Markets and Morality

The collateral damage of The Good Right’s phoney war

The Good Right’s Good Press

Tim Montgomerie’s “The Good Right” certainly gets a good press. Like, for example, the fair trade movement, nobody can argue that they made a hash of their branding. Yet we still await a critique of free markets from its advocates that stands up to robust criticism. We are also waiting for a convincing explanation of how the state really can do better in those areas where it is believed the market fails.

Paul Goodman, in an interesting piece, referred back to Pope Leo XIII’s great encyclical, Rerum novarum, and suggested that The Good Right agenda is the Christian Democracy inspired by that encyclical. I think Paul misinterprets the Pope’s letter. I can’t quite see, for example, The Good Right agreeing to the limited welfare state implied by Pope Leo when he says: “True, if a family finds itself in exceeding distress, utterly deprived of the counsel of friends, and without any prospect of extricating itself, it is right that extreme necessity be met by public aid”. Nevertheless, a case can be made that The Good Right is trying to build a Christian Democratic consensus, though it smells more Disraelian to me. But, even if this is the case, it needs a robust critique of free markets, not one based on straw men.

And straw men certainly abound.

Nick Faith, for example, produced a justification for The Good Right, suggesting that government ministers were now also critiquing ‘capitalism’. Apparently, Michael Gove said: “Left to their own devices, capitalists seek out monopoly positions, form cartels and become rent-seekers. So we need Government to intervene.” Yet almost everything the government does (health, education, and so on) is a monopoly. Capitalists do seek monopolies, but in a free economy they are always under threat. Naomi Klein listed Blockbuster, Netscape and Kodak amongst “omnipresent” multinationals in No Logo, but buying anything from these companies today would be pretty difficult. With regard to rent seeking, this involves the corporate sector seeking financial favours from the state. You do not solve that problem through bigger government, but by reducing state favours.

More recently, Louie Brockbank argued that the housing market, high rents and high prices are the most vivid example of a capitalist system riddled with faults and failures. This is extraordinary. Even Tim Montgomerie agrees that state land-use planning policy is the culprit here.

The Good Right’s misdirected critiques

The Good Right’s own critiques of markets are no better.

In chapter one of his new work, Tim Montgomerie, lists the following problems of capitalism “as now practised in the west” (in his words). Each one is followed by a brief comment:

  1. Taxpayers underwrite many large too-big-to-fail banks….

This is simply not ‘capitalism’: it is a critique of corporatism as practised in the West. Indeed, I think that I invented the phrase “welfare state for bankers” to describe the bank bailouts. But, in other ways, government policy in this area reveals a failing of government. Almost every regulatory act, especially in the US (for example, encouraging loans to low income households, deposit insurance, weak bankruptcy laws in many states, underwriting securitisation and Basel bank capital regulations), encouraged the problem that Tim cites. What makes him think that new methods of intervention will work better?

  1. There is too little corporate responsibility from businesses infected with Milton Friedman’s teachings. There is a focus on short-term profitability…

The issue of corporate responsibility is one a Christian Democrat may legitimately raise about capitalism. However, short-termism is an odd accusation. If a business really is infected with Friedman’s teachings, it will pursue the maximisation of owner value. This means ensuring that the discounted value of all future profits is maximised. You cannot be short-termist and Friedmanite; it is just inconsistent.

  1. There is too little long-term investment – particularly in infrastructure.

How can this possibly be a criticism of capitalism? Businesses built the railways, canals and roads in former generations. However, they are prohibited from doing so now by a nationalised rail infrastructure company, planning laws (again) and (in the case of roads) the fact that the government alternative is free.

  1. Free trade agreements are being designed by politicians who have the interests of big business rather than of smaller, job creating businesses and the whole of society uppermost in their minds.

The main beneficiaries of free trade agreements are consumers and not producers. Producers have to compete with their foreign equivalents when trade is freer. Consumers get cheaper products: that is the point of free trade agreements.

  1. There is too little protection of the social institutions upon [which] free market economies depend, notably the family.

How is this a problem of capitalism and not a problem caused by the utterly destructive way in which the state discriminates against family formation through the welfare system?

  1. And fundamentally there is too much belief amongst free marketeers in the idea that self-interest and the invisible hand are sufficient for the creation of a good society – a belief that Adam Smith would be horrified by.

I don’t believe that Tim has ever named names or cited sources for this assertion. Every one of the main free-market think tanks in Westminster except the Adam Smith Institute (the IEA, the CPS, Politeia, Policy Exchange) has had its research and publication programme led by a practising Christian for a substantial part of its recent history and in two of those cases for the whole of the last 13 years or more. There are certainly a few people who believe that self-interest is a sufficient condition for a good society, but there are very few on this side of the Atlantic. After a Twitter battle, Tim Montgomerie quite rightly challenged Paul Mason to name one politician who believed: “that the natural state of humankind is to be a bunch of ruthless individuals, competing with each other”. Tim implies that libertarians in the political debate do believe this. Perhaps I can ask him to name one who has influence.

As it happens, if you really do want to see critiques of how the government interferes in banks, prevents private sector investment in infrastructure, promotes policies (including protectionism) that benefit big business and designs welfare systems that undermine the family, your first port of call would probably be free-market think tanks such as the IEA.

If Tim Montgomerie wants a free and virtuous society, we are all on his side. But, then he should create something like the Acton Institute in the US. But the mistake that Tim makes with all of these assertions is to denounce what he describes as ‘capitalism’ (I prefer the term “free economy”) as an economic system by seemingly defining capitalism as everything that happens now. This is a tendency of the political left.

The Good Right’s Confusion

Blaming capitalism (even if qualified by “as practised”) for failings which are nothing to do with capitalism is dangerous. It will simply make people less well disposed towards policies in which he probably believes. The creation of a free and virtuous society is a noble project. And robust debate is an essential part of a free and flourishing public square. But, we need to be sure what we are debating.

Interestingly, Tim did note in a chapter of his latest paper: “The system that is producing the reductions in poverty that we noted in the last chapter is not a pure free market. Government is involved in reducing inequalities, supporting innovation and infrastructure, and regulating bad practice. The system we are defending might more properly be called democratic capitalism” (emphasis in original). In making this point he does, in fact, refer to and laud Michael Novak’s The Spirit of Democratic Capitalism (though he does not mention that the UK version of that fine book was published by the IEA).

That is interesting. If it is true – and it clearly is – that the status quo is not a purely capitalist or market-based economy, then Tim must accept that the faults he finds are faults of that mixed system. That simply raises a question that Tim never addresses with theory or empirical evidence: are the problems about which he is concerned caused by interventions in the free market or caused by the market? For example, is it really the free market that is undermining the family or is it the welfare state combined with the land-use planning system? Economists describe questions such as these as “joint hypothesis” problems – though pointing this out is a question of simple logic rather than complex economics.

The answer really matters. If Tim makes the case against the market without proper justification or evidence, then he helps change the intellectual climate in which policy is made in a direction that is beneficial to the left. For some time, we have been waiting for a critique of what supporters of a free economy really believe and say that they believe, backed up by evidence or theory. We are in for a good wait yet.

Prof Philip Booth is the IEA’s Academic and Research Director.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.