Bad capitalism, good capitalism

I am very much looking forward to reading Steve Hilton’s book 'More Human' when it appears at the end of this week. His interview with Evan Davis recently was extremely revealing and I shared Evan’s feeling that he sounded more of a socialist than a conservative, which is what he professes to be. It seems that Hilton is arguing that we are sleepwalking into a world where we will find ourselves increasingly exploited by large organisations, in both the public and private sectors and that, further, there is a kind of ‘power elite’ of leaders who are economically and socially cohesive and who share concentrated power between them. Anyway, more will be revealed when the book appears. The interview also chimed with the common current criticism of Labour’s election campaign, suggesting it was too anti-business. It brought to mind a blog I wrote some time ago when I suggested something similar. At the heart of my concern is that we should be able to distinguish between ‘good capitalism’ and ‘bad capitalism’. Bad capitalism for me consists of companies who are exploiting their market power to exploit stakeholders. The stakeholders include their own workers, their customers, the community, taxpayers, sometimes their suppliers and even in some cases their own shareholders. The kind of industries where this kind of exploitation is common include energy companies, oil companies, supermarket chains, phone companies, insurance firms and, of course, the banks, the daddies of them all. I’d include, incidentally the growth of what might be called secondary market companies that operate on the net and increasingly hoard control over bookings for various services. These include the secondary events ticket market, hotel and holiday booking firms and now even restaurant reservation services. I am not suggesting these kinds of firms exploit all their stakeholders, but that they do exploit a substantial proportion of them. In addition, it has to be said that these industries are often characterised by barriers to entry so that they are able to maintain their market power against competition. Often, of course, these barriers are natural (e.g. the huge investment needed to enter a market, or the established reputation of existing firms), but sometimes they are manipulative, such as supermarket groups hoarding sites for possible development by competitors, threats to suppliers who consider serving competitors (which is illegal but difficult to detect), cartel practices such as banks colluding to control markets, secondary ticket firms buying up all available tickets, predatory pricing (reducing price temporarily to undercut new entrants, then raising prices when the competitors have been deterred) and a variety of other anti-competitive practices. We all know about the behaviour of banks in exploiting customers and rigging markets, but there are many other examples, such as energy companies remaining opaque over pricing structures (rail companies and airlines do the same). Complex pricing systems have the effect of making customers pay higher prices than they need to unless they can find their way through the small print. Many of us will recognise the problem of trying to find the best return on our cash savings or the best annuity deal. It can become a full time occupation! Insurance companies are notorious for small print – literally. Tax avoidance and evasion has now been well documented. It is not victimless. This exploits those taxpayers who cannot or do not wish to engage in such practices. The list goes on and on. Recently joined is the Premier Football League whose vast and ever burgeoning income does not find its way into the hands of supporters, exhausted by ever rising ticket prices that take advantage of their loyalty, but instead finds its way to greedy players and their agents who earn lottery win sums every week but continue to beg for more. Good capitalism is simply the opposite. I would offer John Lewis as an example, but there are clearly others. I think Prêt à Manger has good practices as do some internet tech companies. These firms pay decent wages and have strong career development systems, are transparent to their customers and do recognise competition as a natural feature of capitalism. Good capitalism also consists of thousands of small firms who lack market power and so have to look after their customers and offer quality, who are unable to keep out competition and who are unable to hide their true profits in the interests of tax avoidance. They do not rig markets, they do not exploit their customers through complicated price structures or they would have no customers at all, and they cannot erect barriers to entry. It may be true that smaller firms pay low wages as there is so much pressure on their cost base and they may have to offer zero hours contracts but that is inevitable in such industries, but as full employment looms even these firms will be forced to pay good wages or face staff shortages. Now back to politics. The implication of all this is that I would like to see policy makers, of any party, recognise the difference between good and bad capitalism. It should not be a case of being pro or anti business, but pro good capitalists and anti bad capitalists. This should impact upon such issues as corporate taxation, market regulation, tax enforcement, consumer protection and labour practice legislation. If we turn to ideology, there has been an ideological consensus in the politics of the developed world since the 1980s that says that the state should not intervene in free markets as this has a distorting effect. Underpinning this is a simplistic belief that runs: ‘free market good, state intervention bad.’ Further, the answer to all the problems of modern capitalism – of the kind I have described above – is posited as more competition, not state intervention. Time and again such policies have failed. The banks are the classic example, as are energy companies. The problem here seems simple to me to be this: When a market fails, as many of the ones I describe have done, the answer cannot simply be more competition. Even if more competition can be created, a market prone to failing will continue to do so. Markets that work in the interests of stakeholders are self-evidently desirable, but those that are failing cannot be treated in the same way. What I would like to see is that the state should intervene when a market is failing and has been failing despite vain attempts to revive it. The problem of distorting the market by state intervention disappears when the market has already been distorted by the market power of large companies, often acting as cartels. So, why not a state bank to compete on a fair basis with the others but which is not exploitive? Why not have local authorities building affordable houses for sale to its deserving residents when private constructors constantly renege on their promises? Why not a state railway corporation offering transparent prices? Some of this will indeed require international co-operation as governments remain petrified that, if they regulate businesses, they will take their offices and their investment elsewhere. This is another reason why UK membership of the EU is so vital. The EU has a decent record of controlling monopoly power. It can do still more. So let’s see Labour as not anti-business, let them be pro good business.