We need 1997 capitalism plus social justice

At 6pm yesterday I posted an article by Michael Fallon MP on the banking crisis.  It's a terrific piece that points to massive errors from the banks, regulators and the government.  It's vital that Gordon Brown doesn't get away with the lie that this recession is all the fault of bankers and of America.

One paragraph from Michael's piece stood out to me:

"When Gordon Brown first set up his new system of banking supervision, the amount British banks lent out was matched by the amount that they held on deposit.  In fact, they were often in overall surplus. By the time he finished as chancellor, they were lending over £625 billion more than they held on deposit.  That’s not supervision – it was sheer recklessness.  It’s that funding gap which is the key to understanding how our banks have crumbled."

When we hear pundits call for a fundamental restructuring of our economy and when we hear that capitalism has failed we need to remember facts like that one.  Capitalism was working reasonably well at the end of the Thatcher-Major years.  It's true that there were too many people who were struggling (and that is why Iain Duncan Smith's social justice agenda is so incredibly important) but there is a huge danger that - like markets - politicians 'overshoot' and over-regulate and over-nationalise in response to current difficulties.  We must remember that businesses like Tesco, Ryanair and Sky Sports have been huge instruments of social welfare.  More importantly still we must give room for the small firm and entrepreneur to flourish without suffocating regulations and taxes.

I worry sometimes that Team Cameron is too fascinated by new ideas like 'nudging' and 'Red Toryism'.  All new ideas are worthy of study but conservatives should always prefer reforming imperfect systems to building new systems.  The most important thing is that we get back to some of the permanent truths highlighted recently by Ryan Robson:

"You can’t spend what you don’t have. We can’t afford more teachers and nurses unless a healthy private sector creates the profits to pay taxes. The family is the basic building block of our society. The state is the people’s servant not its master."

Tim Montgomerie

Comments

[JP Floru]

The best way in which the state can make capitalism work is by keeping its hands off it.

[Peter Thurgood]

Capitalism "can" work again?

That's almost be defeatist! You mean it "will" work again!

[Ross Warren]

Tim Montgomerie

I must admit to being surprised when you say:

"I worry sometimes that Team Cameron is too fascinated by new ideas like 'nudging' and 'Red Toryism'."

Nudging maybe as it's a new one on me, but Red Toryism is as old as the hills. We were talking about it when I was doing my O'level in British Constitution 1977. Of course it has a somewhat different meaning in Britain, but it was a very big movement in Candaian Conservative thought . To quote Wikipedia

"Red Toryism derives largely from a British Tory and imperialist tradition that maintained the unequal division of wealth and political privilege among social classes can be justified, if members of the privileged class contribute to the common good. Red Tories supported traditional institutions like religion and the monarchy, and maintenance of the social order. Later, this would manifest itself as support for the welfare state." So in fact there hasn't been a UK Tory government since WW2 that was not at it core Red Tory.
I hope that helps to kwell your fear of red Torys because there are a lot of us about, maybe you would prefer it not to have the word red associated with it?

[Green Tory]

We need 1997 capitalism plus social justice... plus environmental sustainability

[J. Trudgill]

China has capitalism, Nazi Germany had capitalism, in the sense that much of the capital was privately owned.

More fundamental is the market system which devolves economic power and prevents it coming into the hands of those with political power.

If you want greater equality of opportunity, with everyone able to maximise their life chances, then monolithic bureaucracy has to be replaced by greater diversity.

[Letters From A Tory]

I agree that in the past, knee-jerk reactions from politicians have often caused more problems than they solved, but surely we need a huge change in culture and attitudes towards both the government and society if we are going to bring this country back from the brink?

[Andrew Lilico]

>We need 1997 capitalism plus social justice<

I concur. But, alas, there is no chance of us having 1997 capitalism (or indeed anything we would normally call "capitalism") for the next twenty years. I fear we need to be more realistic. Recent events will profoundly change politics, and there is no quick route back - particularly since our own leadership had explicitly disavowed capitalism of the 1997 variety.

Of course, ConservativeHome (of perhaps, better, some dedicated page within it) could become a righteous voice in the wilderness, akin to the IEA in the 1960s. (What do you think, Tim? A "Restoring Capitalism" section of ConHome?) But mainstream debate within the Conservative Party must surely focus on how to operate within the new non-capitalist paradigm, rather than trying to wish the non-capitalist reality away...

[David Belchamber]

"It's a terrific piece that points to massive errors from the banks, regulators and the government. It's vital that Gordon Brown doesn't get away with the lie that this recession is all the fault of bankers and of America".

You are absolutely right, Tim, to describe Michael Fallon's article as "a terrific piece" but it does highlight the need - never greater than now - for capitalism to be reined in by effective checks and balances. There have been monsters of greed and egotsim before - think of Robert Maxwell - but the harm they could do was more limited then.

It is vital that Gordon Brown is finally nailed for the part that he personally played in causing the credit "boom and bust", which predated the sub-prime fiasco.

However, I think you will understand the concern of so many of us expressed here that it is only now that Brown is really being held to account for his lack of competence in 1997 and over the next ten years.

The fact that it is Howard Flight, John Redwood and Michael Fallon (not to mention many other commentators no longer in the HoC), rather than our shadow treasury team, who are calling Brown to account is not entirely reassuring to those of us who believe that nothing but our best brains should be brought together to sort out the unholy mess created by Gordon Brown.

[GB£.com]

Andrew is right again.

The UK is and will not be a home for capitalists for at least a generation.

[pp]

'Social Justice' must be the responsibility of the individual.

If people are so infantile that they need to ask the state to make them do what they know they should be doing, then they can leave me out of it -- and just sign up themselves.

(Like Frank Skinner on This Week - saying taxes should be higher and he would be happy to pay more - but insisting that he needed the government to make him pay more, he wouldn't make unilateral additional volantary contibutions).

The state has no place making decisions that idividuals could make for themselves if they so wished.

This is the same mentatlity that allows MPs to abdicate personal morality, decency and justice when claiming expenese, and instead cite 'rules' that they themselves wrote to justify their financial manipulations.

And my (taxpayer) money being used to bail out so called 'charities' -- give me back my taxes and I will choose for myself which 'charities' I want to support, thank you very much.

It is truely pathetic - where have all the 'grown ups' gone?

[Sandy Lovatt]

To say that Capitalism is dead is absurd. Its like saying thermodynamics or electronics is dead.

Capitalism is simply an economic theory. It is the only one that has stood the test of time, albeit with modifications as issues within the theory have been resolved. Compared with other economic concepts such as Socialism or Feudalism, it is the only one that provides any sort of useable framework for our economy.

People who preach that Capitalism is dead are either ignorant or trying to "capitalise" on other people's ignorance to further their own agenda.

[RichardJ]

We need the restoration of laissez faire complete with a 100% reserve gold standard and an end to the statist menace that caused this crisis - the BoE.

[spagbob]

"When Gordon Brown first set up his new system of banking supervision, the amount British banks lent out was matched by the amount that they held on deposit. In fact, they were often in overall surplus."

I'd like to see the evidence for that statement because as far as I was aware, the banking system uses fractional reserve banking i.e. it only needs to keep a certain fraction of the deposits that it lends out so it can cover day to day costs. For example, if it has 10,000 pounds in deposits, it can lend our 100,000 or something like that. so where is the evidence for the above statement?

[The Ranting Penguin]

The Police State also needs reform or dismantling. Why is a private limited company called ACPO Ltd given such powers?

[Andrew Lilico]

spagbob

There's a distinction between the amount deposited (which for banks is a liability) and the amount of liquid capital they hold. The statement does not mean that the amount lent out was matched by liquid capital. It means that the liabilities of the banks in terms of deposits roughly matched the amounts lent (assets). Saying that they were often in "surplus" is presumably a bit of an understatement since one hopes the assets typically exceeded the liabilities!

What has happened more recently is that banks have added an important additional class to their liabilities - loans they have received in wholesale money markets. This has led the deposits to become a much smaller proportion of assets. In the case of HBOS, for example, assets peaked at 193% of deposits - absolutely extraordinary for a retail bank.

The issue with fractional reserve banking relates to liquidity - the notionally at-call liabilities of the bank (the deposits - so in some sense "liquid liabilities") being a large multiple of the liquid assets.

[pp]

spagbob

'Fractional reserve' banking seems to have two different meanings and there are many people who will absolutely assure you that each is the only correct definition... Wikipedia actually shows both...

1) A bank gets a £100 deposit and lends £80 having a fractional reserve of 20%.

2) A bank gets a £100 deposit and lends £400 having a fractional reserve of 20%.

In case 1 it is the percentage of deposits retained by the bank and not lent out; in case 2 it is the ratio of deposits to loans.

I sumise that central banks use definition 2 (because they can print the 'extra' money), but retail banks use definition 1 (because they couldn't print more money even if they wanted to - alothough I guess they could borrow it...).

[Tim Montgomerie]

I can't be as pessimistic - dareIsay as defeatist - as Andrew and others.

A more socially just form of 1997 capitalism can be built if we work much harder to pin the blame for a lot of what happened on the monetary policymakers and regulators (where it belongs) and we contend again for the superiority of Tesco, Ryanair and the small businessman to the state that gave us the NHS supercomputer, tax credits and HIPS etc.

Let's talk over our scheduled dinner, Andrew, about how we take all this forward.

[James E. Petts]

Those who reject socialism should also reject socialist language, such as "capitalism" (a word, I understand, coined by Marx) and "social justice". There is no such thing as *non*-social justice, since one cannot have justice or injustice except in the context of interrelations between persons.

It is a fundamental mistake to think of the principle that governments ought not intervene more than minimally (and, in any event, not directly) in private property and contractual rights is a "system" which can be assessed as to whether it is "working": there is no such thing as the "system of capitalism". The economy is a system, but the principle that it ought not be controlled directly by the executive is not. The lack of something is not a system that either works or does not: the only meaningful question is whether any given state intervention will, over the very long term, produce more harm or good, taking into account all costs of compliance, perverse incentives, loss of efficiency and potential for abuse of power by the executive.

It is imperative that those who disagree with the socialists ensure that the debate is not had on the socialists' terms: accepting that there is such a thing as "the capitalist system" which can either work or not work is accepting the socialists' fundamentally flawed premise that the economy in every detail is the primary responsibility of the state, and that the state should assume ultimate control of it (even if it decides, by its discretion, to give back some of that control to individuals - but only in so far as and for as long as those in power decide that it is "working" according to their own self-interested and short-term agendas).

The fundamental principle should be that excessive executive intervention gives rise to extreme abuses of power, which are a very serious threat to freedom, happiness and prosperity, and that there is a real alternative way of dealing with the problems caused by conflicts of private interests with each other and with the public welfare than direct executive control: that of private law rules, enforcing rights and duties between people rather than giving people duties to the executive and the executive power over people. That system worked very well, and produced a great deal of efficiency and prosperity in the pre-war period; the subsequent imposition of direct executive control over enormous areas of people's lives since then is an ever-increasing threat to liberty, prosperity and the rule of law.

[Andrew Lilico]

Fine, Tim - let's chat over dinner. I would of course vigorously dispute that I am "defeatist". Indeed, I believe that the Conservative Party will dominate politics over the next 15 years. And I certainly agree that we need to strive to get to 1997 capitalism plus social justice - I'm not advocating giving up on this goal. But I believe it must be a long-term goal (i.e. with something like a 20 year horizon) rather than something we believe we could implement shortly after coming into office. The banks will be nationalised, for goodness' sake! And we won't be able to privatise them quickly (Osborne has said as much, and he's right). Returning to anything remotely like private capitalism will be a venture of decades, not of months.

[The Dog]

"Let's talk over our scheduled dinner, Andrew, about how we take all this forward"

Very cosy. Us proles can keep our distance, eh?

Same old Tories.

[GB£.com]

"we contend again for the superiority of Tesco, Ryanair "

I 100% agree. Both of these companies have achieved value for their customers, not through altruism, but good, old-fashioned self-interest in a competitive arena.

Give me a greedy capitalist bastard in a competitive environment over a well-meaning paternalist politician every day of the week.

In short, it is competition not Red Tory nudging that is the key as the examples you cite clearly demonstrate.

Cameron should not be defining some nonsense like "moral capitalism" he should simply be ensuring that a competitive environment exists.

[cosmic]

I remember a friend of mine at university, now a distinguished civil engineer, talking about this in 1974.

As he put it to some socialist students, "I might have gone along with your ideas fifty years ago, but as far as I can see, things are fair enough. Anybody with the ability and drive to work at something can do it. You're never going to make things perectly fair, and in trying to do that, you'll end up with something complicated, expensive and not even very fair. I can't what's fair about who are prepared to do something having to subsidise idlers and people who deliberately do silly things with their lives".

As far as I can see, things have gone backwards from 1974. Throwing money at education hasn't produced leavers better able to compete in the world economy. Navel gazing about social justice and throwing money at it hasn't produced social mobility. What they've produced is preferment on grounds other than ability and an infantilised public.

If something doesn't work, stop doing it, don't do the same thing harder in the hope that it might work somehow.

[Ross Warren]

A Rock and a Hard place.

"A more socially just form of 1997 capitalism can be built if we work much harder to pin the blame for a lot of what happened on the monetary policymakers and regulators (where it belongs) and we contend again for the superiority of Tesco, Ryanair and the small businessman to the state that gave us the NHS supercomputer, tax credits and HIPS etc"

I am not certain that I understand the difference between pre-1997, 1997 and post 1997 capitalism. I do know that tax credits are effectively a subsidy, brought in, as much to aid inefficient and badly organised employers, as to boost the wages of "minimum pay" workers.
Of course there is another way, which is to reduce that other destroyer of competitive remuneration which is taxation. How can we justify anyone working 36 hours or more a week, living in poverty? Something has gone badly wrong with this nation and I believe that you point to it in your last sentence.
The State has become over-bloated and as a result taxation has become dangerously high. It is now impossible for an average man to support his family on his wage packet alone.

We might do well to meditate a little on that fact.

As it is I do not believe we can simply pick up from were we left off. We will not inherit a golden legacy. On the positive side we will have a pool of Labour that will be historically cheap, at least it will appear cheap until the real cost is calculated. If we are going to continue to support the wage policies of the likes of Tesco we will have little choice but to roll out a replacement for tax credits. As an Conservative I am against subsidies on principle, regardless of those who benefit, but can anyone offer up a solution that doesn't end up costing the Tax payer?

As we have seem deferment of taxation is a recipe for disaster, we need look no further than the USA to see were it leads.

[Jack Stone]

What Britain needs to do is to stop its reliance on the service and financial sectors and start manufacturing again. We need to give tax breaks to people starting up businesses that actually manufacture things.
For far too long and it started back in Margaret Thatchers days we have stood back and let our manufacturing base decline. That should be reversed by positive government action.

[GB£.com]

"We need to give tax breaks to people starting up businesses that actually manufacture things."

Hmmm, yes, and then you could give tax breaks to shops to stock these crappy overpriced products and then you could give tax breaks to people to buy these crappy products too...

If you can't compete in one sector, it is not government(taxpayer) hand-outs that are needed, you need to move into a different sector!

[pp]

Jack Stone isn't entirely wrong for once - just looking at it from the wrong end.

It is not a matter of giving 'tax breaks' to struggling industries - the default position should be 'no tax', with taxes only being raised where they can be afforded. (Similar to dropping corporation tax, and giving the government a 20% share holding in every uk company upon registration or some such...)

Maggie cut out the indusrial deadwood - which prepared the ground, and sewed the seeds of new enterprise - but those that followed either let it go to seed, or actively destroyed the seelings.

You can't blame someone who cleared a site for nothing being built their later...

[Andrew Lilico]

GB£. Indeed. That's sometimes called a "price signal", which translates roughly as "If you can't produce this and make a profit, produce something else!"

[David_at_Home]

"We need to give tax breaks to people starting up businesses that actually manufacture things."

I would rather that we should stop penalising companies which manufacture things.

Manufacturing, and other industries which compete in a world market, are penalised when taxes paid by companies in the UK are higher than in competitor economies. Employers' NI should be a prime target because, unlike corporation tax, it is a direct tax on employment and must be paid even when the company is not currently profitable.

[Sally Roberts]

"The best way in which the state can make capitalism work is by keeping its hands off it."

Absolutely, JP - agree 100%!

[GB£.com]

Sally,
So why did you defend Cameron's "state capitalism" speech at the end of Jan?

[Ross Warren]

GB£

It's sensible to be clear and vocal in support of your leader. He alone is leader and he alone sets the general tone of the debate. David is wise, we cannot dismantle the state in a single day a single week or even a single parliament. It will take patience and a deal more softly softly if we are to have a hope of achieving our Objectives. This economy is fragile right now it would be wise to manage its decline and plan each step, every single step should be planned. What we don't need is a conservative counter revolution the moment after Dave comes to power. WE cannot switch from a promissory economy to a hard currency in one bold move on day one, but we should work towards it.

[GB£.com]

Ross,
I think you need to go and read what Cameron actually said in that speech.

Cameron wants to create a "moral capitalism" where politicians determine if businesses are "good for society" and act if they do not fit the politician's vision.

Cameron is not alone at all. Quite the opposite, in fact.

He fits perfectly within the New/Blue Labour model of creating a perpetual and downward cycle of state meddling in areas where the state should not touch, leading to unintended consequences that demand further state meddling that create further unintended consequences and so on.