It was, perhaps, predictable that high taxes on business and the rich would be central to the manifesto of Jeremy Corbyn’s Labour party. Twenty years after Tony Blair successfully staked his leadership on removing the commitment to public ownership from Labour’s constitution, and led his party to three successive election victories, Labour now wants to renationalise rail and water.
But the retreat from the economic liberalism of the years from 1980 to 2015 is most striking in the Conservative party manifesto. Energy prices are to be capped, and Theresa May has promised extended employment rights, regulation of the gig economy and new measures for worker representation. After almost 40 years in which the phrase was banned from political discourse, industrial strategy is back in vogue.
There is an obvious element of opportunism here. Labour’s lurch leftward and the 2015 Liberal Democrat collapse have left the central ground open. But the shift is also motivated by a recognition that the neoliberal project has failed to win over hearts and minds. And, as commonly presented, how could it? Ever since the fall of the Berlin Wall provided a symbolic demonstration of the triumph of the market economy over alternative economic systems, the dominant account of that success has claimed that greed is a prevailing human motivation; that financial incentives drive behaviour; and restrictions on the scope of profit and rent-seeking get in the way of overall prosperity. Yet as an account of how capitalism really functions, that description is as false as it is repulsive.
Self-interest is of course a human motivation, but not an exclusive one. Adam Smith wrote that it was not from the benevolence of the butcher, brewer or baker that we obtained our dinner, but their self-love. But the same Scottish economist also observed that anyone in the grip of “extravagant passions” such as avarice and vainglory “is not only miserable in his actual situation, but is often disposed to disturb the peace of society, in order to arrive at that which he so foolishly admires”. And so it has transpired.
The baker of Smith’s day rose early to earn money to feed his family; but he also knew his customers and, if he was a good baker, took pride in his craft. Today the sustainably successful business seeks to make a healthy profit but also satisfies its customers and creates a co-operative and stimulating working environment. If the business’s purpose is to create shareholder value, there is no answer to the question “why do I want to work there?” except “you will make a lot of money”. But such an instrumental business is itself vulnerable to the greed of its own employees. The consequences have been starkly evident in the finance sector. The conflict of interest between the individuals who occupy senior roles in the company and the company itself destroyed Bear Stearns and Lehman Brothers, and trashed the reputation of most other financial institutions.
The legitimacy of modern business organisation has been further undermined by continuing revelations of corporate wrongdoing, no longer confined to the financial sector, and by the disclosure of the aggressive tax avoidance practices of even widely respected companies.
Mrs May’s plan to limit energy prices accurately responds to widespread public concern, but misses the mark; the underlying problem is the absurd proliferation of complexity that means anyone reluctant to spend several hours comparing energy tariffs is likely to pay more, and often much more, than they need.
Similar issues extend far beyond energy. How many people understand their mobile phone bill, realise that the cost of a printer depends far more on what you will pay for the ink than what you pay for the machine, or know how much of the return on their investments is absorbed in charges? Companies take advantage of complexity to force all but the most hawk-eyed customers to pay too much. It is no answer to say that people must spend more time reading the small print. And regulatory interventions to date in energy prices may have aggravated rather than relieved the problem of complexity.
There are good grounds for fears that “industrial strategy” means open season for lobbyists and Luddites, and that arbitrary measures such as price caps really will have detrimental effects on badly needed investment. And there is little reason to think that the avarice and vainglory of too many modern businesspeople will be tempered by an obligation to consult with representatives of workers. If we ask why tariffs were once simpler and zero-hours contracts rare, and why chief executives only recently began to pay each other millions of pounds a year, the answer is in earlier days reputable companies did not think it appropriate to do these things. So the best answer is not to attack a few topical symptoms of excess, but to restore a culture that recognises corporations are above all social organisations.
A great intellectual failure of the past two decades is the inability to offer a more nuanced account of the market economy than that contained in the mantras of “greed is good”, “eat what you kill” and “shareholder value is the goal”. For a time in the 1990s, the US president Bill Clinton and Tony Blair, the British prime minister, appeared to be struggling towards such a narrative, but the “third way” collapsed in vacuity and deserved derision. Yet in the absence of such a mediated account of the strengths of the market economy, the real achievements of the past 30 years in removing obstacles to productivity and innovation will be steadily eroded by the unplanned consequences of random interventions.
This article was first published in the Financial Times on May 20th, 2017.
For a more nuanced account of the market economy refer to The Truth About Markets.