The US economy is stagnating. The Eurozone is in turmoil. The UK may be dragged back into recession. The present crisis is not a mere economic downturn, but a fundamental loss of value, caused by excessive financial speculation and foolish political decision-making over decades.
Nevertheless, we must never forget that capitalism is the greatest tool of economic development and social advance ever known. Korea used to be one country. Thirty years after the Korean war, GDP per capita in capitalist South Korea was five times that of communist North Korea. In 2009 it was sixteen times greater. China’s economic growth only accelerated in the 1980s, when it opened up special economic zones and implemented market-oriented reforms. Trade, not aid, is pulling Africa out of poverty after decades of stagnation.
But the case for capitalism is not just economic and social; it is also moral. Capitalism is often said to be intrinsically unethical, and driven by greed; to be founded on theft by “robber barons”; to create and perpetuate exploitation and inequality; even to be morally vacant.
Of course abuses often occur. But the bigger truth is that, on balance, capitalism is a moral force for good. It rests on personal freedom and individual autonomy, the foundation stones of morality. It encourages the virtues of hard work, creativity and thrift. It relies on social exchange: traditions and practices by which intellectual, financial and human capital can be shared and deployed to best effect. It involves institutions from effective government to the rule of law to the family, and a stable but fluid social order in which opportunity exists for all. In short, capitalism demands trust. It does not exist to make the rich richer.
But this is real capitalism, capitalism as it’s supposed to work. What we have now in large parts of the UK economy is a kind of crony capitalism, which has disguised economic reality, shielded underperformance, cosseted poor management and leached away value.
Not only that: many people now identify capitalism with the rampant financial speculation that got us into the present mess in the first place. Yet socialism and communism have failed. Thus the root cause of the current wave of anger at bank bonuses and financial malpractice is precisely the fact that, however unfair this crony capitalism may be, no-one can articulate a plausible alternative. Little wonder protesters have occupied St Paul's for so long.
How did we get into this sorry state? The story is as much cultural as political and economic: a fifty-year process of change in public expectations and norms, taking in the social liberalisation of the 1960s, the economic liberalisation of the 1980s, and the cultural liberalisation and immigration of the 2000s. Much of this was necessary and important. But it's also true that towards the end of this period the UK increasingly became a culture in which values of decency, modesty and respect were disregarded, and short-termism and quick returns dominated long-established norms of fair dealing and just reward.
But there is a more recent cause: the enormous burst of borrowing over the last decade. Between 1960 and 2000 the loans made by banks consistently averaged about twenty times their shareholder capital. After 2000, it rose to a barely believable 50 times capital in 2007-8. This fed through into huge consumer borrowing, an explosion of excessive pay and the waste of the Private Finance Initiative, among other things. And it meant that when financial crisis struck, the banking system was already in a desperately fragile state.
So what can we do? Today the Free Enterprise group of MPs publishes my paper on The Case for Real Capitalism (download here). Here are three ideas from it, ranging from big to small. None is original.
The first is that government should have far more tools to manage asset bubbles like the recent property bubble. The Bank of England must be able to monitor areas of growth and intervene proactively where appropriate, without undue political pressure.
Secondly, bank bonuses should be paid not in shares, but in debt. Paying bankers in shares simply boosts borrowing, since in normal times the returns go straight to the bottom line, while it may take years for bad debt to appear. Bonuses in non-transferable debt would encourage bankers to preserve capital and manage risk prudently.
Thirdly, the banks should look at restoring the old rule that required people to save for a minimum of two years to get a mortgage. Who would you trust, someone who buys a plasma screen on tick, or someone who saves up over many months for it? It’s the same with housing.
Economic incentives are important. But so are virtuous habits. If we’re going to get back to real capitalism, we need to focus as much attention on our culture and values as on our economy.