Matt Ridley: The market as the antidote to capitalism

The anti-capitalists, now more than 50 days outside St Paul’s, have a point: capitalism is proving unfair. But I would like to try to persuade them that the reason is because it is not free-market enough. (Good luck, I hear you cry.) The market, when allowed to flourish, tears apart monopoly and generates freedom and fairness better than any other human institution. Today’s private sector, by contrast, is increasingly dominated by companies that are privileged by government through cosy contract, soft subsidy, convenient regulation and crony conversation.

That is why it is producing such unfair outcomes.

Item: the finance industry, protected from upstart competition by high regulatory barriers to entry, handles the supply and demand of a good — money — that is priced by government fiat. For doing so, it trousers big bonuses even when arranging the issuance of bonds to pay for the bailing out of itself. That’s capitalism, but it’s not a free market.

Item: the private finance initiative suits government by postponing cost, suits business by giving it handsome returns — and roughly doubles the cost of infrastructure to taxpayers, the Treasury Select Committee says.

Item: The planning reforms were drafted in close consultation not with real people who want to build conservatories, but big developers.

Item: the defence, transport, energy and healthcare industries live almost entirely at the whim of government procurement, subsidy or regulation.

We must distinguish two meanings of the word “market”: one is “commerce”, a forum where people exchange goods and services, for consumption, in freely competitive ways. The consequence is innovation, efficiency and general improvements in quality and price for which regulation is barely necessary, except to deter monopoly and enforce contract. The reason that your toothpaste is cheap, available when you need it and not substandard is that people are competing to supply your needs, rather than because armies of trading standards officers make it so.

The other meaning of the word “market” is a casino where you buy goods for resale (like stocks and shares) and speculate on them. Such markets are necessary to allocate capital but they are prone to booms and busts and need regulation. They also produce unequal outcomes and tend towards monopoly. The housing market should provide a service (accommodation) but it keeps being turned into a casino. Instead of deregulating finance and over-regulating commerce, we should have done the opposite.

That commentators confuse these different kinds of market is bad enough. (Until recently, I used to.) The real problem is that those who spend other people’s money — public servants — do so too. And by repeatedly supporting crony capitalism rather than commerce, they repeatedly screw up markets. No wonder our political servants (I nearly wrote masters) forget whose side they are supposed to be on.

The political divide between the champions of the public sector and the private sector misses the point; the key divide is between those who support the monopolistic tendencies of both capitalism and government, and those who support the competitive effects of markets. Big oil companies, airlines, national health services and education authorities divert their energies into political defence of their partial monopolies, while smaller start-ups invent things that customers want, such as cheap gas, cheap flights or personalised genetic medicine.

It was ever thus. In 1349, London glovemakers petitioned the mayor to cap wages and restrain freedom of movement of employees. High demand for gloves because of the approaching plague had put their workers in a strong bargaining position. The mayor naturally granted the request. Remember this when you see the BBC lobbying for its licence fee.

As Adam Smith, who championed the market but not capitalism, put it: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” The market is where these conspiracies get exposed. To win in it, you don’t lobby, you innovate.

Lobbied by big companies, politicians do bonkers things like rewarding innovations that increase the cost of fulfilling a need — such as putting up the price of electricity to subsidise wind farms and claiming it “creates jobs”. Any hairdresser, unable to make a new hire because of his electricity bill, could tell them that it does the opposite.

Wherever free markets have been even tentatively tried, from Ancient Greece to modern Hong Kong, they have produced not just rising living standards, but net moves towards peace, tolerance, freedom and equality.
Today, global inequality has probably never been lower than since the Stone Age: according to the economist Xavier Sala-i-Martin, the Gini coefficient of world incomes, which measures inequality, has been dropping like a stone for 20 years. Free trade did that. Yet inequality has gone up within Britain and America, where markets in goods and services have been getting less free and barriers to social advancement have been built by government monopolies on education.

Capitalism represents the interests of the rich, whereas the market represents the interests of the poor. Let’s hear it for the market as the antidote to capitalism.

Matt, an acclaimed author and former Science and Technology Editor for the Economist blogs at www.rationaloptimist.com.