First published in the Sunday Times on 18th September 2016.
The debate about the morality and purpose of capitalism never ends. There are always critics queuing up to attack the free-market system, from governance to equality to the environment.
For example, over the summer I read Makers and Takers, by Rana Foroohar. Its subtitle is The Rise of Finance and the Fall of American Business. The author argues that the US economy has been “financialised” by Wall Street. She states that the financial sector generates a quarter of total corporate profits while creating only 4% of jobs, that corporations favour share buybacks over R&D and investment in new plant and equipment, and that financial services force-feed the US economy too much debt. Foroohar says that leverage should be reduced and bankers should play a much smaller role in the economy.
An angrier assault on business is contained in Guy Standing’s The Corruption of Capitalism. He claims the rise of neoliberalism has unleashed armies of rentiers, which has led to a corrupt and unfair system. He believes in nationalisation, redistribution, more regulation and higher taxes.
I have written before about attempts by entrepreneurs and other interested parties to try to reform business, in order to put it on what they believe will be a more sustainable basis, while encouraging companies to share the fruits of private enterprise more widely. One example is Conscious Capitalism, a movement inspired by the Whole Foods founder John Mackey, who believes that every successful company needs a higher purpose than just making money.
Somewhat similar is the B Corporation campaign, which believes that business must be conducted as if people and place matter, and that it should aspire to do no harm and to benefit all.
The global financier Lady Forester de Rothschild promotes her Coalition for Inclusive Capitalism, which sounds very worthy and holds conferences attended by lots of business grandees. And Will Hutton, using his Big Innovation Centre, is preparing a final report on something called The Purposeful Company with “thought leaders”, mainly from large institutions.
In one sense, I applaud all such initiatives. Of course business should be better, more sustainable, and its outputs more widely shared. One of the fantastic aspects of competitive markets is that no business can stand still — they must constantly evolve to satisfy customers and capital providers or they go broke. And I would never argue that our model of entrepreneurship, competition, freedom to trade and rule of law is perfect. One characteristic of the most successful business leaders and companies is that they are not complacent or easily satisfied. They believe profoundly in constant improvement.
But for all its flaws, capitalism is the most materially enriching form of human interaction yet created. In terms of innovation, job creation, tax generation and wealth generation, no other system comes close.
And while profit is a powerful spur to action, entrepreneurs and investors capture a surprisingly small proportion of the surplus they help create.
The economist William Nordhaus has written about the impact of new technology on profits. He estimates that innovators capture just 2.2% of the total surplus of their inventions. The rest is a huge dividend to society as a whole. For example, a large majority of all the most important and heavily prescribed medicines in the world are off patent and cost a fraction of their previous price: virtually all were developed and are made by private pharmaceutical firms.
Moreover, the alternative to the economic status quo is much worse. Leftwingers — who call their philosophy “progressive” to make it sound modern — have no practical solutions to the opportunities and challenges of the 21st century. They complain about markets, trade, profits, capital, banks and business but cannot articulate how any economy could function without them. Moreover, the entire support base for the left appears to be falling apart. The Labour party is willing itself to commit hara-kiri, assuming it confirms Jeremy Corbyn as the leader on September 24.
Even a commentator for their bible, The Guardian, last week despaired: “Labour’s problems are systemic, rooted in the deepest structures of the economy and society.” The rise of self-employment, the power of technology, the collapse of trade unions, the growth of the knowledge economy and the transformation of the workplace — Labour refuses to understand these shifts and has no way to pay for its economically illiterate welfare promises. In the future, I expect socialism will be seen as a curious historical anomaly, in all senses a bankrupt ideology.
Therefore I shall stick with capitalism, warts and all. It may be imperfect, but the relentless advances it has brought mankind could never have been achieved any other way.