The Market Works - If Only We Let It
Westerners are so self-obsessed. Europeans and Americans talk as if the whole world is in meltdown, when in fact most countries are blithely unaffected by their little problems. In 2008, world GDP stood at $62 trillion. By 2012 it had grown another sixth, to $72 trillion – astonishing.
Even more astonishing is that back in 1989, world GDP was less than $20 trillion – and half of that was America’s. But that was the year when the world realised that its 70-year experiment with socialism had failed, pulled down its walls, and embraced markets and trade. That is what has propelled two billion people out of abject poverty in just the last 25 years.
Today, 80% of China’s growth, 80% of its employment and 90% of new jobs come from the private sector, not government. India’s growing IT businesses now account for 7% of the global market and are headed to earn $225 billion by 2020. Almost everywhere is much better off, apart from a few outposts where capitalism has not yet penetrated, and that has brought social improvements too – huge rises in literacy (especially female literacy), better nutrition, better health and greater life expectancy. And the very poorest have benefited most: world inequality has fallen massively.
Our own problems stem from too much government interference in this benign system, not too little. Politicians and central bankers love creating booms: it makes them look good. So they spend wildly, make credit easy and print money, making us all feel better off. This time it’s real, they told us again as the fake boom unfolded: it’s new technology, expanding markets, the peace dividend. But, like the Roaring Twenties, it was actually another credit- and cash-fuelled party, leaving us with a similarly big headache.
After several shots of such intoxicating ‘liquidity’, the party was already in full swing when the Fed cut US interest rates after 9/11, from 6.25% to just 1%. With loans now six times cheaper, Americans rushed out to buy unaffordable homes and luxuries and invest even more in producing them. Taxpayer-guaranteed mortgages fuelled a housing bubble, while laws forcing banks to lend to poorer households created the sub-prime crisis.
Eventually, the bubble burst, leaving us geared up for a boom-time economy gone bust. We have the wrong assets in the wrong places, still producing boom-time stuff. We need to go through the pain of re-allocating them, not to prolong the agony with a hair of the dog in the form of rock-bottom interest rates, and Help to Buy.
As for the banks, they’re too big. Five – Barclays, RBS, Lloyds, HSBC and Santander – hold 80% of the UK's banking and (with Northern Rock) two-thirds of mortgages. Why? Because banking is the world’s most highly regulated industry: only huge banks can afford the huge compliance cost. With no real competition, they can overpay themselves without concern. And with taxpayers guaranteeing their customers’ funds, they have every inducement to take excessive risks.
We need to cut regulation on smaller banks and encourage more into existence. Competition is the best regulator, focusing companies on long-term customer value not quick profits. And the threat of going bust keeps them careful and sound. Where competition prevails, firms are accountable to the public in the most direct way – through the purchasing decisions their customers make every hour of every day. Customers are free to go to someone who satisfies their needs better / faster / cheaper. Competitive firms make money only by retaining them and generating value for them.
Competitive markets therefore generate value and progress for the whole of society. Political intervention usually does the opposite. Pressured by interest groups and businesses, the politicians hand out subsidies, bailouts and regulations that benefit large and well-connected firms but stifle the creation of new ones. That is not capitalism, it is crony capitalism – crapitalism – and it is indefensible. But only the politicians have the power to corrupt the competitive market process and create this cosy world.