Regulated Capitalism, Market Socialism

James Franklin

(Dissent no. 5, 2001, pp. 11-13)

Eric Aarons' `Why Communism failed' (Dissent no. 4) is welcome especially for its determination to go back to basics. The `infinite preciousness of every human life' in the words he quotes from Rai Gaita, has always been at the bottom of concepts like liberation and freedom. How could they not be, since what is the point of liberty, unless humans themselves are valuable?

Aarons is also convincing in his even-handed exposition of how the ideals of freedom and human worth became suppressed in the name of extremist ideologies that originally spoke in their favour, both those of the Leninist variety and those supporting the simplistic free-for-all of unregulated capitalism. He is perhaps not so accurate in his distant and dismissive view of the reasoning and the moral vision that actually stands behind the `economic rationalism' that has so successfully promoted itself in the last two decades. A closer view, one that listens carefully to its proposed justifications, will reveal some interesting features of it, both strengths and weaknesses, and indicate a way forward.

Economic rationalism has two strong points. The first is that when markets do work, they empower real people to decide for themselves how to allocate their resources. No unaccountable bureaucrat tells them what to do; they put their own money where they think they can best spend it. Other things being equal, it is better for people to decide for themselves what to acquire. Before debating the inequities produced by free markets, it has to be admitted that there is something desirable about a market as such, simply because it means the exercise of free choice by people. To approve of a market is not, as the Left has often thought, in itself to reduce human relations to greed, or to reduce humans themselves to heaps of dollars. If people wish to support, say, charity, or opera, or religion, the creation of a market in charitable or operatic or spiritual services is what will allow them to make their support count. If the state decides to subsidise education or legal aid, by some system that is equivalent to vouchers that can be spent only on state-inspected services, it creates a controlled market in things that are good for humans, in a way that gives human wishes a say (but not free rein).

The second strength of economic rationalism is its correct understanding that co-operation and competition are not opposites. On the contrary, it is competitive pressures that encourage co-operation. Within companies, or groups of companies, co-operation is necessary to get the job done and keep ahead of the competition. The normal activities of a business are almost all co-operative: ensuring the smooth running of the supply chain, paying suppliers, ensuring the quality of supply to customers, and so on. `Market signals'—that is, the wishes of real people—do count in business decisions, and do encourage innovation in areas that people want.

It is worth dwelling on the strengths of economic rationalism, because its weaknesses are the same as its strengths. Understanding how markets work, when they do work, is what makes it possible to understand why they don't work, when they don't. If markets work when people are free to allocate their resources, they fail to work, obviously, when people do not have any resources, or when they are ignorant of the quality and safety of the goods on offer, or when the goods are ones that cannot be individually bought, or when there is a monopoly of supply. Conservative economists have not been unaware of these problems, and have studied them under the name `market failure'. They have put forward solutions which, coming from anyone else, would have been called socialist: plans like anti-trust legislation to enforce competition and laws on the honest labelling of goods. These large qualifications to the official theory need to be remembered when market theorists are wheeling out the usual propaganda on the alleged ability of free markets to deliver the best of all possible worlds. (They could be remembered, too, when socialists in depressed moments are inclined to admit that `planning has failed' -- actually existing capitalism is full of planning.)

The same conservative theorists have been less keen to look into the implications of the second strength of economic rationalism, the power of competition to bring about large-scale co-operation. If co-operation to create internally co-operating companies and consortia is a good thing, why is it not a good thing also for labour to co-operate into unions, or the whole of society to join in defending itself against outside threats, such as global warming or rampant international capitalism? The dilemma goes back to the classic days of laissez faire theory. Factory owners were free to act without State interference, but when the Tolpuddle Martyrs formed a small `combination' of labour, they were rounded up by the State (!) and shipped off to the Antipodean gulag, also run by the State. One logic for the rich, one for the poor. The imbalance of power has improved somewhat since then—partly through solidarity by labour—but the logical shortsightedness among theorists has not budged. The most obvious contradiction in economic rationalist theory is its support for the global mobility of capital along with its denial of the global mobility of labour. Speculators demand their freedom to withdraw capital from Asian economies and cause social chaos, but if an Afghan refugee tries to migrate to the tycoons' front lawns and sell his labour to the highest bidder, he will soon find himself a guest of the State. (``Business migrants'', of course, are different.) Just as arbitrarily one-sided are the Reith plans for individual labour contracts. Businesses may form blocs of arbitrary size to consolidate their position, but there are sudden objections if labour indulges in collective bargaining to secure its side of the equation. Co-operation and its benefits, it seems, are a good thing only for one side. (I form strategic alliances to gain a competitive advantage, you do shady deals with Mafias to subvert honest trade, they plot with Luddite socialists to fetter free enterprise.)

So what is the way forward? It is not along paths like flabby `third ways' or Clayton's socialism. Success will come from encouraging the natural tendencies towards people-sensitive planning that are already in play. As Aarons says, co-operation is natural to humans, and so is the use of reason to plan. The success of capitalist enterprises like Microsoft is evidence of that. Notwithstanding some unethical behaviour towards rivals, the main reason Microsoft became rich was simply that they made something people wanted. (Not forgetting, in case IT is paraded as a purely capitalist success story, that computers themselves, the Internet and the World Wide Web were all developed with public funds and given away free.) Large-scale planning for the public good can work, if there is some way to ensure that the wishes of the people affected by decisions have an impact on the decision-making process. Under regulated capitalism, or market socialism—which Western countries already approximate, though not well enough—real people have money and use it in the same way they use their votes in a democracy, to gain some hold over those who make the decisions.

The reason why this vision is not a pipe dream is the fact, often neglected on the Left, that those in power are very good at guessing the reactions of anyone who might threaten their power, whether they be volatile electorates or fickle customers. Furthermore, it is possible to design systems that give people the power to pose a threat to those doing the decision-making. The idea that `market forces' act rigidly like the laws of physics is a piece of capitalist propaganda that does not fool real businessmen. They are well aware that what the profits of an enterprise are depends on how you do the accountancy. That is, there is room for giving people’s wants some hold over profit-makers by changing what is allowed to count as a profit. The prevention of industrial accidents is a model case. The capitalist might prefer to distribute the costs of his activities to others in the form of industrial accidents, pollution, poor working conditions and the like. But over the last century and more, the legal regime—through common law liability as much as through legislation—has gradually enforced higher standards of workplace safety. Capitalists have been forced to `internalise' these costs, that is, to pay for safety measures before counting their profits. Something the same has happened with pollution. The way to deal with industrial pollution is not to set up a giant bureaucracy to clean it up, but to extend ordinary legal notions of liability to force potential polluters to pay for measures to avoid polluting in the first place. If they can only count their profits after paying the real costs of their enterprises, capitalists will factor the necessary measures into their planning soon enough. The `multitude of individually inadequate but collectively effective strings' that Aarons imagines restraining the Gulliver of capitalism are already there in the combination of legal notions of liability with the tendency of those affected by bad decisions to organise in opposition to them.

On the Right, these matters have been the subject of heated debate, to the extent that conservative economic theory has split into two hostile camps. On one side is a group of unreconstructed Hayekian fundamentalists, asserting against all the evidence that the economy is a self-organising system that no-one can do anything about and no-one is responsible for. On the other side stand those, like the Coalition ministers Robert Hill and Tony Abbott, who are prepared to use government muscle to resculpt reward systems to accomplish social goals. (Hill's speech of 13/6/00 on how this works in environmental policy, makes interesting reading for anyone who may have been out of touch with conservative thinking for some time.) The Left must understand these developments and decide how much of them they agree with, instead of hankering after discredited Statist solutions or retreating to simplistic abuse of Economic Rationalism