#39. Capitalists would be crazy to ignore inequality


Regular readers won’t need me to remind them that capitalism has been getting a bad name in recent years.

Free market economics has been blamed for the Great Recession (wrong: this actually resulted from dangerous banking practices, feeble regulation and debt-based economic policies). Banking and corporate scandals, we are told, are the product of free markets (wrong: scandals simply result from bad behaviour).

The latest and most powerful indictment, set out to good (or at least controversial) effect by Thomas Piketty, is that capitalism is the cause of widening inequalities of wealth and income.

What has disturbed me most about this is the way in which supporters of the free market have rushed, in their droves, to defend inequality. The all-too-frequent response to Piketty seems to be that capitalism and inequality are Siamese twins, and we should like it or lump it.

Frankly, this is dangerous nonsense.

It is dangerous because, if capitalism accepts the inequality tag, it will go the same way as feudalism, the French ancien regime and the Russian Tsars.

It is nonsense because free markets, founded in competition and operated ethically, do not create inequality. Corporatism, on the other hand, does create inequality, just as surely as absolute monarchy, feudalism and communism.

Supporters of popular capitalism need to put the record straight. I’m delighted to have been invited to write on this for CapX, which incidentally is a first-rate source. You can read my article here.

As ever, your comments are very welcome.


4 thoughts on “#39. Capitalists would be crazy to ignore inequality

  1. It’s a difficult one. Industrialisation creates inequality, because it has created massive wealth, and the greater the wealth, the greater the scope for inequality. This was quite clear to see in communist countries, but the same is true in capitalist countries, with the caveat that the working classes in capitalist countries were in real terms considerably better off than the lower classes in communist countries.

    You speak of the free market, yet you also imply a regulated market. That is something of a contradiction. The freer the market, the more you find that monopolies tend to accumulate. As for competition, this means that countries compete with one another for economic growth. In a sense, we are therefore competing with one another to use up our resources as quickly as possible, in the dash for growth. That’s what it amounts to – though we must also factor in the fact that we also (usually) strive to make our products as efficient as possible, and more efficient when new developments come along. You yourself, Dr Tim, have emphasised that we are getting diminishing returns on investment, because oil and ores are becoming harder and more expensive to extract. Not only that, we are messing up the environment hugely, which also causes us expense. Eventually, capitalism will fail and be replaced by something else. How many decades this will take, we can’t say – but there will always be a “market” of some sort – whether capitalist or not.

    You seem to be suffering from cognitive dissonance – as I am too. We have enjoyed, and still are enjoying, the fruits of capitalism and the technology it has brought us. Yet now it has passed its heyday. Until we transition to something else, which is less energy-driven and less resource-heavy, we must of course cope as best we can with the current system – and change it intelligently where possible. So your pieces have been thought-provoking and hopefully will help provide a template for going forward.

    • Great points, very challenging to answer.

      Capitalism works well in principle. The trouble is that if it’s left to its own devices it destroys itself – more successful businesses destroy or swallow less effective competitors, and we end up destroying competition. So capitalism does need to be regulated in some way – I know this is imperfect, but every system is a compromise.

      Likewise, I trust competitive (not crony) capitalism to create wealth – but I do not trust it to take care of society’s needs, and I accept that something else (implicitly the state) has to direct some of the proceeds of wealth creation into socially desirable ends.

      Where this thinking leaves me is with a compromise – but extremes, be they economic or political, frighten me anyway. So my “least worst” system is a mixed economy – capitalism creates wealth, but the state redirects some of that wealth, and also saves capitalism from corrupting itself through monopoly.

      We do, of course, need safeguards ON the state (hence my anti-corporatist “charter”) and safeguards OTHER THAN the state. Here one could mention ideals, generosity, altruism – but I would settle for integrity. What worries me a great deal about the UK today is the erosion of integrity……a subject for another time!

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