Capitalism is in danger

By Tim Montgomerie
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Earlier today a report from Income Data Services noted that pay for the directors of Britain's top businesses rose by 49% over the last year once salary, benefits and bonuses were counted. These increases were much greater than any increase in profitability or share price (+4.5%). They were also eighteen times greater than the pay increase for the average private sector worker.

Something seems to have gone wrong and at a press conference in Australia this morning, David Cameron acknowledged it. I've only got partial quotes but he said "this has been a problem" and talked of a "closed shop of remuneration committees". He called for "more women on boardrooms" (although I'm not sure there's any evidence that this helps) and repeated his "responsibility should be exercised by everyone" message; "including in the boardroom". Nick Clegg was even more direct. The Deputy Prime Minister said that "some of [these pay awards] are incomprehensible and will strike most people as a slap in the face for millions of people who are on normal incomes and struggling to make ends meet."

Conservatives are understandably reluctant to intefere with the internal decisions of private companies but there are many options between doing and saying nothing and unacceptable statutory regulation of boardroom pay. The Conservative Party isn't a true friend to capitalism if we defend everything that markets produce - especially when those markets aren't functioning properly. A market where entities don't go bankrupt is a false market and many markets in Britain are currently distorted. The banking sector, for example, where the profits belong to the owners, directors and staff but the losses are picked up by the taxpayer. In the boardroom there's a problem when remuneration committees are not transparent and where there's a merry-go-round of directors sitting on each others' boards and approving you-scratch-my-back bonus packages. I'd also add the housing market. The heavy regulation of planning means that those fortunate enough to own a house or ten are getting wealthier and wealthier and those without a foot on the property ladder are falling further and further behind.

The capitalism Conservatives support must be one where competition and transparency are always on the side of consumers and shareholders and small businesses. I've described this as a conservatism for the 'little guy'. We need more competitive banking and energy sectors. We need a cutback in the red tape that means small businesses can't compete with big businesses. We need simpler annual reports so that directors cannot hide the remuneration packages that they are awarding themselves. We need reasonable limits on immigration so that firms are encouraged to recruit and develop the talents of local people. We need more taxation of unearned wealth so that we can cut taxes on the entrepreneur, the small business and the low-paid. The choice is between a crony capitalism that protects existing businesses and existing wealth and a creative capitalism where new ideas and new firms can flourish.

Martin Wolf sets out the danger of inaction in today's FT (£). In "the big questions raised by anti-capitalist protests" he worries that "darker forms of politics [are] waiting in the wings: nationalism, chauvinism and racism". We, as the free market's friends must reform it, or the anger will bubble over, capitalism's enemies will come to power and they will wreck the system that remains the greatest poverty-fighter that mankind has ever devised. Remember: We are only at the beginning of a very dangerous time for the developed, indebted economies. Incomes are likely to be flat or squeezed for many families for many years to come. Crude anti-capitalist messages could become very politically potent.