Capitalism has a problem. Increasingly it is viewed as a deeply unfair system favouring a small, privileged elite at the expense of everyone else.
Our politicians have been quick to join the criticism. Last week David Cameron mooted granting extra powers to shareholders to restrain executive pay. Today he will give a speech on how to make capitalism more “inclusive”. Ed Miliband, meanwhile, has attacked “rip-off Britain” and backs forcing firms to consult workers on bosses’ pay levels.
There is a whiff of hypocrisy in some of these statements. Recent government initiatives include a plan to give top executives special access to ministers and a scheme to subsidise mortgages which will be run by the housebuilding industry.
Nevertheless, both leaders are correct in acknowledging the UK has a serious problem with “crony capitalism”. They are wrong, however, about the causes and solutions.
In fact, cronyism is quickly rooted out in a genuinely free economy. Companies that fail to incentivise success fall behind the competition. Cosy and complacent corporate cliques are outflanked by vigorous and innovative market entrants.
That is how markets are supposed to work. But Western economies have moved a very long way from free-market capitalism. It is not just that government spending now accounts for close to half of GDP; most sectors are also very heavily regulated.
For many firms, profits are more dependent on political favours than serving individual customers. Energy companies rely on rigged electricity markets for their reveunues from renewables; rail firms require operating subsidies; the defence industry needs government contracts, and so on. The banking sector is, of course, one of the most telling examples. Without the bailouts, many of the banks now being heavily criticised on pay would not exist.
Read the rest of the article on the CityAM website .