Good capitalism requires good rules
The crash in the world economy has claimed many victims, among them a now-discredited picture of how the state should approach the regulation of business.
This picture, which saw government’s central task as simply getting out of the way of wealth creation, allowing deregulated private enterprise to get on with generating prosperity, had its roots in libertarian and neo-liberal thinking.
Nevertheless, it came to be enthusiastically embraced by parties of the centre and left, and especially by New Labour. Labour’s variant on this approach combined quiescent government deregulation with a belief in the sort of under-the-radar redistribution that can only be achieved during times of economic plenty.
A slick and rampant financial sector, supercharged by the liberating effects of ‘light touch’ regulation, would create tax receipts that could be diverted through the bountiful effects of increasing spending on health and education, and increasing the size of the public sector workforce, to those floundering, deindustrialised sections of the country that had not benefitted from the boom.
As long as public spending could be kept high, the inequity and instability of a lopsided economy could be safely ignored.
Well, the good times, such as they were, ended in tears and we are left with a spluttering, unhealthy economy, marred by structural infirmities and rampant inequality, wheezing at the prospect of facing the future.
The embrace of neoliberalism and deregulation, rather than giving parties of the Left a new way of approaching prosperity and social justice, instead delivered a toxic mix of unfairness and economic uncertainty.
It seems that the elements of a better approach are beginning to emerge. Ed Miliband has started to talk about ways in which values of fairness and social justice could be better embedded in the mechanisms by which the government sets the rules within which business and finance operate.
A change in corporate governance could see worker representation on remuneration committees, in keeping with the recent recommendations of the High Pay Commission, thereby creating internal pressures to drive down ultra-high executive pay.
Changes in government procurement rules could see lucrative government contracts restricted to firms that take on and train significant numbers of apprentices, thereby contributing towards the country’s long-term skills-base and helping to arrest the hollowing-out of high-skill, high-quality industrial job opportunities.
Rather than the government simply getting out of the way of business, this rival model sees government’s role as being much more active.
This approach to ‘good capitalism’ recognises the residual power of government to set the rules under which the market and its participants operate. Governments have three significant levers, all of which need to be used in unison:
- control over the structure of the tax system, which can be used to incentivise particular forms of corporate behaviour while penalising others;
- changes in direct regulation, which can forbid certain activities, mandate others, or raise or lower the costs of particular business strategies;
- the purchasing power of government procurement, which can be deployed with an eye not just on narrow issues of immediate price, but with a broader eye on economic, environmental and social sustainability.
It is myopic to think that the interests of value-creating businesses and entrepreneurs are served by the creation of an unbalanced, unstable deregulated economy; on the contrary, smart regulation rewards good business practices, and creates opportunities for real value-creators.
Some critics of the pursuit of ‘good capitalism’ complain that these sorts of interference in ‘the free market’ both infringe important commercial freedoms and lead to economic ruin.
But even the most familiar ‘free market’ institutions are not facts of nature. The limited liability joint-stock corporation as an organisational form did not spring fully formed from the ground like a mushroom. It is a creature of legislative design, dating back to the Companies Act 1862.
The irony of demanding that governments not interfere in the ‘natural’ order of corporate activity is thus a decidedly rich one. Markets are created by the rules of property, and structured by a formation of regulatory instruments and legal rules.
Appealing to the entitlements thought to be associated with the corporate form is doing no more than appealing to a convention, bereft of independent authority.
Still other objectors decry Miliband’s talk of rewarding socially valuable economic activity and punishing socially useless business as a return to a sort of moralised version of 1970s industrial policy, but this time with the government picking ethical rather than purely economic winners.
But this misunderstands the idea that government’s role in the economy, even when extremely active, need not and should not be about endless micro-level interventions, or the promotion of the interests of particular companies or businesses. Instead, it is about optimising the rules of the game, given a set of goals that encompass both social and economic objectives.
Lastly, objectors to a ‘good capitalism’ agenda might see it as inappropriately moralistic.
On this view, markets are machines for producing economic value, and economic agents act within those markets to pursue their self-interest, not to bring about a fairer, more equal or more stable society. To bring ethics into economic policy could look like the worst kind of folly.
But if we take seriously the role of politics to embed our social values – such as values of fairness and social justice – in the rules of the economic game, then we have no need for individual market agents to make implausibly heroic efforts to bring moral motivations to the front of their own individual agency.
Miliband’s approach to ‘good capitalism’ would appear to understand this, and so looks to ways in which government may be able to change the rules of economic life in order to promote the common good.
The alternative approach, which sees government’s attitude to business as a value-free zone, places the burden of moral leadership on individual agents within the market, but, given the economic pressures faced by individuals and firms, these burdens are simply impossible to carry.
A ‘supply-side revolution from the left’ (as Stewart Wood has called it), which places social values at the centre of regulation, is a way to make good on the purpose of politics, and avoids the unrealistic moralism that sees the possibility of a more ethically justifiable capitalism only in the actions of individual economic agents.
This is an excerpt from a longer report for Renewal. You can find it in full here.