Response: Reports of capitalism’s death are exaggerated 

26 October 2008 tbs.pm/957

The Economist: Capitalism at bay

Richard G Elen wrote recently on this blog about the financial crisis sweeping the world. The Thatcher/Reagan economic experiment was a disaster; it is time to sweep the existing consensus aside and revisit the period of statism inaugurated by Clement Atlee’s 1945 administration – the closest this country has ever come to a socialist government.

Not so fast. Richard is quite right to point out that crucial sectors on which we all depend (i.e. utilities, public transport, the financial sector etc.) should not be left entirely to the vagaries of market forces. More generally, however, ever since the collapse of Lehman Brothers brought the crisis to a head last month “hysterical Marxists and others from the dustbin of the Left”, to use Simon Heffer’s accurate, if somewhat colourful, description, have been eagerly predicting the collapse of capitalism. The banks can’t be trusted to run themselves; their innovative streak outpaces the ability of the regulators to keep up; big and greedy companies fleece their customers for all they can get away with. It is time to reign them in, for the state to start calling the shots, for multi-national corporations and the “military-industrial complex” (whatever that means) to be put firmly in their place under the thumb of governmental control.

At this point, it is worth stepping back a little to put recent events in their historical context. What we are seeing now is the pendulum reach its extremity of travel and start to change direction. Ironically, it was the Left who helped usher in Thatcherism: the unions’ excesses and their abuse of power in the 1970s, culminating in the “winter of discontent” of 1978/9, created the exceptional circumstances that, at the time, made a change of government seem more attractive. In normal times, it is quite likely that James Callaghan would have won in 1979, his proven experience trumping the novelty factor of a female prime minister and the uncertainty of a change of direction led by someone who had little proper experience of wielding Cabinet power. But 1979 was not normal times. Mr Callaghan’s experience wasn’t enough to persuade the voters he was best placed to deal with the problems. The electorate must have thought: “he got us into this mess; the other lot can’t be any worse and might do better.” The pendulum swung to the right. Privatizations, de-regulation and the city boom were the result.Unfortunately, it went too far. Just as the unions’ excesses in the 1970s proved to be a disaster for the movement and – more importantly – all those who relied on collective bargaining to stop unscrupulous bosses playing one off against another (Asda, owned by Wal-Mart, is reputed to be anti-union, and has been found to discriminate against union members – what little New Labour has done in respect of collective bargaining is not enough), so the financiers’ excesses have proved to be a disaster for capitalism and, by extension, the countless millions around the world whom The Economist says it has lifted out of absolute poverty. Capitalism is now facing its 1979 moment. The question is: how will it respond?

If world leaders have any sense, they will start by ameliorating the worst excesses of the financial system. One of the questions on Any Questions? this week was: “Who’s to blame for the recession?” The answer is: almost everyone. All those who lived beyond their means. The banks who offered 105% or 110% mortgages and the hapless home-buyers who signed on the dotted line of whatever paper the mortgage providers thrust in their faces. The loan companies and debt consolidation charlatans who flogged rip-off financial services and the consumers whose profligacy had left them in need of toxic loans in the first place. The banks who offered increasingly baroque financial instruments to all and sundry and institutions around the world who contaminated the pensions of millions of workers with collateralized-debt obligations and credit-default swaps without performing due diligence.

The sober banking industry that existed before the Thatcher/Reagan revolution had a conservative approach to risk and to debt. Knowing your customer and knowing you could honour your obligations to creditors were at one time programmed into the DNA of the banks. It’s all very well saying that greed is intrinsic to the species; that does not abrogate from anyone the need – nay, the duty – to exercise personal responsibility for one’s own actions and fiscal as well as social and moral rectitude, and to live within one’s means.

This does not alter the fact that the banks were allowed too much rope, and they duly hung themselves with it. This is, I think, where the Thatcher/Reagan reforms screwed up most severely. It is a truism that the markets are driven by greed and by fear. For the past ten years, greed led the financial sector to take risks it did not fully understand; freed from its past constraints, and fuelled by short-termism and an obsession with the next quarter’s results, innovation increased and profits soared. Unfortunately, they were built on foundations of sand.

But saying that the Thatcher/Reagan experiment was a disaster is to throw the baby out with the bath-water. Yes, the financial sector will revert to a sane regulatory system, and lessons will be learnt. But, as The Economist points out, the aversion to a strong state present in democracies should reassert itself. As a rule, the state has no business telling businessmen and businesswomen how best to run their affairs. The state should set standards that all must adhere to: trading standards, property and contract rights and responsibilities, health and safety, employment and industrial relations practices. In some areas, there is a case for more regulation, not less: the Employment Relations Act 1999, for example, should be strengthened to deal with employers such as TRW, Asda-Walmart, Amazon, Europackaging UK Ltd, T-Mobile and Sky who have attempted to circumvent its provisions. Although no government should ever countenance a return to the closed shop, which in effect gives unions the power to dismiss staff.

But in general, the state should butt out and let business do what it does best. The state’s role should be that of a referee, setting the rules and ensuring they are enforced and all activity constitutes fair play. It should not be an active player in the economy, because, by and large, that is not its strength.

There are, of course, exceptions.Essential services, such as utilities, public transport, etc. should be brought more under public direction, and run in the interests of customers, not shareholders. A disadvantage of the bus networks being under private ownership is that a decision to cut a route serving small villages in rural areas that hundreds of people rely on throughout the week can be made for the wrong reasons i.e. it is not profitable enough and the shareholders won’t subsidize it. This is no less wrong than a Labour government – a Labour government – shutting half the post offices. To this extent I agree with Richard.

Ownership of the gas, electricity, water, bus and rail companies should be transferred to non-profit-making companies under the strategic guidance of the state. The electricity and gas markets have been shown not to be working properly. In these areas, the problem is less a lack of competition than the fact that these areas constitute natural monopolies (are we really going to dig up the ground to lay overlapping gas delivery networks to supply each home?) and there is no real scope fo

r innovation (what further innovations can be made in the supply of gas to one’s home?) Here, we need to accept that gas, electricity and water are monopolies that will not benefit from innovation wrought by competitive pressures and, as such, should be run on a not-for-profit basis by competent professionals with a statutory requirement to serve the interests of their customers.

Transport is also problematical. In practice, deregulation of the bus network has led not to the bracing winds of competition but a series of local monopolies. In Cambridge, for instance, the local services are all run by Stagecoach, which snapped up Cambus, the local operator. Here, also, local, regional and national bus and rail services should be run by not-for-profit businesses and in the interests of their passengers and an overarching strategic public transport policy. For instance, the timetables of local and regional buses serving the rail station should bear in mind the timetables of arriving and departing trains.

Broadcasting is another area. I have long argued that broadcasting is a wholesale exception to the normal rules of capitalism and the free market, at least, if you value public service broadcasting. It is not in dispute that Home Box Office, a US network popularly called HBO, has produced a slate of programmes of consistent quality, including The Sopranos, Six Feet Under and The Wire. But it is a subscription service that users have to pay to see. Ironically, HBO’s foreign audience may be better served, with free-to-air or free-to-view networks buying in HBO exports for local broadcast. For those who value an infusion of input from different regions, the de-regulation that led to the end of ITV as a federation of independent broadcasters was a disaster and marked its inexorable retreat from the high-water mark of quality programming for which it was world-renowned. This, not her economic reforms, was Mrs Thatcher’s worst mistake in my book. And for those who value public service broadcasting, and the excellence of Radio 4 at its best, recent changes made to the BBC, and its failure to be a true political, cultural and social microcosm of the entire country it serves, should be a cause for concern. Public service broadcasting cannot be treated as a garden-variety business. Left to the market, you end up with lowest-common-denominator fare that will suit most of the people most of the time, but not produce really great programming outside the occasional niche such as the likes of HBO.

Let us not forget that Mrs Thatcher and Mr Reagan were very close while they were both in power. Had the Left not driven voters to the Conservatives in 1979, it is quite possible that, without her influence, Mr Reagan’s policies might have been slightly different. Still, the US has had three presidents since Mr Reagan: Messers Bush Sr, Clinton and Bush Jr. Likewise, the UK has had three prime ministers after Mrs Thatcher: Messers Major, Blair and Brown. Any of these men should have kept an eye on how the banking and financial system was using its newly-won freedoms and had the gumption to apply a touch on the brakes when necessary. The Thatcher/Reagan experiment was right in the circumstances, but successive leaders failed to recognize when the forces it unleashed were threatening to go too far, or had indeed gone too far. Alan Greenspan allowed the housing bubble to expand like there was no tomorrow; it has now burst, showering us all with foul-smelling droplets. Iceland allowed its banking sector to grow beyond all reason; many Britons are now suffering from the Icelandic government’s inability to support its banks and deal with the aftermath. But none of this is any reason for doing away with capitalism and the free market. Its role is to generate the wealth that benefits us all and without which a progressive government’s social programmes cannot be funded. The state’s role is to by and large give business its head but keep it on the straight and narrow. Social democracy, which fuses the best bits of both capitalism and socialism, is not a bad concept.

Doubtless economic deregulation, while bequeathing many benefits on the world economy, also had its downside, and this is reflected in the present troubles. But it was far from the only cause. As The Economist points out, the financial crisis cannot be blamed on deregulation alone: policy mistakes and the developing world’s ambitions and policies all played their part. Those who delight in holding Thatcher and Reagan to be the fount of all evil should read The Economist’s editorial carefully and take due note.

In the space of two generations, the excesses of both left and right have been thoroughly discredited. It is now time for the world’s leaders to build a new mixed economy; to construct solid foundations harnessing the power of capitalism and the free market to generate wealth, innovation and prosperity while learning the lessons of the past and applying the necessary restraints to stop capitalism from again falling victim to the inevitable consequences of its own excesses. This calls for better, if not more, regulation; for finding the right balance between unbridled capitalism and raw socialism; for forcing if necessary the banks to take a far more cautious approach to risk; for ensuring that those who borrow money will be able to repay it. We need nothing less than a new Bretton Woods to reconstruct the global financial system to meet the demands of the twenty-first century.

A member of the Transdiffusion Broadcasting System
Liverpool, Wednesday 3 August 2022