Capitalism should not be a dirty word

Andrew Wilson

I’m sensing that capitalism is becoming a dirty word again, but only for those who don’t understand what capitalism is, and misjudge from whence their current ills may have come.

By capitalism what we mean is innovation, specialisation, and freedom of exchange. That is pretty much it.

It is hard to take offence at, and is responsible for the extraordinary betterment and enrichment (as Professor Deidre McKloskey puts it) of the past 300 years. The “equality” that drove this was that of equality before the law, and of social dignity, which emboldened and uplifted ordinary people.

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The current climate of an almost rhetorical war on success, conversely, does less to encourage people to risk their own capital and effort on an idea. Free trade and free markets have become whipping boys in the US Presidential race.

They are easy targets for extremist parties throughout the developed world, with seemingly little understanding of the billions lifted out of poverty, and the creation of a new global middle class, hundreds of millions strong.

The fact that for the last couple of decades this has been going on in the emerging world should not devalue the achievement, nor somehow make it less desirable.

For all capitalism’s successes, I do have to say that there is truth in the sense that any gains from the last few years have gone mainly to the existing wealthy.

However, I believe this has little to do with capitalism and everything to do with inflation.

Not inflation of consumer prices, but inflation of asset prices, as a result of the central bank policies of zero-interest rate policy, negative interest rate policy, and quantitative easing. Loose money has a tendency to end up in financial assets, and inflation has the greatest impact closest to where it is created.

That was not an unintended consequence of extraordinary monetary policy, rather the hope was for some “trickle down” effect, which so far has been largely absent.

I would argue a more effective set of policies - and by government rather than central banks - would focus on reducing the burden on mid and small sized enterprises, which will be the lifeblood of any serious economic rebound.

The expansion of government, regulations and taxes can sometimes be borne when economies are strong, even necessary (to some degree), but does clog the arteries of economies to an unacceptable extent during the tougher periods in the cycle.

The problem right now as I see it is that those who misdiagnose the issue with capitalism, and by which they more likely mean the negative impacts of corporatism, are predisposed to further increases in regulation and tax, when it is needed the least.

It would have entirely the opposite effect to that which was intended, unless for some the means is really thought to justify the ends.