Capitalism as we know it has failed. Not even the Tories can defend it

Nick Timothy
Sun, July 2, 2023 

Canary Wharf

Larry Summers, the former US treasury secretary, once explained why he thought inequality had risen. “One of the reasons,” he said, “is that people are being treated closer to the way that they’re supposed to be treated.”

That story is recounted in Hell to Pay, a brilliant new book by Michael Lind about how the suppression of wages is driving economic, social and political crises in America. The idea that we are paid what we deserve – and that the decline in mid-skilled, mid-paid jobs simply reflects the high-tech, globalised economy in which we live – derives from free market theory. But it is, Lind argues, utter nonsense.

In Britain, like in America, the labour market has bifurcated because of political choices and corporate behaviour. Businesses have reduced employment costs by offshoring production to countries with lower labour standards and wages, or by using immigration to import cheaper workers. They have replaced full-time employees with rights and pensions with part-time contractors and gig economy workers. The post-war militancy and overreach of trade unions, and the restrictive laws that followed, has given employers monopsony power: that is, the ability to lower the price of labour because of their relative power over workers.

At the heart of all these changes is a model of globalisation that has caused the economic elites of the West to get richer, and which has allowed millions of people in Asia to escape poverty, but which has also relentlessly and systematically damaged the interests of the Western working – and increasingly middle – class.

Our model of globalisation was not, as Tony Blair put it, as inevitable as summer giving way to autumn. Trade agreements were struck, international institutions created, and when the likes of China broke the rules, dumped goods, stole industrial secrets, and used the system the West had created against us, reality was ignored. In as much as anybody noticed the effects on British workers, the reaction was to subsidise low pay, through tax credits, or – better, but not enough – increase it through minimum wages.

Regardless of the model of globalisation, there always remained choices for domestic policies. We can see this, for example, in how the breakdown between improvements in productivity and increases in pay have differed from country to country. In the US, it is longstanding and chronic. In Britain, more recent yet acute. In Denmark and Sweden, recent and mild.

A recent academic study showed that, contrary to popular perception, Britain and America have tax systems more progressive than in Europe – based on the difference between the taxes paid by the top decile to the bottom half of earners – and redistribute a greater proportion of national income to the bottom half. The reason Europe is less unequal than Britain and America is that wages themselves are more equal.

But wages are not the only way in which capitalism is in crisis. In Britain, everything seems to be in the red: we have a trade deficit, a budget deficit, and a house-building deficit. Personal debt stands at around 130 per cent of household income. The only surplus we seem to run is in net migration: millions have been added to our population in recent years, and 606,000 in the last year alone. Since the financial crash, we have had anaemic growth and stagnant pay. Stuck in a rut of low investment, poor productivity and low pay, we earn no more in real terms, on average, than we did in 2005.

Globalisation is part of the story, but so too is the quality of British economic policy. George Osborne used to describe himself as a strict fiscal conservative but a “monetary policy radical”. But while a fiscal correction was necessary after the financial crash, austerity went too far and for too long. According to Andy Haldane, former chief economist at the Bank of England, “this ruptured growth and was self-defeating for debt”.

Radical monetary policy poisoned the well, inflating asset prices, keeping zombie companies alive, discouraging bank lending to businesses and slowing the circulation of money through the economy. The government and the country became addicted to cheap credit, and left us exposed now the music has finally stopped. It was regressive, hurting households with less, helping those with more, and making it harder for young people to get on to the property ladder. And it caused an orgy of financial restructuring, through share buybacks and leveraged debt.

This is part of the shameful story of the water companies – regulated monopolies that have racked up £65 billion in debt, even as they paid executives multi-million pound remuneration packages and their foreign owners large dividends, all while failing to modernise our creaking infrastructure.

As with the energy companies, this is not just a symptom of monetary policy, but a failure of regulation – which encourages systematic over-reward for investors.

We know capitalism, untempered, can be rapacious: brilliant, innovative and wealth-creating, but also exploitative and careless about the externalities of doing business. Think for example of those tech firms that profit from and care little about the algorithms that send inappropriate content to children. Our economic pain is sometimes caused by a failure to regulate – but when we do regulate we often get it horribly wrong.

From the absurd complexity of the planning system to the failure of pension regulations that drives our savings away from British equities, we have built an economic model that rewards the wealthy not the many, the incumbent not the challenger, the bureaucrat not the entrepreneur, the rentier not the risk-taker, the financier not the maker and the old and not the young. We are serfs to debt, trapped by low pay and bloated assets.

Conservatives should accept that to criticise capitalism is not to succumb to socialism, but turning a blind eye to the failures and excesses of capitalism – especially the crony capitalism we have brought on ourselves – makes defeat to Left-wing parties more likely.

It is often said that those without capital will not support capitalism, but if what we have today is capitalism, it should be up to conservatives to change it – and not just defend the indefensible.