January 12, 2012 6:46 pm
The market still has no rivals
Longer ago than I like to think back I wrote a book, Capitalism and the Permissive Society, the title of which puzzled some people, as I was in favour of both. Like most books on political economy it was highly imperfect. But its faults were those of omission rather than commission; and, looking back on it, nearly two and a half decades later there is almost nothing I wish to withdraw.
There is no need to pretend that market rewards reflect personal merit. As Lord Melbourne said in another context: “There is no damn’d merit about it.” Redistribution is best carried out by a (preferably unified) tax and social security system, and not by interfering with prices and wages.
Successful capitalism is also compatible with – and in my view requires – the use of monetary and fiscal policy to moderate fluctuations in economic activity, and to prevent long periods of demand deficiency causing needless unemployment as well, of course, as to prevent runaway inflation.
My central case for competitive capitalism is that it promotes personal and political freedom. A businessman outside the financial sector will prosper by providing what adults wish to have – even if that is pop records, candyfloss or nude shows rather than what their supposed elders and betters think is good for them. Above all, the individual is free to use his abilities in line with his own choices. He or she can concentrate on personal pleasure, social service at home, the relief of poverty abroad or any combination of these and other activities.
Early in the 20th century Ludwig von Mises, an Austrian economist, challenged socialists to say how to determine what should be produced and by what methods in the absence of capitalist markets. The most interesting response came from “market socialists”, who asserted that state-owned enterprises could mimic capitalist ones in using market prices to guide their activities. Indeed they could with a known set of products, a known technology and known and static public tastes.
The matter is wholly different when it comes to inventing new products or discovering low-cost methods. And who should be the managers and who the managed and how is a limited amount of investment funds to be allocated to everyone with a bright idea?
Above all there is the political consideration enunciated by John Stuart Mill: “If the roads, the railways, the banks, the insurance offices, the great joint stock companies were all of them branches of government ... If the employees of all these enterprises ... looked to the government for every rise in life, not all the freedom of the press and popular constitution of the legislature would make this or any other country free otherwise than in name.” The importance of private capital for freedom of expression was demonstrated by its role in the launch of the critical and satirical periodical Private Eye, or by the way in which supposedly subversive US writers in the 1950s found refuge from McCarthy-inspired persecution by taking jobs in the private sector.
There are some attractions in worker-owned enterprises (to which Mill was sympathetic) and there have been some successes here – for instance, the Mondragon group in Spain; and I write as a satisfied customer of the John Lewis Partnership. But there is simply not enough evidence or analysis to support a politically ordained wholesale transfer of enterprises to such entities.
Jesse Norman, the Conservative MP, has listed some of the numerous ways in which capitalism can be corrupted by cronyism. These include old-fashioned monopoly; Russian-type capitalism symbolised by oligarchs who have gained control over natural resources; khaki capitalism in states dominated by the military and narco-capitalism based on dealings in illicit drugs. The last is aggravated by over-intrusive western legislation akin to US prohibition in the 1920s. There is, however, no need to say that these are not “real capitalism” or to claim a Conservative patent on the genuine variety.
The real shortcoming of my book was that, like many others, I did not discuss the financial sector and how its activities could undermine the capitalist order even if there were no overt inflation or deflation of consumer prices. Any working market order requires there to be some way of marrying savings with the desire to borrow; a market for investible funds and some way of insuring against the vicissitudes of life as well, of course, as a better way of keeping ready cash than storing it under the mattress. But none of this justifies the threat posed by masses of invented money to institution after institution and country after country.
Capitalism is a means to freedom and prosperity, not an end in itself. Improvement here may justify not merely international regulation but the retention for quite a long time in public ownership of banks and other institutions that have had to be rescued by government.
Copyright The Financial Times Limited 2012.
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