Blamed for the credit crunch, reviled as the cause of the eurozone crisis and despised by protesters in St Paul’s churchyard and on Wall Street, there is no doubt about it: capitalism had a terrible year in 2011.
This should be of great public concern. But it sets free market conservatives a special quandary. It is now 30-odd years since Margaret Thatcher’s government took the decisions to open up the British economy, float sterling, dismantle state subsidies, attack cartels, privatise industries and deregulate the City of London. Are current events an indictment of that long arc of government? Has the Conservatives’ belief in free markets been a mistake? Or is something else going on?
To start with that very broad word “capitalism”: it encompasses market systems from Sweden, Germany, Hong Kong and South Korea, to the UK and US. But it also covers deviant kinds of “crony capitalism”, including monopoly capitalism (19th century US), franchise capitalism (seen in parts of the former Soviet Union), narco-capitalism (Latin America) and khaki capitalism (Egypt and Pakistan).
Crony capitalism arises when economic activity escapes the constraints of law and markets and culture. It is marked by the clash of business activity and the wider public interest, and the separation of business merit from business reward. Value creation is replaced by rent seeking and certain groups become enormously wealthy without taking risk. These factors lead to long-term economic underperformance, and sometimes to social unrest. We have seen these things in the UK over the past decade.
Viewed in this light, the recent boom and bust is a clear case of crony capitalism, which has disguised economic reality, shielded underperformance, cosseted poor management and leached away value.
The result is that real capitalism – the greatest tool of economic development, wealth creation and social advance ever known – has been wrongly identified with rampant financial speculation. Socialism and communism have manifestly failed. Thus the basic cause of current social anger seems to be that no one has identified crony capitalism for what it is, or offered a persuasive defence of the real thing.
Is this the legacy of Thatcherism? In a new pamphlet, I argue: no. The emergence of crony capitalism started in the late 1990s, when the Bank of England ceased to be responsible for systemic risk in financial markets, the doctrine of inflation targeting was institutionalised and the banks were allowed to ramp up borrowing from 20 to a staggering 50 times their capital in just seven years.
An economic ideology of neoliberalism took hold in and around government, and provided a theoretical rationale for light-touch supervision of the financial markets; for non-intervention in the massive housing and personal debt asset bubbles; and for a laisser-faire attitude towards executive pay. The great institutions from the Bank to the Treasury to the Financial Services Authority failed to preserve the public well-being. Political blame games are rarely edifying. But the simple fact is that these events occurred under a Labour government.
Current mythology casts Lady Thatcher as a devil-take-the-hindmost economic libertarian. As regards crony capitalism, however, she was little different from earlier Conservative prime ministers, who spoke out against corporate and financial excess. Lady Thatcher had little time for financiers in general, and saw Big Bang and the deregulation of the financial markets as a means to increase competition and end restrictive practices and cosy deals. She was hostile to monopoly in any form, and attacked the management of the nationalised industries as underachieving, featherbedded and far removed from the public good. She would not have hesitated to attack the present crony capitalism.
So should the Conservative party today. It should lead in making the case against crony capitalism and for reform of the market system. And it should do so from the right of the political spectrum. This is not anti-business; it is pro-business.
Ever since Edmund Burke, conservatism has seen society not merely as a means to satisfy individual wants, but as a compact between past, present and future generations to preserve and enhance the social order. It prefers an honest doubt to a utopian theory. It contains a profound critique of market fundamentalism, whose effect has been to saddle our children’s future with debt. There is nothing conservative about crony capitalism.
Nevertheless, making the case will involve a degree of soul-searching for Conservatives. It means distinguishing between the ideology of neoliberalism and the insights of classical liberalism that have often inspired Conservative politicians. It means insisting on the importance of free markets, entrepreneurship and competition. But it also means acknowledging that good government and values of decency, respect and long-term thinking may require restraining “animal spirits” and reshaping the laws and institutions in which markets are embedded.
The Conservative party has built up a formidable recent record in addressing the causes and effects of crony capitalism, from work on poverty and debt to the bank levy and the Vickers reforms. Now is the time to turn up the volume.
[A version of this piece first appeared in the Financial Times]