Business

Getting Capitalism Right

Capitalism is coming under increasing criticism as it no longer serves the needs of the majority. However, it’s not capitalism per se which is at fault, but the version of capitalism we’ve adopted. It’s hopelessly inept, and the root cause of our most serious social, environmental and economic problems. We need to change it now for a version which works or face losing capitalism forever.

social market economy
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Capitalism is coming under increasing criticism because of rising economic inequality and environmental degradation. The question is, is capitalism inherently wrong or is our version of capitalism wrong? You see there is no agreement as to what capitalism entails. There are different versions or understandings of what capitalism is. Capitalism is an ideology. It's not a set of rules by which we run our economy. It represents a vague set of ideas, or philosophies, about how we should run the economy. Some of the ideas have a strong social bias, whereas others are a virulent form of self-interest. For example, the Keynesian form of capitalism has a stronger social bias. Keynes, himself, saw his beliefs based on a British Liberal tradition in which the hard facts of economics are tempered by social considerations, whereas neoliberalism is a virile form of self-interest.  No prizes for guessing what kind of capitalism we practice now. Post-1970's, neoliberalism took hold of developed economies with the appointment of Margaret Thatcher as Prime Minister in the UK in 1979, and Ronald Reagan as President of the US in 1981. Since then neoliberalism has spread to other economies and within the UK and US. It has been the dominant ideology for decades, foisted on emerging economies as well. Another name for neoliberalism is "free market capitalism," however, this is misleading, as it only frees the bank balances of the rich, while enslaving and impoverishing the majority.

In adopting this economic strategy Thatcher and Reagan confused democracy and freedom of individuals with free markets, as it represented the opposite of centralised control, used by socialist regimes, which at the time were their enemies. Drawing a similarity between democratic freedom and free markets is a critical mistake, as free markets (as preached by neoliberals) leaves the majority economically worse off, rapidly increasing economic inequality and with it, social discord. Keynes believed an extreme case of capitalism would lead to a socialist takeover, which as a capitalist he was worried about. And, he has been proved correct. Continuing to follow neoliberal ideas will result in a change in the political order, with the possible lose of capitalism. You can't have a system which serves the needs of a select few at the expense of all other stakeholders and expect the majority to put up with it for too long. It leads to massive imbalances, which are unsustainable. It's indisputable, the quality-of-life for the majority has gone backwards since the adoption of neoliberal ideas, with the environment also paying a high price. It's a failed ideology, and the root cause of our most serious social, environmental and economic problems; we need to change it quickly.

Recognising the problem is the easy part. Deciding and implementing a new ideology is more tricky. In solving the problem we must start with the most obvious question. What is the purpose of the economy? In a democracy, the government must ensure the economy works for the benefit of the majority. This simple fact has been overlooked, as the wealthy have hijacked it to serve their needs. How does a government serve the needs of the majority? By ensuring they have a rising standard-of-living and quality-of-life, which involves the protection and nurturing of the planet and its ecosystem. A secondary objective is to ensure the economy can support the cost of these needs, which entails the support and promotion of economic activities. Society comes first, and then business needs second. I know some will have a "panic attack" on hearing this. They will say you have to create wealth before you can spend it. That’s true, but the two are not mutually exclusive. They are inextricably linked. There is a direct correlation between social and economic benefit when "common good" comes first - they grow or decline together. However, no such correlation exists if you place economic needs first. The economy can grow but society does not necessarily mirror this (which it normally doesn’t.) However, if the economy declines, that’s mirrored in society. So our new ideology has to have a strong bent towards social support, placing common good first, thereby ensuring governments achieve their objectives.

If we look back in history, not that far back, to the rise of West Germany after WWII, there's a lesson to be learnt here. Konrad Adenauer, the Chancellor of West Germany after WWII, chose an economic model which had its roots in the ideas of Franz Bohm and Walter Eucken of the Freiburg School (around the 1930s.) It's called "ordoliberalism", and its chief advocates were Wilhelm Röpke and Alfred Müller-Armack. These economists aimed to achieve what Müller-Armack called a social market economy, not just a "mixed economy", where governments provide a bare minimum of essential public goods, but a middle way between free-enterprise and socialism that aimed for the best of both worlds. Industry remained in private ownership and was free to compete, but government provided a range of public goods and services, including a social security system with universal health care, pensions, unemployment benefit, and measures to outlaw monopolies and cartels. The theory was that this would allow for economic growth through free enterprise, but at the same time produce low inflation, low unemployment, and more equitable distribution of wealth.

The mixture of free enterprise with elements of socialism worked very well. Germany experienced a Wiitschaftswundei ("economic miracle") in the 1950s which transformed it from post-war devastation into a major developed economy. Similar social market economies developed elsewhere, notably in Scandinavia. In the 1950s, as Europe made moves towards economic union, the social market economy was extolled as the model for it to adopt. Many countries in Europe thrived under some form of social market economy, but by the 1980s, some - most notably Britain - were attracted by the ideas of Milton Friedman (of the "Chicago School"), who advocated "smaller" government and free markets. British prime minister Margaret Thatcher criticised the European model for its state intervention and high taxes, which she believed hampered competition. I'm not sure what convoluted thought process was involved in deciding this, where one’s economic competition rates higher than the well-being of one’s own citizens. Her strategy has served the wealthy, and laid the foundation for rapidly declining quality-of-life for the majority - all thanks to her neoliberal ideas.

While the German social market is associated with centre-right politics, the economies of Scandinavia developed along similar lines but were politically centre-left, with more emphasis on making the markets fair. The so-called Nordic model is characterised by generous welfare systems and a commitment to the fair distribution of wealth, achieved through high taxes and public spending. These countries have enjoyed a high standard-of-living and quality-of-life, which has been helped by having strong manufacturing industries. According to the OECD’s (Organisation for Economic Co-operation and Development) Better Life Index, the Nordic countries top their list while the UK and US are 18 and 17th (from the top) respectively, out of 40 countries. Unfortunately, today, there is pressure on these Nordic countries to reduce the role of the state so they can “remain internationally competitive.” Isn't that sad when we force the only governments in the world which have got their economies to work for the majority, to change. For what purpose - so the global rich can benefit? How can chasing "competitiveness", as Margaret Thatcher and her government did, followed by Ronald Reagan, which has led to dysfunctional economies be right? It’s not. Rather than change the "Nordic Model", we must change our model and start spending on social support to emulate their model. We need to place ourselves on equal ground - to help our citizens achieve a high quality-of-life. Can't we see, by putting the Nordic Model under pressure to change we’ve started a race to the bottom, where we will all suffer in the end? We have a successful working model, which we want to destroy and replace with a dysfunctional and disastrous model - what insanity is this.

Copyright © 2019 Adrian Mark Dore