In support of true capitalism

Allister Heath at the Daily Telegraph writes:

It is a real tragedy that so many of the great and the good who are meeting in Davos this week don’t really understand the difference between genuine free-markets and crony capitalism. If they did, they wouldn’t be talking so much muddled nonsense about inequality, one of the key themes at this year’s World Economic Forum.

Real business people, who make their money in open, competitive markets, are entitled to their vast wealth but crony capitalists, who rely on state privileges, don’t deserve our support. The Left and the Right have both got it wrong here: the former wrongly attack all inequality; the latter wrongly defend all of it.

The blunt reality is that all societies are highly unequal, even supposedly communist ones. What really matters is the source of the inequality: are the wealthy rich because they looted everybody else, as was inevitably the case in feudal, pre-commercial societies, or are they prosperous because they profited from serving the needs of others in a competitive market? Is a society open to new talent and ideas, and encouraging of social mobility, or is it controlled by a small economic and political aristocracy that doesn’t let anybody else climb to the top?

This is so on the mark.

There are two ways businesses and investors can make money legally.

The first is by providing goods and services that people want, by working out correctly what assets will be in most demand or by investing capital in successful projects, all activities that boost economic growth, increase employment, help develop poor economies and lift living standards.

This is what the likes of Sir Richard Branson, Facebook’s Mark Zuckerberg or the financier Warren Buffett have achieved and their vast wealth is their just reward. We need more of these kinds of people and we must incentivise them to be as successful as possible.

Sir Richard is a great example of that. The world is a far better place for his entrepreneurial efforts.

The second way that businesses and investors can make money is by getting the government to rig markets in their favour – by erecting barriers to entry to restrict competition, by providing them with cheap credit or by allowing them to use their political connections to grab contracts and other privileges. These gains are not the fruit of value-adding economic activity. Rather than helping to grow the economy, they often merely redistribute wealth.

The more controlled the economy, the more you get this sort.

Britain made a temporary break from crony capitalism during Margaret Thatcher’s time in office, when state-owned industries were sold off, subsidies slashed and competition increased. To survive, old businesses had to reinvent themselves; their future was no longer determined by the cosiness of their relationship with politicians or by the hold of their unionised workforces on MPs in marginal seats. 

Same in NZ in the 1980s and 1990s.

Higher minimum wages were originally welcomed by some large retailers because they knew they would hurt small rivals. Big companies find it easier to hire the compliance officers needed to deal with red tape; in finance, large banks are more easily able to afford the vast amounts of capital now required, freezing out challengers, and lawyers and accountants will have even more fun.

There is a simple answer to all of this and it doesn’t involve punitive taxation, demonising the rich or fuelling jealously. The solution is to promote competition, tear up barriers to entry, unleash consumer choice, eliminate subsidies and soft loans and make sure that the only way an entrepreneur, a CEO, a banker or an investor can make money is by serving customers, discovering new opportunities or allocating capital more efficiently.

If the denizens of Davos are serious about making the world a fairer place, they need to reject crony capitalism and embrace the real thing.

Hear, hear.

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