9 November 2015

A little too much freedom has led to socialism for the rich


In Saturday’s Wall Street Journal – in an article headlined “A Fading Faith in Capitalism” – I set out some of the dramatic findings of a YouGov poll for the Legatum Institute’s “Prosperity for All” report. The poll found that 55% of Americans think the poor get poorer under capitalism. 65% think big businesses have cheated, polluted or bribed their way to success. Only 14% of American adults expect the next generation to be richer, healthier and safer than the last. This 14% number wasn’t just much lower than developing countries like India and Indonesia but was also slightly lower than old worldly Britain and Germany. America, the land of the free – despite being the world’s most inventive country and, still, the magnet to so many immigrants – has nonetheless become something of a global home for pessimism.

In the comments thread below my Journal article many people insisted that it was “crony capitalism” rather than free market capitalism that was unpopular. Here are three pretty typical comments that made this point:

1. Eric Nelson commented: “There is “Crony Capitalism” and “free-market Capitalism”. To lump the 2 of those together is a joke… Free Market capitalism works very well because the markets [are] quick to punish inefficiency. Crony Capitalism works poorly and is only propped up by big government. Time the public was educated on the difference.”

2. Tom Mathewson wrote: “What people today call capitalism is often instead cronyism.  It’s usually based on patronage and a relationship with the government, and as such it’s more like mercantilism than capitalism.”

3. Anthony Swenson added: “People still believe in capitalism, we still believe in the American dream, but we’re not entirely stupid. We know that the crony capitalist Country Club/Chamber of Commerce/Wall Street Washington establishment have perverted the system to keep their corporate welfare rolling in… Until we start seeing those who break the rules held to account instead of having their activities glossed over as “complex corporate ties”, we’re going to have a hard time believing that the Ruling Class and the talking heads of the Media really give a d*** what we think.”

Personally, I’m clear that “crony capitalism” cannot be blamed for all of the capitalist system’s unpopularity. Some of the inequality and social immobility that worries many people today is occurring because growing numbers of people in advanced nations are entering the free marketplace with fewer skills and advantages than others. And I’m not just thinking of unequal educational attainment. I’m referring to the fact that some people have benefited from oodles of social capital during their childhoods and some have had almost none. Those with social capital, who’ve benefited from high quality, stable and intensive parenting, have the soft skills to flourish in today’s knowledge-based economy. Those without social capital, who have grown up in dysfunctional homes and in tough neighbourhoods, lack the skills that the modern economy demands.

Without getting any deeper into the debate about the causes of inequality and immobility I just want to put on record that I don’t accept that “crony capitalism” can fully explain the pessimism and negativity uncovered by YouGov for the Legatum Institute. There are social, technological and global changes that should be included in any full understanding of the challenge. But I do agree with Messrs Nelson, Mathewson and Swenson that the politicisation of the economy is a huge problem. The sense that the rich don’t get poorer but get bailed out because of their political and legal muscle fans the suspicion that the system is unfair: that there is one set of rules for the haves and a different set of rules for the have-nots. If that sense of unfairness reaches fever pitch then the good as well as the bad business leaders could be swept away in a future reckoning.

But what should be done to end what Joseph Stiglitz has called “socialism for the rich”? It’s not enough for people on the Right to give the glib answer that government needs to shrink – that corporate subsidies for agriculture and the fossil fuel industry should be cut back and that “too-big-to-fail” needs to be ended for good. Is there an appetite to will the means to ensure the ends? There are reasons that politicians of all colours have continued to give special financial or regulatory treatment to key industries and one of them is political donations.

Those on the Right are quick to connect the statist policies of the US Democrat and UK Labour parties with the money that those parties receive from public sector unions. They’re less ready to connect the money that business and other special interest groups give to the US Republicans and the UK Conservatives with the corporate-friendly policies of those parties. Until there are strict, low limits on the amount of money that both business and unions can give to politics it’s unlikely that we’ll reduce the influence of special interest groups and the lobbyists that represent them.

And the biggest special interest group of them all, of course, is the people who vote. To put it in the simplest possible way: people who vote have a lot more power than the people who don’t vote. In western nations like Britain and America that means disproportionate power for older and better off voters. About 76% of pensioners cast a ballot at the 2010 British general election but only 44% of first-time voters did. 76% of higher income voters in the better-off AB social class turned out, but only 57% of DE voters did. The pattern is very similar in the US. Turnout can reach 78% amongst those earning over $150,000 pa but be as low as 41% amongst the poorest. 41% of 18 to 24 year olds turned out to vote in the 2008 presidential election but 70% of over 75s exercised a vote.

The right not to vote and the freedom to give massive donations to a political candidate are freedoms that many on the Right will defend to the death. But what if those freedoms are killing free market capitalism? The freedom not to vote is producing something akin to a gerontocracy where welfare for wealthier older voters is pushing the state towards bankruptcy. Most nations require compulsory jury service. Is requiring people to vote once every four or five years such an attack on liberty? Similarly, the freedom for rich individuals and corporations to buy influence in political parties is discouraging politicians from ensuring key industries are exposed to the free market. At some point the Right needs to choose the lesser of two evils. Crony capitalism is a result of the abuse of certain freedoms. Those freedoms may need to be curtailed. Mandatory voting and strict caps on donations may be necessary to get a more honest, fairer state.

Chapter Six of Prosperity-for-All.com focuses on “crony capitalism” and will be published on Friday 13th November.   

Tim Montgomerie is a columnist for the The Times, a Senior Fellow at Legatum Institute and co-founder of the new website The Good Right. His “reform of capitalism” report for the Legatum Institute was published on 4th November.