27 May 2015

Capitalism, corporatism and morality


In her article for CapX, Harriet Maltby raises the question of morality, and asks whether it has been debased because, as some critics allege, “capitalism has transformed us into heartless materialistic machines whose only moral code is fame and money”. She sets against this attitude an essentially Aristotelian morality in which ‘being’ is vastly more important than ‘having’, and concludes that capitalism is not antithetic to virtue because it gives us freedom to choose.

Though she is undoubtedly correct to argue that there need be no inconsistency between capitalism and morality (used here in the Aristotelian sense), it would be wrong to accept, as so many do, that Britain, for example, has a capitalist economic system. The system that Britain actually has is not capitalism at all, but a toxic variant known as “corporatism”. Understanding this is critical to an appreciation of why, despite the virtues of capitalism, so much of what happens in Britain undoubtedly seems morally retrograde.

Properly understood, capitalism isn’t anarchy, or “the law of the jungle”. Rather, the essence of capitalism is the functioning of a competitive market within strictly defined parameters of probity and transparency. Left to its own devices, capitalism will self-destruct, because the stronger will take over or destroy the weaker, by fair means or foul, resulting, not in the revitalising renewal of “creative destruction”, but in monopoly and oligopoly, which invariably destroy competition.

‘Corporatism’ is the triumph of the collective over the individual, and occurs whenever the state fails to “hold the ring”, and to defend the essential market principles of competition, transparency and probity. Wherever this happens, an unhealthy relationship between corporates and government will usually be found to have played a pivotal role.

Recent revelations in the banking sector underline this failure. For a start, the rigging of forex markets was made possible by dishonest collaboration between parties which should be competitors, not co-conspirators. This failing of competition is compounded by a grave deficiency of probity.

Far from countering any of this, the state has failed in its role as guarantor of probity. What should have happened is that individual malefactors should have been punished in exemplary ways, which in the most serious cases would include asset-stripping as well as gaol. Instead, the authorities have fined the shareholders, compounding the injustice that they have already suffered, both as investors and, in many instances, as unwitting counterparties to fraudulent trades as well.

The definition of ‘corporates’, it must be stressed, is by no means confined to large private sector organisations. A corporate can be any collective which promotes the interests of its leaders over the collective or wider public good. Back in the 1970s, trades unions were malign corporates. Today, corporatism is in evidence whenever senior public sector managers emerge unscathed from public service failings, of which Stafford and Rotherham are but the highest-profile recent examples.

It is hard to escape the conclusion that the British state has become enmeshed in complicity with a corporatist elite. No senior person is held to account for grotesque failings in banking, or in the public services. When large organisations con their customers, this is treated not as “fraud”, but as the more innocuous-sounding “miss-selling”. The ruling elite still seems unwilling to conduct a full and open examination of the decision to invade Iraq. This is extremely damaging, because the public will not trust the executive to use military force again until it knows that the basis of such decisions will be made public within a reasonable time.

The climate of suspicion created by corporatism has weakened public trust in vitally important institutions. As the expenses scandal undermined faith in Parliament, so phone-hacking has eroded trust in the press. Whenever “super-injunctions” are granted to the corporate or the wealthy, the reputation of the courts for even-handedness is called into question. Failure to prosecute tax-evaders with the same rigour that is imposed on those who fiddle benefits has a gravely detrimental effect on perceptions of the equity of the state in dealing with cheats.

The influence exerted by corporatism is damaging in practical as well as in moral terms. The private sector corporate preference for high consumption and low wages has mired Britain in debt, because a poorly-paid worker can only be a high-spending consumer as well if he or she borrows the difference. Additionally, the exchequer suffers from the “low-pay, high-spend” corporate preference when taxes fall short of expectations, and when in-work benefits of £25bn have to be provided to under-paid workers.

In the public services, the immunity of senior managers from the consequences of their failures can only worsen not just service quality, but affordability as well.

In short, Britain has two practical problems which corporatism has compounded. One of these is the need to base the economy on borrowing (and asset sales) in order to sustain the dichotomy between low wages and high consumption. The other is an increasing inability to afford public services whose cost-effectiveness cannot be enhanced by the exemplary weeding out of failing managers.

Morally, of course, corporatism exerts a malign influence when it creates the perception of inequity between those who are rich, famous and well-connected, and those who are not. Even-handedness is a hallmark of a just and harmonious society, and corporatism is its worst solvent.

To tackle both the practical and the moral failings of corporatism, certain steps are surely obvious. First, both banking and broader corporate dishonesty should be punished as fraud. Second, the “revolving doors” between government and business should be closed, by imposing strict, though high, limits on what former ministers and officials can earn in subsequent employment in the private sector. Third, government needs to promote, though not necessarily enforce, the living wage.

In the final analysis, whilst morality and capitalism are indeed compatible, corporatism is no more consistent with morality than it is with a prosperous economy or a cohesive society.

Tim Morgan was global head of research at Tullett Prebon plc from 2009 to 2013, and is author of Life After Growth (Harriman House, 2013), and numerous influential papers published by the Centre for Policy Studies.