'There are things to dislike about capitalism but let’s not throw the baby out with the bathwater'

John Boothman

By John Boothman

IN his 1605 classic ‘Don Quixote’ the Spanish author Miguel de Cervantes came up with one of the most famous characters in literary history. His eponymous hero – described as ‘a muddle-headed fool, with frequent lucid intervals’ – sets out to right the wrongs of the world but ends up tilting at windmills.

Most newspaper columnists, even the most celebrated, know that feeling well enough. During the 1930s Winston Churchill, then in the political wilderness, penned numerous pieces warning of the dangers to world peace posed by a resurgent Germany. They were mostly dismissed as the ravings of a disgruntled statesman whose best days were already far behind him. And if the greatest Englishman of the twentieth century – perhaps of all time – made so little impression on the most pressing issue of the era, what hope is there for those lesser mortals who trail in his giant footsteps?

One of the emerging creeds of the present century is that capitalism has had its day. A series of economic crises coupled with stagnating living standards, environmental degradation and rising inequality have left apologists thrashing around for something to say in its defence. Recently, a friend drew my attention to a piece by Miles Bassett on (of all places) the Conservative Home website, under the title ‘The free market has become an idol, and the Conservatives must tear it down’. Bassett himself was formerly a scion of the Young Conservatives. If his view is typical of those on the political right, no wonder socialists feel the wind in their sails.

In his article, he accuses his party of developing a ‘blind faith in free market economics’ which risks alienating large swathes of the population. The UK government has ‘demonstrated a remarkable willingness to sacrifice large parts of Britain’s civic identity to market forces’, leaving ‘little room for more abstract concepts such as identity and belonging’. Its ‘vision for Britain’ he describes as ‘almost medieval – run by narrow and individualistic corporate interests, which the public have little or no control over.’ 

When even a Tory party loyalist (albeit a young one) openly attacks global capitalism, mounting a defence may seem as futile as one of Quixote’s forlorn campaigns; but let’s give it a go. Firstly, the writer in his broadside is about 40 years behind the times. The 1980s Thatcher experiment clearly exposed the trade-offs between economic gains and social damage caused by relatively unbridled free markets. Since then Britain has reverted to a consensual (Major-Blair-Cameron) mixed-economy model in which well over a third of GDP passes through government hands in the form of spending and taxation, and large swathes of business activity remain under heavy regulation. That was partly a consequence of EU policies, but the promised post-Brexit ‘bonfire of controls’ still looks pretty distant.

Following the Truss-Kwarteng debacle, the last redoubt of untrammelled small-government doctrine resides in the right-wing fringes of the Tory party. The Sunak-Hunt reversion to tax-and-spend takes Britain back to the post-war consensus, with the next government (most likely Labour) simply building on the legacy of the present one.

A more fundamental objection is that the ‘straw-man’ fallacy applies with a vengeance to Bassett’s analysis. Free-market capitalism is an answer to the question of how best to deploy resources to optimise economic performance and create prosperity. Progress is driven by innovation, and the application of new ideas to the production and distribution of goods and services. Capitalism provides a competitive framework for this to happen: consumers vote with their wallets for the things they want, producers vie with one another to provide them, investors allocate their capital to those firms that can best deliver.

Command economies rely on central decision-making that is vulnerable to special pleading and comparatively unresponsive to the fluctuating needs of buyers and sellers. Viable state-owned businesses are starved of capital if budgets are under pressure. Non-viable businesses are propped up for political advantage. Absent competition, producers and distributors alike become inefficient and often corrupt. There is frequently a lot of waste too. There is ample evidence (Stalinist Russia, Maoist China, Cuba, Zimbabwe, North Korea) to show that highly socialised economies are disastrous for the wealth and well-being of those trapped in them.

Global free (or fairly free) markets bring mutual benefits to trading partners because each then produces the goods and services they do best and most efficiently. A closed economy that attempts to meet all its own needs through domestic production will almost certainly be poorer than one that trades with others.

Historically, one of the hallmarks of capitalism was a disregard for the collateral damage caused by its obsession with profit maximisation. Not any more: cultural change has been rapid. Woe betide the business that has failed to embrace modern ethical, environmental, social and governance values. From board diversity and inclusion to net-zero carbon emissions, the priorities of governments are increasingly also those of company boards.

What capitalism is not, is a panacea for every evil. That is why its most egregious adverse effects – unemployment, inequality, despoliation etc. – are mitigated by political (fiscal and social) measures. Because successful capitalists are unduly enriched, governments take a significant proportion of their earnings as taxation to spend on services (health, education, welfare) that benefit all, but most especially the poor. And these redistributive policies are backed up by a plethora of other measures – competition rules, health and safety, consumer protection, planning – to help level the playing field.

So why not go the whole hog, and eliminate inequality entirely by raising taxation and spending to even higher levels? Because capitalism only works when business success is amply rewarded. If you entirely remove the baker’s share of the cake he’s baked – or simply give him the same sized slice as everyone else – he will lack the motivation to bake another. Nor for that matter does a gifted medical student have much incentive to complete the years of training necessary to become a surgeon, if her pay ends up the same as that of a hospital porter.

Capitalism is great at enabling and promoting change, rather than resisting it. ‘Creative destruction’ can sometimes hurry things along, but major shocks – war, pandemics, slumps – generally require heavy state intervention, whoever is in power. Often this intervention takes the form of rationing, and other constraints on consumers – whose demands are in normal times the well-spring of private enterprise. Most people understand that market conventions must be suspended in these circumstances. But once the crisis is over, it generally makes sense to revert to the norm – literally, business as usual.

Here in Jersey the key features of modern capitalism are also in place. Our mixed economy (in the sense of part-private, part-public ownership) is more mixed than most. Telecoms, electricity supply, water, the postal service, harbours and airport – many of which have long-since been privatised elsewhere – remain rooted in the public domain; there is even a States-owned property development company. The government employs 8,000 staff and burns its way through revenue of £1 billion a year. Social services have expanded enormously, their cost largely met by middle- and higher-income taxpayers, as well as businesses. As in the UK, a plethora of laws and regulations shield customers and employees alike from the depredations of exuberant entrepreneurs.

There are things to dislike about capitalism, and political arguments will always rage around where the line should be drawn between private enterprise and state engagement. But year after year, decade after decade, while there are undoubtedly ups and downs, free-market economies keep delivering the goods. Online shopping, smartphones, cheap flights, computer games, antiviral vaccines, green energy and electric cars are among the marvels of the modern world.

We need to stay on our toes and stop capitalists getting too big for their boots. But (quixotically mixing metaphors), let’s not throw the baby out with the bathwater.

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