25 June 2017

Glastonbury proves the power of capitalism


It’s amazing quite how capitalist the process of getting hippies dancing in fields is. I refer first and foremost, of course, to dear old Glastonbury. Capitalist here does not mean Scrooge McDuck surfing down his pile of gold coins. Rather, it goes to the heart of the system – the provision of capital by outsiders to get a business or event up and running.

For that is what capitalism actually means. Markets and prices are consistent with a capitalist system but they are not its defining characteristics, however desirable they may be – and they are desirable, more so than capitalism itself.

The distinction with socialism, again entirely consistent with markets and the price system, is with who owns and provides the capital. We have any number of socialist organisations in our own economy, where it is not the outside providers who supply the capital. John Lewis is worker-owned. The Co Op is customer-owned. Both are socialist models. Sainsbury’s is a capitalist organisation in much the same space.

At which point we might conclude that either the distinction doesn’t matter, or that because socialism sounds so much cuddlier we might as well all move over to that. Yet the distinction is vitally important. That is made perfectly clear when you try to start something up. The workers of John Lewis would not be able to subscribe the capital to build out the system they own. Instead it took a century of retained profits plus a substantial initial gift of capital from Spedan Lewis, son of the eponymous John (amusingly he was from Shepton Mallett, not far from dear Glasto). Similarly, the current customers of the Co Op aren’t going to subscribe to capitalise a retail chain these days.

This is where capitalism comes into its own. There is a base of investors out there you can go and get capital from to start up a new idea. Like, say, a music festival. One example of which is the Pemberton Festival in Canada. Which just went bust, swallowing the money pre-paid for tickets in the process. That’s not unusual of course, but the reasoning is interesting. For it takes several years for such a festival to make a profit – meaning that there has to be some pot of capital to cover those losses in the meantime.

There is also that delightful monstrosity of the Fyre Festival, in the Bahamas, which fell apart so spectacularly. The marketing there seems to have been done rather too well. The problem was a lack of capital to organise it. Or perhaps even a lack of enough nous to realise that capital was necessary to order the toilets, tents, food and even pay the bands to ensure that they turn up.

Which does bring us to Glastonbury. The accounts are here and it’s a multi-million pound operation. The 2014 operation turned over £37 million, even if it only made £86,000 in profit. One way that they deal with the capital issue is that they use the float from ticket pre-sales (£8 million perhaps) to provide the working capital for this year’s event. But then that’s outside capital again, and one that works because of the age of the festival. In other words it is a way of converting social capital into financial.

Glastonbury doesn’t really try to make a profit, only not to make a loss and thus makes substantial charitable donations. But they are aware of the unavoidable truth that to get something up off the ground you need capital. Our problem with most new adventures is that the people who want to be part of it don’t have the capital to make it happen. Which is where the failure of a socialist system becomes apparent. For there is no possible squaring of this circle.

Oh, of course, the State can hand out the capital but that will only lead to those things which please politicians gaining the necessary funding. What we would miss there is the great exploration system of possibilities which is the market allocation of capital from capitalists. Which state would have financed a student at Harvard to make Facebook? Indeed, which would have financed Bill Gates to rewrite MS DOS?

It takes the risk of significant funds to get a new adventure started and the risk of those funds is what capitalists provide in a capitalist system. This is true of networks for cat pictures and our ability to get hippies dancing in fields. It’s worth noting that no socialist system ever did develop festivals with music anyone other than the politicians wanted to listen to.

Tim Worstall is senior fellow at the Adam Smith Institute