The announcement that the Conservatives are out to take on vested interests is potentially very important. If they get it right, the fight against crony capitalism could become an important and popular theme for a government. It could help restore the vitality and credibility of capitalism in Britain.
Luigi Zingales recently wrote a very powerful article for the journal National Affairs about how the recent crisis could have a lasting effect on American capitalism. There is an important confidence among Americans that generally people do well because they work hard, have a good idea or otherwise provide some new way of providing some good other people want. The moral quality of free markets is that everyone is encouraged to think of the needs of others; to paraphrase Adam Smith the invisible hand guides the butcher, the baker and the brewer to see their own self-interest in providing our dinner. Americans' confidence in their economic system is largely well placed. Wealthy people in the United States are generally that way because they have provided some valuable service that has made many other people better off. From Andrew Carnegie, who produced high quality steel for the railway lines that made the United States a country, to Bill Gates, who saw a world in which there was a computer on every desk coming and provided the software to make it happen.
Crony capitalisms produce plenty of millionaires and billionaires too. But that wealth is invariably associated with political favour or being in the right place, at the right time, to take advantage of your fellow citizens. Wealth comes at the expense of others, not from catering to their needs. At the more legitimate end of the spectrum, from winning the favour of politicians and bureaucrats. Without the institutions of a free market, you aren't rewarded necessarily for providing some good that others want to pay for, you are rewarded either for convincing those with raw political power to give you what you need or for simple graft.
In the Anglo Saxon economies a combination of a controlled government and the rule of law have meant that generally the best way to get ahead is through productive and entrepreneurial business though, and people have a reasonable degree of trust that is the case. Focus group research here for the Fabian Society and the Joseph Rowntree Trust, hardly ardent free marketeers, reports (pg. 2) that:
"Most participants believed that ‘deserved’ inequalities are fair. They were therefore not opposed to high incomes in general because they tended to believe that these were deserved on the basis of ability, effort, performance or social contribution."
It is a huge achievement to build such a society and incredible good fortune to live in one. But just as Prof. Zingales reports is happening in the United States, here it is under threat for a number of reasons, including:
- The financial crisis and the bailout that follows it has sent the message that those in the financial services industry do well out of their political protection, not talent or hard work. The Fabian Society/Joseph Rowntree Trust research found that the attitude I quoted above was "noticeably affected [negatively] by the financial crisis of autumn 2008."
- Regulatory and financial interventions on the part of government mean that the economic success of a person, firm and industry is often determined by the fortunes of their lobbyists not their productive efficiency or consumer demand. I recently wrote for the TPA site about how the Carbon Trust have admitted that will be the fate for entire industries under their proposals to deal with carbon leakage due to the European Union Emissions Trading Scheme.
- In large parts of the country the state dominates the local economy. Trying to get your share of the financial resources provided by taxpayers is often the best way of getting ahead. David B Smith wrote a brilliant report (pg. 9) about this for the Economic Research Council's Britain & Overseas journal in Spring 2007.
We need to start rebuilding real free markets. It could be popular and help build a more productive economy and a more robust and harmonious society. I would suggest a few policies to get such an agenda started:
- Make spending that gives businesses favoured by politicians or the bureaucracies a financial advantage the first target for cuts. The Regional Development Agencies are a great example of that and should be abolished. But lots of other arms of government turn businesses into grant junkies.
- Focus a levy on the banks on those that were bailed out. And look at the regulatory structure so that we can return to the kind of stability that saw us go for over a century without a major bank failing.
- Greater transparency, particularly over public spending. Going beyond the Freedom of Information Act would provide people with more tools to challenge the exercise of power and prevent rent seeking abuse of taxpayers' money.
- Be extremely wary of anything that will make it harder for people to stand on their own two feet. In particular, regressive taxes and regulations like renewable energy targets that are set to push up electricity prices. We shouldn't be turning low to middle income British families into welfare cases unnecessarily.
- Decentralise the government finances.
- Reform lobbying. Require greater transparency about all lobbying and end taxpayer funded lobbying.
Most of those policies are contained in the TaxPayers' Alliance Manifesto that has just been published and sets out the range of policies that we will be fighting for after the next election, whoever wins. The biggest priority has to be cutting spending. That isn't just important in order to prevent a fiscal crisis and avoid the need to take too much money out of the pockets of ordinary taxpayers. It will also reduce the amount of financial fire power at the disposal of politicians and bureacrats, and thereby move us back towards a world where the most profitable game in town is providing for the demands of regular families. The new book How to Cut Public Spending (and Still Win an Election) which I've edited and Biteback Publishing will shortly be bringing out sets out how spending can be cut.
If we get things right, we can rebuild robust and free markets and people's faith in the economic system. Over this Budget week and the next five years after the coming election there is a lot at stake.