The case for real capitalism

Jesse Norman, a UK, makes a good case for real capitalism, not crony capitalism. It’s an 18 page pdf, so not a long read. His summary:

• Capitalism is the greatest tool of wealth creation, social advance and economic development ever known.
• We are living through a period of crony capitalism, of which the Goldman Sachs flotation and Lloyds-HBOS merger are just two examples.
• Conservatives must make the moral case for real capitalism, and take action against crony capitalism — and the culture that created it.

He notes the track record of capitalism vs the alternative:

In fact capitalism is the greatest tool of economic development, wealth creation and social advance ever known. In capitalism, owners of intellectual, financial or human capital have property rights that enable them to earn a profit as a reward for putting that capital at risk in some form of free market economic activity.

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.

But says capitalism has to also be defended on moral grounds, not just economic:

But the case for capitalism is not just economic and social; it is also moral. For many decades, capitalism has come under attack on moral grounds. It is said to be intrinsically immoral, and driven by greed; to be founded on theft, with the greatest capitalists mere “robber barons”; to create and perpetuate exploitation and inequality; even to be morally vacant.

Something we hear in NZ a lot.

Of course abuses of capitalism often occur. But the bigger truth is that capitalism is at root a moral force for good. It relies on, and so demands:

a. Personal freedom and individual autonomy, the foundation stones of personal morality;
b. The virtues of hard work, creativity and thrift;
c. Social exchange: traditions and practices by which intellectual, financial and human capital can be shared to best effect;
d. Institutions such as the rule of law and the family that preserve property over time;
e. Effective government to create and enforce the law, to share social costs and, I would argue, to help the disadvantaged;
f. A wider culture and a stable but fluid social order in which its virtues are respected and opportunity exists for all of energy and talent, that is for all.

He then turns to crony capitalism:

What is crony capitalism? One can identify different varieties, such as monopoly, franchise, khaki and narco-capitalism:
• Monopoly capitalism flourished in the USA at the end of the 19th century. At that time individuals such as Cooke, Vanderbilt and Rockefeller were able to amass enormous wealth by agglomerating new industries into “trusts”, which exercised monopoly or oligopoly market power within markets.
• Franchise capitalism developed in Russia during the 1990s. A generation of “oligarchs” emerged, alongside the official apparatus of the state, whose wealth derived from winning lucrative natural resources franchises in oil and gas.
• Khaki capitalism has taken root in countries such as Egypt and Pakistan, where the armed forces have become large economic actors in their own right. In Egypt, for example, the army runs roughly 10 per cent of the economy.
• Narco-capitalism has been seen in recent decades in Mexico and Colombia, among other countries. The drugs trade created enormous illicit profits for its chiefs. As the trade became a substantial part of a regional or national economy, it was further entrenched through corruption.

These varieties can and do often co-exist in a given country or society. They all exploit the absence of law or law enforcement, market mechanisms or culture which act elsewhere as constraints on individual self-enrichment.

More generally, one might say crony capitalism has two key features:
a. Business activity loses any relation to the wider public interest
b. Business merit is separated from business reward.

By contrast, real capitalism is a system where real people take real risk, invest real time in real work and reap real rewards for their efforts. A day’s work for a day’s pay. Markets are used, but not venerated. Competition is welcomed, but made subject to proper regulation and supervision. People are rewarded and respected for their aspiration, energy and innovation, not for who they are.

I don’t agree with everything he advocates, but he makes some good points. He finishes with nine lessons:

1. Conservatives need to turn up the volume on crony capitalism.
2. Culture matters.
3. Excessive pay is a serious issue.
4. Corporate governance isn’t sexy. But it is vital.
5. The banks should temporarily restrain, and perhaps cease, dividend and large bonus distributions.
6. We need a fundamental rethink about competition.
7. Key public institutions require better governance.
8. The new Financial Policy Committee must have a range of tools to control asset bubbles.
9. We need to love our savers.

Good food for thought.