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The image of capitalism is a popular illusion

08 March 2018 by Anthony Hilton

The image of capitalism is a popular illusion - Read more

Free-market capitalism is more tied up with government than many people think

Driving at 70mph along the busy five-lane freeway that connects the airport to the centre of San Francisco, the driver of a Tesla electric vehicle removed both hands from the wheel and his foot from the accelerator, then turned to a passenger in the back seat.

The car was left to drive itself amid an ocean of traffic, with its speed and position controlled by on-board sensors and cameras. It can park itself too.

With Silicon Valley just a short hop down that same road, it is easy to think of this as yet another triumph of US capitalism – and up to a point it is.

But the other truth is that the Tesla is heavily subsidised by a state and government keen to encourage the development of the technology. Without the subsidy, it would be too expensive for a mass market.

Capitalism is supposed to be about free markets and individuals pursuing their own desires and paths, but Tesla reminds us to ask how much freedom there really is.

UCL Professor Mariana Mazzucato has written extensively on innovation and what spurs it.

She points out that that even such an iconic invention as the iPhone depends heavily on technologies that were originally discovered in US government labs, under government-funded research programmes. Even Steve Jobs needed a helping hand from government.

And how truly capitalist is the FTSE 100? An analysis by another academic a few years ago pointed that the current and future prosperity of many of its companies were far more a function of how well they handled their relations with government than how good they were at satisfying customers.

“You have to question how much control a business has over its costs when it is governed by health, safety and employment legislation”

Many, including transport and phone companies, or electricity, gas and water utilities, are told by a regulator directly or indirectly what they can charge in what are near, if not actual, monopolies. Whether the regulatory determination is harsh or lenient is what drives those businesses.

Others have the state as a major customer. The generosity or otherwise of government procurement contracts drives the profitability of defence contractors, nuclear and conventional construction companies, drug firms supplying the NHS, and educational establishments dependent on research contracts.

The outsourcing contractors like Serco and Capita get a huge slice of their revenues from government – as did the now dead Carillion. It may seem now to have been subject to business model and corporate governance issues, but for many years it seemed to add value and dividends to its shareholders.

Other industries benefit from barriers to entry imposed by government licencing requirements.

Competition in banking has long been restricted by the difficulties of getting a licence, while potential innovators in insurance, fund management and a host of other financial activities face similar obstacles with regulators.

But they benefit once they are established. Having insurance, for example, is a legal requirement for many activities, not a commercial decision.

External regulation is an issue even in something as ferociously competitive as food retailing.

For many years Tesco dominated the industry, not really because its food offer was miles better but more because it was far more effective at managing the planning process and could open new stores at two or three times the rate of its competitors.

All this is before you get into the big picture stuff. You have to question how much control a business has over a significant slice of its costs when it is governed by health and safety and employment legislation, and has to pay at least the minimum wage.

When you then factor in that over 30% of the economy is public sector employment in central and local government, tax and revenue collection, education and health, you begin to wonder what we actually mean when we talk about capitalism.

If it exists today, it is down in the SME sector, because it is only down there that business is still business rather than bureaucracy. But there are even some SMEs where they are in effect working for a multinational.

Does it matter? Less perhaps than we think. It is generally accepted that the UK became much more free market focused and capitalist with the arrival of prime minister Margaret Thatcher in 1979.

A recent study by Cambridge economists Graham Gudgin and Ken Coutts of Britain’s economic performance in the 30 years before Thatcher’s liberalisations and the 30 years since found, however, that by almost any metric you cared to choose – productivity, growth, employment, return on capital – we were more efficient before.

Hard to believe, but true.

Anthony Hilton is financial editor of the London Evening Standard

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