We need a new capitalist revolution: A young writer presents his provocative manifesto for free markets
19 September 2011 6:16am
MORE people have climbed out of poverty in the past 50 years than did so in the 500 years before that. Life expectancies across the world have doubled in the last one hundred years. The global poverty rate has fallen from 25 per cent in 2005 to 12 per cent today. By 2015, it will have halved twice in twenty-five years. More women (and men) can read and write than ever before. Travel is cheap. Information is becoming free. And free market capitalism is the reason why.
But the Eurozone is collapsing and the Western economies are stagnating. Nearly every politician of every party believes that corporate bailouts, economic crises and long-term stagnation are inherent to our capitalist system, and that our future prosperity needs planned from above. But what caused the 2008 crisis, what is holding us back now and what is sowing the seeds of the next crash is not too much capitalism, it is too little of it.
Capitalism is change. At its core, it is every person trying to better their condition by engaging in exchanges with others.
Everybody has their own talents and ambitions, and only they know how to make the most of them. Top-down plans made by experts in government ignore this - they're about directing people towards the planner's goals, not their own ones. In economies that are planned by the state, to any degree, change is disruptive and bad. In capitalism, change is progress.
The free market provides a structure where experimentation is encouraged and rewarded, with all the failures and false starts that experimentation requires. To get the successes that capitalism has delivered so well, we need to endure the failures and adapt to changes.
Every successful change disrupts established practices and firms. Capitalism's great strength is that these disruptions give people better living standards and better hopes for their children. The benefits of economic change are enormous: the doubling of global food production in the last 50 years, mobile phones that now cost a day's wages instead of a month's, real wages in the UK tripling since 1945. But these can also be invisible and dispersed. The costs of disruption, meanwhile, are often visible and concentrated - easy to lobby against.
As a result, the biggest threat to free markets is no longer anti-capitalist ideology, but protection for special interests against competition - corporatism.
The struggle for free trade in the 19th century pitched a few believers in capitalism against the powerful landed interests of the time. The Corn Laws protected landowners against cheaper foreign imports, impoverishing the many but enriching the few. It took a broad social movement to overcome them and allow the forces of change to bring cheaper food to Britain.
Defenders of capitalism today face similar challenges. Across the economy, entrenched special interests use the state as a weapon to protect themselves from change and competition. Some banks have been given huge bailouts since 2008. Farmers are protected by tariffs and £3bn of subsidies every year. Planning laws protect property owners from developments that would increase the supply of houses. In countless other areas, established interests are protected by the state.
Like free trade, the controversial subject of free movement of people would disrupt the existing economic order and understandably meets fierce opposition from people at risk of change. But radical as the idea now seems, the productivity of a low-skilled service worker in London is around twenty times that of one in Lagos. A recent review of economic studies of open migration found that world GDP could increase by between 67 and 147 per cent if barriers to migration were lifted. The same spirit that possessed the free trade campaigners of the 19th century should invigorate open borders campaigners today. Capitalists have to be open to extraordinary changes to unlock the extraordinary power of humanity.
Corporatism in finance has brought ruin onto the world. Letting banks fail is messy, disruptive and ugly (though not as much as people think). But bailing them out creates moral hazard - it gives a blank cheque to reckless banks. Unless bad banks are allowed to fail, good ones cannot take their place. Preventing failure is good for established banks, but bad for everybody else.
Cheap credit created by central banks inflated the housing bubble that burst in 2008. The combination of artificially cheap credit and banks expecting a bailout led to the crisis. Money should emerge from markets, not be imposed by governments. Without radical changes to money and banking policy, we will sleepwalk into the next crisis, and it may be even bigger.
Somebody needs to speak up for the freedoms of the many against the protections of the few. Corporatism - not capitalism - was at the root of the last crisis and it will be at the root of the next one. Britain needs to reject protections for businesses. It needs a free market revolution.
Sam Bowman is the head of research at the Adam Smith Institute.
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