Capitalism does work – to the extent that we allow it to operate
24 October 2017
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Economic Theory
Brexit
25 October 2017
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4 November 2024
We all know that capitalism is failing.
Jeremy Corbyn has been telling us since the 1970s, before we even had capitalism. Theresa May, who assures us she’s a fervent believer in free markets, also believes those markets are broken. Now, it’s the captains of industry who are imparting their wisdom about the demerits of the system they are supposed to be steering.
But as Mark Twain admonished, it’s not what we don’t know that gets us into trouble, but what we do know that simply isn’t so. Wherever it is allowed to operate with some measure of freedom, capitalism is working marvellously – not just for the capitalists, but for ordinary consumers and the poor.
Look at China, where the advent of markets has seen a reduction in extreme poverty, from 84 per cent in 1981 to less than six per cent today. Or Latin America, where those countries which adopted largely open markets and free trade have seen incomes after inflation more than double since 1990.
Meanwhile, those which regressed, notably Venezuela, are increasingly gripped by want, disease, squalor, ignorance and unemployment.
You may say that the development of poor countries has come at the expense of the working class in rich countries. In fact, real incomes have doubled since Britain began the process of leaving socialism behind by joining the European common market in 1973.
Privatisation and liberalisation made such consumer essentials as phone connections, electricity and travel more widespread, cheaper, and increasingly available to the toiling masses.
Consider now how much better virtually every item of daily life is compared to even a few years ago. Not just smartphone apps, but cars (safer, cleaner, more comfortable), computers (lighter, faster, with greater storage), entertainment (more varied, cheaper, of greater quality), clothing (cheaper, more differentiated).
Real wages are also rising. It’s just that more and more previously unemployed people are entering the workforce at the lower end of the payscale. This brings down the average, but doesn’t mean anyone is harmed. In fact, we’re all better off.
Compare the current state of affairs in those areas of life where capitalism is allowed to operate to the dreary condition of our health system (which keeps patients waiting and dying at higher rates than elsewhere in Europe), education system (which fails to prepare poor and minority groups adequately for top universities), and planning system (clobbered so badly by planning restrictions that pensioners are now nearly three times as likely to own their home as those aged 25-34).
That’s failure. And those are the factors increasingly sapping the confidence and happiness of people in the UK and other parts of the rich world.
The problem with so-called business leaders who critique capitalism is that they operate within bureaucracies which are as daunting as the departments of Whitehall. Their professional experience is shaped more by dealings with politicians and other company bureaucrats than by daily negotiating with financiers, customers and suppliers.
Many of them work within industries where state regulation has so constrained the competitive process that whatever profits are made do not come from customer satisfaction, but from the rents created by protection. That’s why they are prone to claim that “a fixation with shareholder value at the expense of purpose” has afflicted firms.
But the purpose of business is to deliver value to stakeholders, and the most succinct measure of value creation is profit. Profit is purpose, and purpose is the improvement of our condition, which has patently happened under capitalism.
With our politics in disarray, our public services depleted of efficiency, and the international order disturbed by all manner of shocks, the appropriate question is not whether capitalism is working, but: is anything other than capitalism working at all?
This article was first published in City AM.
Jeremy Corbyn has been telling us since the 1970s, before we even had capitalism. Theresa May, who assures us she’s a fervent believer in free markets, also believes those markets are broken. Now, it’s the captains of industry who are imparting their wisdom about the demerits of the system they are supposed to be steering.
But as Mark Twain admonished, it’s not what we don’t know that gets us into trouble, but what we do know that simply isn’t so. Wherever it is allowed to operate with some measure of freedom, capitalism is working marvellously – not just for the capitalists, but for ordinary consumers and the poor.
Look at China, where the advent of markets has seen a reduction in extreme poverty, from 84 per cent in 1981 to less than six per cent today. Or Latin America, where those countries which adopted largely open markets and free trade have seen incomes after inflation more than double since 1990.
Meanwhile, those which regressed, notably Venezuela, are increasingly gripped by want, disease, squalor, ignorance and unemployment.
You may say that the development of poor countries has come at the expense of the working class in rich countries. In fact, real incomes have doubled since Britain began the process of leaving socialism behind by joining the European common market in 1973.
Privatisation and liberalisation made such consumer essentials as phone connections, electricity and travel more widespread, cheaper, and increasingly available to the toiling masses.
Consider now how much better virtually every item of daily life is compared to even a few years ago. Not just smartphone apps, but cars (safer, cleaner, more comfortable), computers (lighter, faster, with greater storage), entertainment (more varied, cheaper, of greater quality), clothing (cheaper, more differentiated).
Real wages are also rising. It’s just that more and more previously unemployed people are entering the workforce at the lower end of the payscale. This brings down the average, but doesn’t mean anyone is harmed. In fact, we’re all better off.
Compare the current state of affairs in those areas of life where capitalism is allowed to operate to the dreary condition of our health system (which keeps patients waiting and dying at higher rates than elsewhere in Europe), education system (which fails to prepare poor and minority groups adequately for top universities), and planning system (clobbered so badly by planning restrictions that pensioners are now nearly three times as likely to own their home as those aged 25-34).
That’s failure. And those are the factors increasingly sapping the confidence and happiness of people in the UK and other parts of the rich world.
The problem with so-called business leaders who critique capitalism is that they operate within bureaucracies which are as daunting as the departments of Whitehall. Their professional experience is shaped more by dealings with politicians and other company bureaucrats than by daily negotiating with financiers, customers and suppliers.
Many of them work within industries where state regulation has so constrained the competitive process that whatever profits are made do not come from customer satisfaction, but from the rents created by protection. That’s why they are prone to claim that “a fixation with shareholder value at the expense of purpose” has afflicted firms.
But the purpose of business is to deliver value to stakeholders, and the most succinct measure of value creation is profit. Profit is purpose, and purpose is the improvement of our condition, which has patently happened under capitalism.
With our politics in disarray, our public services depleted of efficiency, and the international order disturbed by all manner of shocks, the appropriate question is not whether capitalism is working, but: is anything other than capitalism working at all?
This article was first published in City AM.
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Capitalism needs to do away with Keynesian and return to the capitalism as envisioned by Smith
The three cases of failure identified above – namely the health system, education system and the planning system for housing have one thing in common – they suffer from a lack of real competition, which is at the heart of a free market economy.
What is also undeniable is the fact that, the type of competition used by the buyer to purchase goods, services and labour is the single most important factor that determines if value for money will be obtained, or not – especially so, if that buyer is the Government itself which, as a rule, always spends more than any other entity in any country around the world.
Central to any effective competitive process is what some Governments call ‘keeping up competitive tension’ between suppliers throughout the entire period of the competition. It is just another way of saying that Bidders should be exposed to the full rigours of the free market, that is, not shielded from ‘feeling the heat’ of competitive market forces (which interferes with decisions relating to the allocation of private capital) – from the time the Government engages with the market for the provision of goods, services or labour, to the moment the single Bidder is selected, as the preferred Contractor to receive the contract.
Whatever it is called, it is certainly not happening when the Government enters the market for military equipment. This is because the Ministry of Defence’s preferred version of competition to procure defence equipment for the Armed Forces is the ‘sudden death’ competition, which reduces the field of Bidders from six to one following a one-off release of the invitation to tender. See this illustration pic.twitter.com/xk0d8phEAJ.
The presently applied ‘sudden death’ competition used by MoD has been rendered ineffective by Defence Contractors, who are quoting identical bottom-line Selling Prices against the same requirement – which amounts to price-fixing on a grand scale, with the active connivance of the Secretary of State for Defence. See this illustration pic.twitter.com/BQV4KUgdNg. Worse still, MoD’s Project Team Leader is being denied the opportunity to choose the single Contractor on the basis of price competitiveness, and therefore value for money.
This has come about because MoD’s long-standing policy of disclosing the total budgeted expenditure figure or associated year-on-year financial funding profile in the ITT has resulted in Defence Contractors quoting identical bottom-line Selling Prices in their ITT responses – an entirely predictable result!
What’s more, the single Contractor has no incentive to perform or keep prices down the moment all five Competitors disappear suddenly, which would explain why defence equipment procurement programmes have been plagued by persistent delays and cost over-runs, for as long anyone can remember.
It is precisely to avoid this sort of disastrous situation from arising that the Government should do the sensible thing and quietly ditch this tried-and-failed competition policy and instead, set the objective of selecting the winning Contractor from a choice of industry teams, by running a multiple-phase winner-takes-all competition on the basis of a level playing field genuinely open to all-comers, including non-domiciled suppliers – to make sure it gets the very best value for money for the taxpayer.
Using the market-based instrument of fair and open competition to select a single Contractor has the beneficial effect of incentivising all Bidders to get serious about identifying, quantifying and controlling the prime equipment and its associated Support Assets costs – a process that begins at the time of preparing the response to the ITT for the first Contract performance phase. Bidders who fail to do so run the risk of being excluded from the next phase of the competition.
Normal commercial pressures and market forces inherent within the context of a multiple-phase winner-takes-all competition will, in themselves, compel Bidders to produce and deliver competitively priced, fully compliant ITT responses – not, because the Government says so, as some people in the pay of the State seem to think, but because of the omnipresent threat from the Competition!
The policy of Progressive Elimination – removing Bidders one-by-one during the winner-takes-all competition requires that, a Bidder who scores worst against the selection criteria should be eliminated immediately after the Project Delivery Team has taken receipt of ITT responses and another, who has performed least well, at the end of each Contract performance phase, as shown in this illustration pic.twitter.com/RUToAZ6thx.
That is to say:
(a) From seven Bidders to five immediately after taking receipt of responses to the ITT for the first Contract performance phase.
(b) From five to four at the end of the first Contract performance phase.
(c) From four to three immediately after taking receipt of responses to the revised ITT for the second Contract performance phase.
(d) From three to two at the end of the second Contract performance phase.
(e) And finally, from two to one after taking receipt of responses to the revised ITT for the final manufacture and in-service sustainment phase.
The ultimate result is one winner and six losers at the end of the multiple-phase competition.
Another beneficial side-effect of applying this fully inclusive, winner-takes-all competition policy is that it will remove long-standing distortions and inefficiencies in the Supply Chain – by identifying and rooting out those Subcontractors who have positioned themselves in the extended Supply Chain but are not actually adding any value, that is to say, people who are acting as middle-men by simply raising invoices against the value of goods and services produced by lower-level, small and medium-sized enterprises suitably marked-up to reflect their cut of the action!
@JagPatel3