"Capitalism for the people"

This week I was in London where I attended the Margaret Thatcher Conference on Liberty (follow the Twitter feed on #Liberty2014) organized by the Centre for Policy Studies (CPS) (here's a link to some blog posts I wrote for them). It was an international conference held in London's historical Guildhall to celebrate the 40th anniversary of the foundation of the CPS by Sir Keith Joseph and Lady Thatcher.

It featured a series of world class speakers; from professors such as Niall Ferguson, Luigi Zingales, Deirdre McCloskey, Richard Epstein, Deepak Lal, Art Laffer, to former and current politicians such as Australia's ex-PM John Howard, Estonian PM Taavi Roivas, Polish Minister of Foreign Affairs Radoslaw Sikorski, British MEP Daniel Hannan, UK Secretary of State for Education Michael Gove, retired US army General Petraeus, and a number of journalists, businessmen and the like. And of course the CPS chairman Lord Saatchi who presented a new policy aimed at restoring Britain's growth potential - #thePolicy - a suggestion aimed at abolishing the corporate tax rate for SMEs. However I still feel the suggestions I made in my ASI paper (where the key is to abolish employer's NIC among a number of other things) would boost SMEs more than abolishing their corporate tax rate. The conference was opened by British Nobel prize winner in literature - V S Naipaul. The full list of speakers is here. 

It was a conference celebrating the achievements of the Thatcher-Reagan revolution of the 1980s. Its emphasis has been on issues that are mostly overlooked by the critics of the so-called "neoliberal doctrine" - a focus on Capitalism for the people, a moral case for capitalist democracies, a way of thinking highly advocated and practiced by Lady Thatcher (and consequently a title of prof Zingales's new book). I have emphasized this every time I wrote a piece on Thatcher - she "strongly opposed the accumulation of power by the elites and the consequential rise of cronyism. She advocated wealth creation and the principle of property ownership. But as much as she supported wealth creation, she was against wealth expropriation. She knew of the distinction of being pro-business and being pro-market. One does not imply the other. Being pro-market meant supporting competition and equal opportunity, not creating monopolies or picking industry winners." This is what the governments that succeeded hers have forgotten. The banking and media elites whose power was only partially exposed by some of the recent UK scandals (the Leveson inquiry, LIBOR) would never have been able to accumulate so much political clout if Britain truly continued down the path set by Lady Thatcher. The extent of their cartelisation was clearly shown in Lord Saatchi's presentation: 

Source: Saatchi (2014) "The Road from Serfdom", pg.8

And in addition he pointed to a survey which showed that 70% of Britons don't trust neither big government nor big business. The direction of policy proposals should be quite obvious in this case.

The conference thus presented a realistic view of capitalism. The speakers quickly and precisely recognized all its problems: cartelisation, cronyism, corporatism, clientelism. These are essentially the reasons behind rising inequality and low social mobility. Lack of opportunity leads to negative selection. As powerful interest groups have captured and redistributed most of the public spending towards themselves, less and less is left for the poor ends of society particularly in terms of schooling and health. Inequality is a product of a faulty, captured, crony capitalism. Not its liberal alternative. Which is why the methods, or if you want instruments, to deal with inequality are not policies aimed at imposing higher tax burdens - these are very short-sighted solutions, and in most cases can be very counterproductive.

To deal with the problems of Western capitalism, we (and here I essentially mean our governments) must impose more competition in other to dissolve the highly accumulated political power of big business, and offer more incentive-based policies aimed at helping the poor. Capitalism was designed to work for the people - it was aimed to alleviate poverty. Being pro-market or pro-capitalist does not imply being anti-equality. On the contrary, the point of the capitalist system is to offer everyone the same opportunity for success. Liberalism achieved within capitalist democracies implies the freedom of opportunity. Every other system know to man (socialism, national-socialism, feudalism, etc.) fails to offer such incentives, since it lacks the prerequisite of political inclusivness. They also lack the one important thing that makes capitalism strive - trial and error.

Essentially one should always think of the capitalist democracy as a trial and error process. When cronyism prevails we are obviously in state of error. But via scrutiny, innovation, and a persistent exchange and competition of ideas we are able to fix the faults of the system. This is, in fact, what Thatcher and Reagan have done after the stagflation of the 1970s. The answer is always more competition and more innovation. The same way they've cleared the path for the beginning of the third (IT) industrial revolution, we need ideas and leaders that will remove all obstacles from the still ongoing technological revolution. The Liberty Conference was the first step in the right direction.

Addendum: China is a friend not a foe 

Each session was very interesting and though provoking (see the full list here); I particularly enjoyed the panel on "Big Government and Big Corporations" featuring Art Laffer, professors McCloskey, Zingales and Lal, and the Economist's editor-in-chief John Micklethwait. It was in my opinion the central event of the conference. However each session had at least something to say about China. In the opening part of the conference the mainstream view on China was presented, partially under the influence of Ferguson's hypothesis of the forthcoming Chinese dominance. However in the panel called "After America, What?", featuring John Howard, Dr Keyu Jin and General Petraeus, the Chinese economist Dr Jin (she holds a PhD from Harvard and works at LSE) presented a very realistic portrayal of China and particularly the Western perception of China. She stated that China's economic development is still far below what the western media headlines would lead us to believe. She emphasized several times that China is still a poor country with major issues, where a lot of people are still far below a decent living standard. China has yet to figure out its development model, and the West should cooperate and help them, not constantly feel threatened and flex its muscles in front of them. Trade is the key word here. 

I couldn't agree more. China's state capitalism is being given way too much praise than it deserves. It is certainly much more fragile than perceived (cronyism is rampant as is high inequality), and the Chinese themselves realize this. With respect to its forthcoming financial crisis, China has yet to face major fiscal sustainability issues. Another big problem is a huge ageing population. As the crisis hits and as the middle class expands China will be forced to change from state capitalism to liberal capitalism. If it maintains good relationships with the West it may endure this transition less painfully and with more resilience than any other country. This is its advantage but at the same time a big political risk.