13 October 2015

What markets have done for us


We generally have a good idea about what makes a society rich. The state needs to be secure from internal and external threats. Its political and economic institutions need to be transparent and accountable. At the heart of its economy, there needs to be fair and competitive markets where contracts are enforced, strong infrastructure, a well-educated citizenry, a clear tax code, and a fathomable regulatory framework. For those countries which are not already prosperous, the first step is often setting up a non-corrupt government to introduce basic technologies around healthcare, hygiene and vital resource distribution.

But why are markets themselves so important to successful societies?

1) Markets are an expression of liberty

Liberal thinkers have long associated the ownership of property as an essential underpinning to a free society – that ownership both of one’s person and of the basic necessities of life are essential bulwarks against oppression. “All mankind… being all equal and independent, no one ought to harm another in his life, health, liberty or possessions,” wrote John Locke in the second of his Two Treatises of Government in 1689.

At the heart of Margaret Thatcher’s model of capitalism was a property owning democracy, the intellectual ballast for which was provided by David Howell. That property owning democracy has been wrongly interpreted as promoting just home-ownership. What they were actually supporting was a kind of popular capitalism in which the many had a tangible stake in companies, be they corporations, co-operatives or mutuals. At her party conference speech in Blackpool in 1985, Thatcher called for ownership in shares to be as popular as ownership in cars.

A report published by ResPublica last week showed that we have been going backwards. Individual share ownership has halved since the 1980s. Only 11% of total outstanding UK shares are held by individuals, while home ownership is back to the levels it was in 1985. These are tragic developments and do much to undermine support for the free enterprise system.

It’s not about consumerism. There is something in what the brilliant Oscar Wilde (who was an anarchist) wrote about the excesses of acquisitiveness. “Property has led individualism entirely astray. It has made gain not growth its aim. The true perfection of man lies, not in what man has, but in what man is.” Wilde advocated socialism as the antidote, but the development of industrial capitalism in the last century, particularly the broadening of leisure across the population, has opened up possibilities for individual freedom that previous generations would have thought unimaginable. You don’t have to be a Baudelairean flâneur like Wilde to appreciate this.

2) Productive economies create more leisure time

Karl Marx saw as oppressive the division of labour that worked at the heart of 19th century industrial capitalism and what continues to make it wonderfully productive. From the pin head producer to the modern back-end manager, Marx saw individuals in the body economic as cogs in a system so disconnected from the big picture that life lost its spiritual purpose.

In a managed economy, he suggested, “society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic.”

In George Orwell’s Coming Up for Air, protagonist George Bowling, a sort of interwar Reginald Perrin, recognised a contradiction in his mid-life search for purpose. He hated his mundane day-to-day existence and the way his hometown had been transformed by the needs of industry, but he recognised that those very processes gave him the time and resources to think about the bigger issues.

As a result of the spread and evolution of industrial capitalism, the average number of hours worked in advanced countries has steadily declined as labour productivity has increased. In 1870, the average labourer in OECD countries put in over 3,000 hours a year or about twelve hours a day. By 1998, that figure fell below 1,500 hours. At the same time, living standards increased by many multiples. Fewer hours at the coalface mean more time spent with friends and family, exploring the world or thinking about how to improve it. You just couldn’t do that in Maoist China.

If we get right the difficult transition to an industrial structure which automates more jobs, and that – at the moment – is a big if, the benefits for human freedom and prosperity could be even greater that those we have seen so far.

3) Markets provide the necessary material comforts

For all the faults of the market, it has been a wonderful engine of material progress – not just the gaudy ostentation– but important things such as vaccinations, bountiful harvests, secure homes furnished with all the life enhancing benefits of three industrial revolutions. Air travel, household appliances, mobile internet, the sharing economy. While it would be wrong to suggest that all of these benefits are the sole consequence of “the market,” it is a market system which permits capital to accumulate and allows governments to provide infrastructure and public services that has underpinned the developments of the last two centuries.

John Maynard Keynes knew this very well when he corrected predicted that living standards would be over four times higher in 2030 than when he wrote his paper on the Economics Possibilities for Our Grandchildren in 1930. Karl Marx saw the limited liability corporation as “capitalist production in its highest development,” and he supported it because by separating ownership from management, capitalism, Marx believed, was in the late stages of its dialectical transition to communism. He was wrong on that point, but on the following he must surely remain relevant:

“On the basis of capitalist production a new swindle develops in stock enterprises with respect to wages of management, in that boards of numerous managers or directors are placed above the actual director, for whom supervision and management serve only as a pretext to plunder the stockholders and amass wealth.”

Support for markets, particularly in the developed world, is being undermined by a systematic failure to deal with some of their worst features. Seven years after the financial crisis, corporate governance remains in the spotlight. We should tackle these issues but not lose sight of the fact that by improving the material standard, markets have raised the dignity of man and broken down the feudal arrangements that kept the great majority ignorant and servile and that made life nasty, poor, brutish and short for almost the entire length of human history.

Zac Tate is Deputy Editor of CapX