3 November 2015

Tim Montgomerie’s report on the future of capitalism is a vital wake up call


How should capitalism be reformed and promoted? That’s the question posed in Tim Montgomerie’s new report for the Legatum Institute. If capitalists do not think more creatively and do not do more to respond to the challenges posed by technology and globalisation, there must be a danger that when the next crisis comes electorates will turn towards those offering populist, protectionist, destructive policies.

There will be another downturn or crisis. Of course there will. They cannot be legislated or regulated out of existence, and they are part of the cycle that drives innovation and leaps in prosperity. Indeed, write a book about the City of London – as I’m currently doing – and you notice something obvious from reading and researching the history. The story of financialisation and capitalism is inextricably bound up with the appearance on a pretty regular basis of periods of crisis that vary in intensity.

In Britain, before the extensions of the electoral franchise this was ‎not too much of a problem. The bursting of the South Sea bubble in the autumn of 1720 created distress (and made the fortunes of those who sold out at the top) but the Whig Establishment was up to its neck in the scandal and free shares. The Parliamentary inquiries were inadequate and the government conspired to destroy evidence and spring from jail one of the key figures who knew what had been going on. What could the voteless general population do about it? Not much. They didn’t own shares and life continued as normal in its largely bleak fashion.

Once more citizens got the vote, and simultaneously the economy became more inter-connected and sophisticated, with finance capable of causing explosions that destroyed value and knocked growth, it was harder for this position to hold. The panic of 1866, and the public anger with the City that followed, was arguably one of the factors that increased pressure for more electoral reform, which was delivered in 1867. The 1929 disaster shifted politics and attitudes leftwards for half a century.

Finance and economics came increasingly to shape public attitudes to politics, because most of us acquired a stake, whether it be in a pension (or not), or in the taxes we pay or the survival or otherwise of the industry we work in. And we can vote, in anger when something goes badly wrong.

Any capitalist who dismisses concerns – about concentrations of interest, or excessive scale, or the shape of the economy and its impact on their less fortunate fellow citizens – is making a grave mistake. Those citizens can vote, and even if they do not vote hard left their legitimate anger‎ can prompt fearful politicians (whose currency is votes and power) to do more daft stuff, such as cook the housing market, or distort the incentives in banking, or mess up the tax system to satisfy voter hunger for retribution.

The West is still dealing with the aftermath of the most recent crisis, which was the worst since the late 1920s and early 1930s. ‎The moderate Left’s response in 2008, led by Gordon Brown, took the biscuit for shameless audacity but it was consistent with a big government view of the world. Terrible people – who had been knighted and feted by Brown – had let us all down and here came Gordon to save the world with lots of other people’s borrowed money.‎ That was his version of events, and pretty mainstream a view it was too.

The hard left endorsed the idea of government as the answer, but it rejected New Labour’s cosy relationship with “neo-liberal” forces and high finance. Quite a lot of voters agree, even if they do not endorse the hard left’s ultimate remedy.

Conservative and classical liberal responses tended to be more confused or contradictory. Yes, a few bad people ‎had been awfully badly behaved but it wasn’t capitalism to blame, indeed it wasn’t capitalism in operation pre-2008, it was said‎. It was crony corporatism. I have some sympathy with that view but it is a hard sell to sceptical punters who may think it looked pretty much like capitalism to them. Then there is regulation. There was too much of it, or not enough, or it was focussed on the wrong parts of finance. Take your pick.

If the next crisis or downturn (hopefully not as severe as the last) is coming eventually, and it is seven years since the financial crisis of 2008, meaning we are probably closer to the next recession than to the last, ‎do capitalists have their arguments for the defence properly marshalled? Indeed, have pro-market forces done enough to reform capitalism and finance since the crisis? Answer: No, probably not.

That is what makes Tim Montgomerie’s initiative on rethinking capitalism so important. The first results are published this week and ‎he has produced fascinating polling to accompany the report. You can read the polling here, but it suggests that there is widespread distrust of business and voters seem convinced that poverty is increasing, even when the evidence globally points in the other direction.

I am sure I will not agree with every one of Tim’s recommendations. His attachment to increased wealth taxes is philosophically problematic for those of us who think ownership and property rights are the roots of a free society. Keep taxation simple, and broadly restrict it to income, purchase taxes and charges for services rendered. The moment the state can challenge pure ownership and demand money with menaces just for the act of owning something – a painting, a case of wine, what else? – then a line has been crossed. The implication would be that we own what we own only at the pleasure – or displeasure – of the state, rather than because it is intrinsically ours and the state serves us.

‎But beyond that, the report is a timely warning and vital work. It should be read as a wake up call.

Iain Martin is Editor of CapX