by Dalibor Rohac
Vince Cable's speech at the Liberal Democrats Party conference on Wednesday can easily be dismissed as yet another vacuous ramble targeted at an audience which is not exactly reputed for its intellectual rigour. However, this conclusion would be hasty, as the speech conveys a rather disturbing message to those who hope that the present government is committed to paving the way towards a freer and more prosperous society.
But, first, let us give credit where credit is due. Dr Cable is spot-on when he denounces the economic legacy of Labour. Britain had been on an unsustainable fiscal path before the crisis started. Similarly, the Labour government was not doing anything to discourage the real estate bubble from emerging. One can only agree that the pinnacle of hypocrisy is when Labour dismisses the coming fiscal consolidation without proposing any alternative. Finally, Dr Cable is absolutely correct when he says that the growth driving the economic recovery has to be sustainable, and not based on another bubble.
Yet, when it comes to the possible avenues for achieving this, Vince Cable’s arguments become much more blurry. Unsurprisingly, the “government has a key role”. It has to – among other things – force the banks to extend credit to “sound, non-property, business” and make sure that the capital is not “frittered away in bonuses and dividends". Finally, Dr Cable announces that the government needs to “make [banks] safe and make them lend". Unfortunately, he does not offer the slightest hint of how this could be achieved.
After all, the present crisis was driven by reckless lending, even to individuals and businesses that were not creditworthy. The idea that the recovery can be driven by simply encouraging the banks to do the same again means getting us exactly back to the “failed world of ‘business as usual”, which he rightly rejects earlier in the speech.
The fact that Dr Cable has not grasped the dangers of government-induced misallocation of capital is apparent when he defends the idea of a “Green Investment Bank” that could use “vast amounts of institutional capital” to “support environmentally valuable projects and infrastructure, alongside […] private investors: making the rhetoric of the Green New Deal real". Does Vince Cable really not understand that the current crisis is a result of the US federal government picking arbitrary segments of the economy (in this particular case, real estate) and channelling resources towards them through a variety of policy interventions? Why does he think that a "Green New Deal" is going to lead to anything other than a "Green Bubble"?
It is simply a fact of life that governments do a very poor job at identifying worthwhile projects and allocating capital to them. This applies to green energy as it does to any other area of the economy. After all, it is very easy to look at the political backlash of support for photovoltaic solar panels in places like California or Germany. Green projects, which once seemed attractive to policymakers, have now become a political liability, and governments are in an extremely difficult position if they want to retract resources from projects which are now clearly economically unsustainable without permanent support from the public purse.
“The Post Office is not for sale,” we are being assured. Instead, “employees in Royal Mail will benefit from the largest employee share scheme of any privatisation for 25 years,” as if employee ownership was an unambiguously worthy goal. In fact, worker ownership generally suffers from a serious incentive problem, as the dispersed nature of ownership creates an incentive for workers to shirk and, as a rule of thumb, is not advisable – unless one believes that companies should be run for the benefit of their employees and not for the benefit of their clients.
Given that Dr Cable seems to believe that the House of Commons should be run for the benefit of the MPs, this might not come as a surprise. However, even if one takes into consideration the interests of Royal Mail employees, it is not at all clear that employee ownership is going to help them. Most importantly, it would effectively prevent them from diversifying their wealth and would make both their salaries, and the value of their savings, dependent on one single company – moreover on one which is supplying products and services that are likely to become increasingly obsolete in the future.
One ought to make an important concession to Vince Cable. He is absolutely right in pointing out that markets fail, and that they are “often irrational or rigged". However, his speech is driven by a completely unfounded belief that the government – unlike markets and “short-term investors looking for a speculative killing” – will be able to identify the “good companies” and channel resources to them.
This belief is not based simply on bad economics; it is based on a fundamentally Marxist vision of economic life, as Dr Cable himself reveals when he says that “capitalism takes no prisoners and kills competition where it can.” Interestingly enough, he attributes the idea to Adam Smith, obviously having in mind the famous passage from The Wealth of Nations (I.10.82). He forgets that Smith was not deploring capitalism and markets as such, but rather merchants’ propensity to use the power of the state to obtain special privileges. The idea that, if left unregulated, capitalism will naturally evolve towards increasingly concentrated market structures cannot be attributed to Smith, but to Marx.
History of economic thought aside, there is no empirical evidence for the idea that unregulated capitalist markets actually evolve towards monopolies. Yes, there exist highly concentrated industries, some of them created by government interventions, some of them created by the existence of economies of scale, but there is no compelling account of market dynamics that would drive an initially competitive market towards monopoly.
It is only appropriate to call a spade a spade, and a Marxist a Marxist. And holding a fundamentally Marxist set of beliefs should not be a desirable qualification for the post of Business Secretary in a non-Labour government.
Dalibor Rohac is a Research Fellow at the London-based Legatum Institute.