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How to rehabilitate capitalism

1 February 2016 By Hugo Dixon

Capitalism is under attack. Witness the popularity of Bernie Sanders, the socialist running neck-and-neck in the opinion polls with Hillary Clinton for the Democratic caucuses in Iowa being held on Feb. 1. To rehabilitate the system of free enterprise, it needs to be buttressed by a modern conception of fairness.

Viewed from Mars, capitalism has been a huge success. Free enterprise has generated wealth and removed hundreds of millions of people from poverty. But viewed from Earth, what often stands out is how many have been left behind by the march of globalisation and technology, while others have got ahead by methods more foul than fair.

The classic left-wing response to the perceived unfairness of capitalism has been to tax and spend. That doesn’t work well. High taxes can sap entrepreneurial spirit, while high welfare spending can leave poorer people dependent on hand-outs.

Just because the classic response has been tried and failed doesn’t mean it won’t be tried again. The success of left-wing populists such as Greece’s Syriza party and the election of Jeremy Corbyn as leader of Britain’s Labour Party show that such ideas still have appeal.

This makes it important for centrists – whether they consider themselves left-wing progressives, radical centrists or liberal conservatives – to articulate a credible middle road. This should be based less on a view that fairness is the same as equality and more on the idea that people should get a fair crack at a good standard of life.

There are two main aspects. First, it is important to tackle the foul methods by which people and companies get ahead – and, in the process, make it tougher for hard-working honest people to make progress.

One example of this is evading or avoiding tax. This is rife in some countries, such as Greece. But it is a global problem that makes people furious everywhere. Consider the anger in January in the UK over how Google, the internet giant, was seemingly able to run rings around the authorities and pay what looks like a tiny amount of tax.

Corruption, which is again widespread across the world from Asia to Latin America and pretty much everywhere in between, also sticks in the craw. Sweetheart deals between politicians and business line the pockets of the few to the detriment of the many.

Another justified target of ire is the existence of markets that favour insiders at the expense of the general public. Finance is top of the list. The global financial crisis exposed how many bankers had a one-way bet: during the good times, they raked it in; during the bad, the state picked up the pieces. This was a mockery of how capitalism is supposed to work.

Monopolies and vested interests are yet another source of resentment. Sometimes, the culprits are the big oligarchs who pull the strings in government to get the rules written in their favour, by giving bribes to politicians or senior officials.

But often the beneficiaries of vested interests aren’t particularly rich or powerful as individuals. Greece is one of the best examples of the phenomenon. Over decades, it perfected the art of doling out special privileges to such an array of groups – farmers, notaries, pharmacists, civil servants, teachers and ordinary pensioners as well as shipping magnates – that its economy gummed up.

Such practices sap entrepreneurial spirits but they do so by locking people out of opportunity rather than by using the methods of old-fashioned socialism. They also inflict bigger taxes on honest citizens and higher prices on consumers.

A modern conception of fairness would put an assault of foul methods at its heart. But it would do more than that.

Although successful societies need welfare states, most of Europe’s need refocussing. Part of the problem is that too much government spending is directed to what Europeans call the middle class rather than the needy.

The situation varies from country to country but the main goodies are generous state pensions for middle-to-high earners and tax breaks that benefit relatively well-off people. To be fair, some countries are reining these in. For example, the UK no longer offers such attractive incentives for rich people to save for their retirement. But, in many countries, there is a lot that could be done.

The money saved from funding this “middle class” welfare state could then be redeployed where it is needed. The priority will often be to invest in schools so kids get a fair start in life – and in adult education so that older people whose skills become obsolete as a result of technology can retrain.

Such a conception of fairness is not really new. It has a lot in common with classic liberalism. Nor is it dead. Successful politicians around the world – such as India’s Narendra Modi with his fight against corruption or Matteo Renzi with his willingness to confront vested interests – are deploying some strategies from this playbook.

It is a rich source of ideas with which to tackle the unfairness of capitalism without falling for the inefficiency of socialism.


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