Hopefully I at least win points for the most pretentious title.
The recent history of the world has been one of a struggle between two predominant economic theories – Capitalism, and Communism / Socialism.
Capitalism is a system in which the means of production and the capital (hence the name) required to finance such things are held by a small sub-set of the population, whilst the rest of the population are employed by this sub-set to work the means of production for profit – i.e. for the benefit of the holder of the means of production. The various elements of this sub-set compete amongst each other on the free market to produce the most profit.
Socialism is a system in which the means of production are owned by everyone, worked by everyone, and the profits of the labour are owned by everyone.
For a good proportion of the 20th century the world was engaged in a grand experiment to see which of these two opposing ideals would win out, and ostensibly Capitalism came out victorious. Purists would argue that the “Communism” on display was false, and was essentially Capitalism in disguise – the subset owning the means of production was now the Party, not the Rich, but in almost all essentials it was exactly the same as the Capitalist system, apart from the lack of the anarchic effects of the free market having a detrimental effect upon the Soviet economy.
Along with the fall of Communism and the Iron Curtain came the rise of Thatcher in the UK and Reagan in the US, who eliminated every vestige of socialist thought and ideology wherever it could be found, and raised the Cult of the Free Market in their place. In this country, Thatcher presided over the castration of the unions and the dismantling of British state industries; replaced with private companies, they are now bound to deliver profit to their shareholders, instead of delivering the best for the British public.
This tendency has followed through all contemporary Anglo-American policy, on both sides of the Left/Right divide. The Cult of the Free Market is everywhere – an absolute belief that if the market will always find the right way, the most efficient way, the best way; if only government cuts out red tape, if only the government kept out of the market’s affairs. To some degree, this liberalising tendency (hence the name neoliberal) has worked over the past two decades. As bonuses of the bankers in the City of London have inflated, so has the prosperity of the country. The bankers’ benefit was our benefit, so it seemed.
It doesn’t take much of an analysis to see that the myth of the free market is essentially unsound; it’s based upon a simplistic application of the idea that local optimisation leads to global optimisation. In short, the hypothesis of the free market is: if everybody does what is best for themselves, then the outcome will be what is best for society. This can be shown trivially to not necessarily be true for all cases with a simple counter-example.
Consider panic buying of some finite resource, say, petrol. Assume for the sake of this argument that there is enough petrol for everyone’s needs for a week, after which the petrol is replenished. It is in the interest of society that each individual continue to buy exactly how much they need, then everyone will have enough for their purposes. However, in a condition where future replenishment becomes uncertain, or is perceived to be uncertain, it becomes in the interest of the individual to buy as much petrol as they can; to stockpile it. This means that some people will now potentially not have enough if they do not also panic buy. The best strategy in this situation is obviously for everyone to continue buying normally, then everyone will have enough for at least the week. Panic buying will ensure a lot of people have to little or none, whilst the others have too much. The natural “market”, if you will, behaviour creates a sub-optimal situation.
It’s a metastable equilibrium situation, i.e. there are two equilibrium states, and the system can easily decay from one to the other. The perfect scenario can exist under the system, but it requires only a small perturbation to throw it into a very undesirable state. This isn’t a particularly contrived example – a very similar one could be constructed that approximates the credit crunch, where the metastable state is economic prosperity, and the stable state is economic depression.
Essentially, the individual greed of the bankers creates something approximating a successful economy only under carefully controlled conditions, inside their little metastable box. Perturb the economic parameters too far, and all hell breaks loose as each of them tries to save their own skin, dropping the system into the stable state.
This is ignoring the other poisonous effects that such an accumulation of wealth has on society. It’s like throwing fertiliser into a lake; you get huge explosive growth that covers the surface of the water and starves the plants below of light and oxygen. Wealthy London bankers go out and buy second homes in the country, causing a property boom that prices people out of the towns and villages they’ve lived all their lives. These second homes that lie empty most of the year, choking the life out of these places. Wealth that can afford the best education for their children – practically a guarantee of a good university place, statistically speaking – and all the money and support needed to set their children up in anything. There is gradual ghettoisation as those who can afford to move out of “poor” areas into “rich” areas do. I could go on, and on, and on.
The sums that these kinds of people receive are phenomenal, but are they of any more value to society than teachers, nurses, police, doctors, or scientists? I would say they’re worth a great deal less, but because they handle the capital, the dominant force in our society, they are elevated above the more socially worthwhile professions.
The really sad part is that these greedy banks cannot be allowed to fall, as the misery inflicted on the general public would be too great. So these bankers must be rescued from their own folly by the governments who condoned, allowed, and supported their actions.
It’s a damned shame that a government that calls itself Labour is committed to helping these scum prosper, not wiping them from our nation entirely.
However much I may have condemned it above, there will always be a place for the free market, this is true. It does encourage many positive competitive instincts, but it must be viewed for what it is; one tool in the box for solving a complex problem, the principal-agent problem; that is, making it so that one body (the agent) working on behalf of another (the principal) does what the principal wants them to. Turns out it’s pretty hard to solve in a general manner. The free market is not the be all and end all.
As an example, take the principal to be a bank offering mortgages, and the agent to be a mortgage salesperson. The bank wants to sell a lot of mortgages, so they offer the salesperson a commission on each mortgage sold. The salesperson’s interest is not in the general health or wellbeing of the bank – he’s not here to debate about if selling a mortgage to Mr & Mrs Redneck is a good idea – he just wants his commission, so he’ll shift as many dodgy mortgages as he can. This is, excuse the pun, a pretty sub-prime solution to what the bank was looking for.
Idolising free-market capitalism is a mistake. There are roles to be played by socialist thinking instead – obviously the scope of what could be done is well beyond this blog post! Mostly because this is really long already, I’m not an economist, and I don’t have the real world to compare it to like I can with the vast free-market experiment. The alternatives include democratic control of institutions, for instance I would posit that transport in London has been improved since being under the control of a democratically elected Mayor. It’s so much better than the rest of the country, it’s really not even funny.
Anyways, I’m sure that many of you reading will think I’m wrong. That’s cool. I mean, you’re the ones who are wrong, but we can’t all be right, can we? Feel free to make your case heard in the comments, though.