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Rather than too much capitalism, the financial crisis happened because there wasn’t enough

Lewis Whyld/PA Archive/PA Images

Lewis Whyld/PA Archive/PA Images

August 16, 2017   6 mins

‘Capitalism,’ as the political cliché has it, ‘contains the seeds of its own destruction.’ The endless pursuit of profit causes inequality to rise ever-upwards – so much so that society eventually unravels and, as an organising principle, capitalism implodes.

Such gloomy Marxist nostrums are, once again, becoming fashionable. No matter that the Soviet Union itself collapsed under the weight of its economic contradictions. No matter that, during the century since the Russian Revolution, centrally planned economies have never worked well anywhere, at any time.

And seemingly no matter either that deluded collectivist ideologies, by throwing an intellectual gloss over the regimes of countless dictators and despots, have been an accessory to millions of deaths. Marx may have been wrong about communism, today’s goateed bien pensants argue, but when it comes to capitalism, the old boy’s analysis was spot on.

Only a handful of cranks still cling to the central vision of the nineteenth-century economist and philosopher – that state-driven communism will create a society that is productive, humane and just. It takes a pretty concerted effort of self-delusion to ignore completely the economic and political history of Russia and China, but some tenured professors still manage it.

Only a fool would argue that we’re immune from another serious systemic meltdown

More and more respectable thinkers, though, now say that Marx was onto something when he argued that capitalism is inherently unstable ­– and will eventually collapse as a result of repeated booms and busts. Ten years on from the 2007-08 global financial crisis, only a fool would argue that we’re immune from another serious systemic meltdown. And as inequality spirals across the Western world, even hard-working, well-qualified people face an increasingly precarious financial future.

Just a generation ago, middle-class lives were supposed to unfold in an orderly fashion – a steady job, leading to home-ownership, financial security and a decent retirement. Over the last twenty years, all that has changed: as jobs-for-life have gone, pensions have often evaporated and, for many, the dream of home-ownership has been replaced by the locked door of unaffordability.

As capitalism has advanced, then, are we not reverting to the mid-nineteenth century? Are we not in the early stages of that self-destruction of capitalism the bearded revolutionary predicted almost 170 years ago? Are today’s middle classes not facing the precarious hand-to-mouth existence of Marx’s ‘proletariat’?


The first thing to say is that, while capitalism clearly has its faults, it has been capitalism in various guises that has, since the 1989 fall of the Berlin Wall, lifted billions of people out of poverty. Across the former Soviet economies and much of the developing world, the share of the global population in ‘extreme poverty’ has plunged from 37% in 1990 to less than 10% today. This unalloyed triumph, by far the most important economic phenomenon of the last three decades, has been driven by the spread of property rights, contract law and enterprise – in other words, by capitalism.

The second counter to warnings of an impending dystopia is that while many households across advanced economies like the UK and US are clearly struggling, with today’s young adults often less well off than their parents, we remain a long way from Marx’s vision of penury. The financially insecure have far higher incomes and, to an important degree, are cushioned against shocks by what remains an extremely comprehensive welfare state.

That is by no means to claim that trends across the Western world towards economic marginalisation and unhappiness are welcome, or even remotely acceptable. Because, of course, they are not. Yet the substantive response to reports of capitalism’s demise is that the predicted self-destruction we associate with Marx is far from inevitable. That’s because capitalism is what we make it. It is our servant, not our master.

During the mid-twentieth century, communist and capitalist ideologies vied for supremacy. It was the Russian-born American economist Simon Kuznets who argued, in stark contrast to Marx, that the inequality of capitalism corrects itself, becoming less acute as societies develop and become more sophisticated. Winning a Nobel Prize for his trouble, Kuznets’ work during the 1950s and 1960s underpinned the broad acceptance of capitalism and “the American dream”, helping free markets to prevail in the mid-century clash of ideas.

Capitalism is what we make it. It is our servant, not our master

Since the global financial crisis, such ideas have increasingly been challenged. In 2013, Thomas Piketty’s Capital pointed to a sharp rise in Western inequality and the re-emergence of “patrimonial capitalism”. A dense 696-page door-stopper, it became an unlikely bestseller. Piketty’s book sparked fierce debate in the US about power, money and the grand bargain at the heart of American life – that a hard-driving, commercial culture is tolerable because anyone, if they try hard enough, can get ahead.

That’s no longer true, Piketty argued, because Western societies are reverting to historic type, with low social mobility and resources and opportunities dominated by a well-connected elite who too often came into money by birth. An inherent feature of capitalism, ever-rising inequality can only be tempered, said Piketty, by heavy state intervention – including an income tax rate of up to 80% and an annual 2% tax on wealth. Unless that happens, he concluded, the result will be chronic social and economic instability, leading to a toppling of the democratic order.

Piketty’s warnings should not be dismissed – not least as the descriptive analysis in Capital rests on firm empirical foundations. While there is a debate to be had about the extent to which income inequality is rising across the Western world, the distribution of wealth has undoubtedly become far more unequal.

Yet, when it comes to capitalism, Piketty is far too pessimistic. The 2008 Lehman collapse and its aftermath, for instance, far from highlighting the drawbacks of capitalism, as Piketty and his many admirers maintain, shows what happens when you mess with capitalism so much it mutates into something “cronyist” and destructive.

The financial crisis happened because ‘independent’ central banks, egged on by myopic politicians, pumped up equity and debt markets with cheap money. Bank regulations, designed to keep markets relatively orderly, had meanwhile been severely diluted courtesy of Wall Street’s campaign cash. The ‘financial elite’ was then shielded from the wreckage it had caused, as banks’ vast losses were shoved onto taxpayers.

None of this utterly outrageous behaviour is due to ‘free markets’ as, at every turn in this sorry saga, free markets have been traduced. Rather than too much capitalism, the financial crisis happened because there wasn’t enough.

I also don’t accept Piketty’s assertion that, under capitalism, inequality will inevitably rise. “Widening and deepening inequality isn’t driven by immutable economic laws,” the Nobel prize-winning economist Joseph Stiglitz once told me. “A well-functioning market economy doesn’t only create jobs, but should also generate increases in income that are shared”.

The key part of that argument, of course, is “well-functioning”. And Western capitalism in the twenty-first century is functioning rather less well than it should. Too-big-to-fail banks that extort government bailouts are anathema to free markets. Monopoly corporations using their power to restrict competition and exploit consumers are anathema to free markets.

Being pro-market does not always mean being pro-big business. It often means precisely the opposite

An oligopolistic house-building sector, deliberately restricting the supply of new homes to keep prices and profits high, is anathema to free markets. Plummeting social mobility is anathema to free markets – undermining the social contract upon which capitalism is built. These trends are increasingly apparent in modern Britain. That’s why the UK’s broad cultural and political acceptance of free markets is now being questioned. That’s why urban trendy types are increasingly quoting Marx.

Capitalism need not lead to ever-rising inequality, provided the right checks and balances are in place. We must face down behaviour that causes systemic instability, or involves excessive corporate greed –  implementing regulations that work. Being pro-market does not always mean being pro-big business. It often means precisely the opposite.

This weekly column is called Tarbell – named after an American journalist of the late-nineteenth and early twentieth century. A writer who believed strongly in capitalism and enterprise, Ida Tarbell also understood the vital importance of reining in capitalism’s excesses. From humble origins, Ida rose to the pinnacle of American journalism, tackling the economic and business issues of her day with skill, determination and courage. It was Tarbell who exposed the criminality of Standard Oil, forcing Teddy Roosevelt to become the ‘trust-busting’ President. But it was also Tarbell who defended mechanisation and technological progress – arguing, correctly, that rising productivity and living standards, ultimately help create a better, more prosperous society for all. And, yesterday, UnHerd published my film about her life and example.

This column will, in the weeks and months to come, look at economic, business and political issues from the same perspective as Tarbell. The author supports capitalism, but is mindful that it must be tempered lest it lose public consent.

As for Marx, the irony is that he never said the quote at the start of this article. It was “the rule of the bourgeois democrats”, he told the Central Committee to the London Communist League in March 1850, not capitalism, that “will carry the seeds of its own destruction”. Under Marxist theory, ‘bourgeois democracy’ is essentially a government that serves only in the interests of the wealthy and well-connected. That’s one warning from Marx I am fully prepared to accept.

Liam Halligan writes his multiple-award winning weekly “Economics Agenda” for The Sunday Telegraph. A panellist on CNN Talk, he has previously worked for The Economist, Financial Times and Channel 4 News.


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