4 November 2015

Legatum’s Vision of Capitalism report is a must-read


“The biggest single thing that has lifted people out of poverty is free trade,” hailed Chancellor George Osborne as he launched the Legatum Institute’s Vision of Capitalism project, an in-depth study of the free enterprise system led by Tim Montgomerie.

The problem is, it’s a statement that’s altogether true, quickly dismissed and treated with deep suspicion and disbelief.

On CapX, we have been working to debunk some of the myths about the free enterprise system in the knowledge that capitalism is more unpopular than ever. The crisis of the capitalism is one part poor communication, two parts organic and three parts design. Because while we can talk about how the benefits of improved nutrition, indoor plumbing, household appliances and cheap international travel have revolutionised the social and material space, if voters around the world are uncomfortable with how large parts of their economies work, then all this progress is diminished and at risk of being assailed by appealing alternatives.

According to YouGov polling for the Vision of Capitalism, peoples around the world do not associate the positive features of their societies with their perception of capitalism. Big business is seen as tax dodgers and polluters, to which myopic politicians are beholden. Pluralities support the idea that government should tax or limit cheap goods from abroad if they cause unemployment in domestic manufacturing industries. Large majorities in the US, UK, Germany, Brazil, India and Thailand believe that the rich get richer and the poor get poorer in capitalist economies – although they also believe, by a margin of about seven-to-one, that tackling poverty is more important than reducing inequality. For these reasons, the Vision of Capitalism is a timely and much needed contribution to the debate on the reform of capitalism.

The reform of capitalism is an imperative for serious governing parties across the political spectrum. It was striking to hear the degree of agreement in a BBC radio interview earlier this year between Joe Stiglitz, the Nobel economist who described himself as a social democrat, and Steve Hilton, who was David Cameron’s Director of Strategy. Both agreed that markets need to work a lot more like markets, which means a bolstered role for competition policy and improvements in corporate governance that empowers workers within businesses and the wider stakeholders reliant on them. This John Kay view of the world, which the OECD thinks can improve companies’ bottom lines, is (and always has been) more befitting to large organisations with great cash reserves and wasteful share buy-back schemes than the new Googles and BSEs that need all the incentives they can get to establish themselves.

There was a strong sense of democratic capitalism in Montgomerie’s speech, following the work of Michael Novak, who argued that national life can be separated into three spheres of activity – the market, the democratic and the moral spheres.  Simply reinforcing the primacy of the market is not enough. If market forces are too powerful, then concentrations of power and wealth become damaging, but if they are too weak then economies and the energies of the people who power them are held back from their full potential. If the state is too strong, it taxes and regulates too much. If it is too weak then the foundations of wealth creation are not laid – the problem facing most African countries today. But Montgomerie also emphasised the importance of developing social and cultural capital and the influence of social factors in driving inequality, reflecting the view of Pope Francis, who recently said that the family was “the nearest hospital, the first school for the young and the best home for the elderly”. Redistribution does not have to be the exclusive domain of the state.

The report will be showcased over the coming fortnight and there were hints of what’s to come, including proposals to scale back middle-class benefits and create a domesday book of public assets – an idea first mooted by Dag Detter – to be sold to support infrastructure spending and R&D. Traces of Mariana Mazzucato’s Entrepreneurial State can be found in this view, which says the economy is better off if the government invests £60m backing Skylon’s super-plane than yet another real terms increase in pensioner benefits. Mazzucato is a one of Jeremy Corbyn’s economic advisors (and she may not agree with plans that reduced current spending at the same time as boosting R&D) but her work has been endorsed by Conservative David Willets, a minister in the last government.

One of George Osborne’s mistakes in the previous parliament was to cut capital spending too quickly and deeply. Scrapping investment projects is politically easy but does more to damage the long-term state of the economy than scaling back day-to-day spending that hits important clientelist interests. Osborne’s more aggressive argument on the deficit in 2010-2012 has also meant that he cannot take advantage of historically low long term interest rates to finance programmes and developments that would boost long term economic growth. Instead he’s had to court investment from China.

Altogether, the Vision of Capitalism is a refreshing look at how an economic system that is both so productive and yet so distrusted can be reformed to meet the interests of the many. The goal is to put the ‘caput’ back onto capitalism, supporting those who create jobs and wealth but also correcting some of the flaws of the late period. It is a response to the fear that the Western liberal model, assailed by disunity and pessimism, is in retreat with its future called into question by more authoritarian models arising in Russia, China and parts of the Islamic world. It is this concern that underpins the work behind the Vision of Capitalism. Some of the proposals may seem left-wing, neoliberal or socially conservative taken individually, but the work should be taken as a whole, as offering a new theory of the market, the state and civil society that renews capitalism for the 21st century.

The Vision of Capitalism will be launched in ten instalments over the next two weeks. You can find the reports and further information here.

Zac Tate is Deputy Editor of CapX