest in trade as led by the invisible hand, he was also the author of the Theory of Moral Sentiments. He argued that far from being purely self-interested, we care about the well-being of others, for no reason beyond the simple pleasure we take from their evident happiness.

He went further, too, advocating for the proceeds of trade to support public works and those unable to support themselves. The nature and purpose of commerce was:

“first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and second, to supply the state or commonwealth with a revenue sufficient for the public services”.

As the Nobel Laureate, Prof Amartya Sen argues, Smith:

“defended such public services as free education and poverty relief, while demanding greater freedom for the in­digent who receives support than the rather punitive Poor Laws of his day permitted…. he was deeply concerned about the inequality and poverty that might remain in an otherwise successful market economy. Even in dealing with regulations that restrain the markets, Smith additionally acknowledged the importance of interventions on behalf of the poor and the underdogs of society.”

Intervention. Market restraints. Decisions made at a macro-level by governments to ensure basic fairness for the little guy. It doesn’t sound like the buccaneering, laissez-faire hero that is lionised by so many on the right.

What Smith knew – and what we continually need reminded of – is that people are not pieces on a chess board, to be moved around by outside forces. And not for him the grand delusions of “men of systems” who seek to organise the world to their own ends.

Smith was a great Scottish humanist – he saw us for the individuals that we are. From this basic insight, flowed everything: his liberal outlook on life, his practicality, his sense of justice and his recognition that markets have to operate with consent.

In the UK, in 2017, that consent is crumbling. We stand at a moment in time suspended between what has gone before and that which is to come. The conclusion of the industrial revolution and the start of the technological one. That second when breath is caught, before we exhale.

And within those eons, we see individual currents and eddies. We are living at the tail end of a transition which started roughly 35 years ago. It’s a transition which has seen Britain gradually migrate from a manufacturing economy to a service-led one. The UK Commission on Employment and Skills shows the changes over the last 20 years in the UK workforce – fewer people in manufacturing, fewer in the skilled trades, fewer secretarial roles; but a great increase in managerial, professional and technical skills.

In many respects, this migration can be considered positive – as a country we now tend to do better-paid, cleaner and more gender-neutral work but it has undoubtedly created winners and losers. Many technically-skilled men, in particular, from declining or now uncompetitive industries, are chief amongst the losers.

The sense of injustice is fuelled by the uneven demographical and geographical impact.

For much of the 20^th century, manual and routine occupations offered progression and pay. For those leaving school to work in a factory, while it might have been hard to later switch career and become a lawyer, there was a clear path to becoming a foreman, supervisor or manager, with relatively high pay and stability of secure employment.

Similarly, in towns which sprang up because of a particular trade, industry or employer; while there might have been an insularity of ambition or even nepotism in appointment, there was evidence of available, achievable jobs. From pit villages to textile towns, whole communities profited in worth and self-worth from their industrial identities.

As the dominant occupations of the UK have migrated, such certainties have been lost. Towns have been gutted. Youngsters leaving school at 16 can no longer conceive that by the time their classmates finish sixth form and then a university degree, they’ll already be ahead of them with money in the bank and the first step on the housing ladder.

How does a teenager living in a pit town with no pit, a steel town with no steel or a factory town where the factory closed its doors a decade ago or more, see capitalism working for them? Is the route for social advancement a degree, student debt, moving to London to spend more than half their take home pay on a room in a shared flat in Zone 6 and half of what’s left commuting to their stagnant-wage job every day; knowing there is precisely zero chance of saving enough to ever own their own front door?

Or is it staying put in a community that feels like it’s being hollowed out from the inside; schoolfriends moving away for work, library and post office closures and a high street marked by the repetitive studding of charity shop, pub, bookies and empty lot – all the while watching the Rich Kids of Instagram on Channel 4 and footballers being bought and sold for more than the entire economy of a third world nation on Sky Sports News?

Not a single person familiar with this impossible choice should be surprised at the rise of the populist right and left, of Donald Trump and Jeremy Corbyn, with their simple, stick-it-to-the-broken-system narrative. This is what market failure piled upon social failure piled upon political failure looks like.

Business and commerce have enriched the world. We live longer, stay healthier, consume more and enjoy greater comfort than at any time in history. But corporate behemoths have forgotten about operating with consent. It is not enough simply for an Amazon to bring down the cost for consumers, the public expect it to pay a fair share of taxation and grant workers a decent wage as well.

It is not inequality that bites deepest, but injustice. People expect that the CEO of a corporation will be the highest paid person on the payroll. What they don’t accept is that FTSE 100 bosses are paid 174 times the average worker’s wage in this decade – compared to 13 to 44 times in 1980.

In 2011, YouGov found that 85% of Britons believed that income should depend on how hard someone works or on their talent. But analysis by the Institute of Policy Studies found that of 241 of the highest paid CEOs between 1993 and 2012, nearly 40% were either sacked, their company had to pay significant fraud-related fines and settlements, or their companies required some form of bail out from the state. Instead of bosses being paid for success, a significant minority were handsomely rewarded for failure.

Adam Smith’s diagnosis “when the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters” while blunt, contains a kernel of truth for the present. If business itself has flunked the opportunity to put its house in order following the 2008 crash, then it is time for governments to take the initiative. Reforms of corporate governance, the break-up of monopolies, restrictions on tax avoidance, lowering barriers of entry to market competitors – each of these actions is required and each needs governments to cooperate in order for them to be effective.

The Conservative governments since 2010 performed essential, albeit unfinished, repair work to the public finances and also began important longer-term initiatives like George Osborne’s Northern Powerhouse and Greg Clark’s devolution agreements for city regions. But there is no room for even an ounce of complacency or wariness.

Debts of households and government both remain too high.

Planning law privileges those who already have property – disadvantaging the young and poor.

Beyond London many regions and regularly forgotten rural communities lack adequate physical and digital infrastructure.

Producers out-muscle consumers in the lobbying of parliament and government.

The low-waged still face disincentives as they move from benefits into work and up the pay scale.

We have not adequately considered how education and training services will need to upgrade in far-reaching ways for when automation slices through many white collar jobs, just as it sliced through so many industrial jobs in recent decades.

Boldness of the kind we don’t often see from government is going to be necessary.

We will need to be particularly bold when we see restrictive practices. Too much profit comes from tax avoidance, land speculation, financialisation and other unproductive economic activity, rather than through innovation and high performance.

Closing loopholes, increasing enforcement and overhauling regulatory frameworks can go some way to addressing the creeping cronyism that is making free market capitalism an unfree and anti-competitive capitalism, but this stick approach should only be one half of the story. Government also has the ability to set the tone and the direction of travel by using its vast array of levers and resource as a carrot, too. It should do so.

Such action is not about the Treasury picking winners or propping up failed industry, but it is about investing in genuine productive activities. Policy should also be realigned to reward firms that do the right thing – recognising investment in research and development, in workplace training, in productivity gains.

Where there is direct public sector investment, it should be to enable, not to replace or push out private sector investment. Its focus on physical and digital infrastructure, education and training; prioritising the public investment in the productivity – and therefore the earning power – of working people.

Taking the Conservatives’ recent UK manifesto as an example – policies such as a huge investment and expansion of technical education will do much more for long term wage growth than putting workers on boards. That technical education has to be focused on tomorrow’s jobs, however – particularly service jobs – and not positions that are being automated.

Similarly, policies of ‘help to build’ rather than ‘help to buy’ will do more to address the inability of young people to get on the housing ladder. The biggest ally we have in increasing housing supply is beauty – if new houses complement the local environment and avoid the disastrous design choices of the past we can help build sustainable local support for extra construction.

While Thomas Picketty’s claims of capital growing without bounds at the expense of workers has been disproved by – among others – the Brookings Institute in Washington DC, its analysis of net capital share shows that housing is the only area where capital income displacement of labour income is apparent.

This matters. If the trend continues across the western world, home ownership will become ever more unaffordable. Measurement by the gini-coefficient might tell us that inequality in the UK has fallen to its lowest level since 1986, but Britain doesn’t feel unequal when a generation’s only hope of home-ownership rests on the lottery of home-owning parents dying suddenly – and without massive care home fees.

In short, the multiple instabilities of insecure employment, opaque career progression, wage stagnation, high rental and commuting costs and growing financial barriers to home ownership clearly explain why Britain’s young adults don’t feel they have a personal stake in a system that doesn’t work for them.

The challenges policy makers face as we stand on the cusp of the next industrial revolution include how to equip our workers with the skills for the future, the road map for individual advancement and social mobility, the framework for fair marketplaces, the investment in productive economic activities, empowerment of consumers relative to producers as modelled by Margrethe Vestager within the EU, and a housebuilding programme which democratises home ownership once more.

It is not enough for government to facilitate a discussion about where next for Britain, it has to actually lead. The short-term, election cycle nimbyism of prohibitive planning laws needs to cease and there is no room for one-of-the-in-crowd Davos sycophancy either. At home and abroad we need to press the case for fairer markets.

Capitalism has lifted billions out of poverty and made the world a better, safer, healthier, more comfortable place. It’s not working for everyone, however, and some people are enriching themselves through the kind of restrictive practices that Adam Smith warned us about two centuries ago. Nationally and internationally, capitalism needs a reboot.

Time to press Ctrl + Alt + Del.

> UnHerd’s ‘Reform of Capitalism’ theme page.

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Baroness Davidson is a Tory peer and former Leader of the Scottish Conservatives.

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