I’m a pro-capitalist social democrat. No, it’s not an oxymoron. It means roughly this:
Philosophically, sure, I have qualms about a system that privileges the accumulation of private financial wealth about all other ends in life. But practically, I see no viable alternative to capitalism. What Churchill said about democracy – “the worst form of government except all the others that have been tried” – is equally true of capitalism. No other economic system could have lifted so many people out of poverty and harnessed the power of human ingenuity to create so much life-enhancing stuff – from books to mobile phones; houses to self-driving cars.
Is capitalism perfect? Of course not. Unfettered, it creates too much inequality, allows for too much rent-seeking rather than genuine value creation, centralises power in the hands of too small a minority who are too motivated by greed. The invisible hand of the market is entirely neutral on issues it’s not OK to be neutral on: chief amongst them, the damage we do to the natural environment.
So capitalism requires tempering, regulating and channelling towards the right ends. For-profit enterprise is the most powerful weapon we possess in the fight to eradicate poverty, avert climate catastrophe and end violence. But, if left entirely to its own devices, there’s no guarantee it won’t blow up in our faces.
That’s why I’m also a social democrat. I believe that governments have a massive role to play in reforming capitalism, curbing its worst excesses and making sure the right outcomes for society are incentivised. They do this best when they see the world not in binary terms – the state vs the market – but in symbiotic ones. Governments, with their ability to tax, spend and regulate, are powerful actors in the marketplace. And markets exist and thrive within a framework of law, order and infrastructure created by the state.
Twenty years ago, this point of view would have been referred to as “Third Way”. Someone with my views would have gleefully voted for New Labour in 1997 (no doubt I would have done so myself had I not been eight years old at the time). But today, across Europe and the United States, the Third Way is hopelessly out of fashion.
There are good reasons for this. 9/11 and Iraq shattered the New Labour dream, leaving many British progressives with a visceral sense of betrayal. Even without the Iraq debacle, there were flaws in the way New Labour put the Third Way into practice. By talking of “light-touch regulation”, they made being asleep at the wheel sound responsible. And while they took the heat out of the antagonism between state and market, their worldview remained essentially binary and sequential: it was up to capitalism to create wealth and then it was up to social democracy to redistribute it. This worked, more or less, for a decade while capitalism held up its side of the bargain.
But now, for almost a decade, growth has been sluggish at best and the signs are that it’s only going to get worse in 2016. Even The Economist, hardly renowned for its interventionist views, thinks it’s time for governments to step in (see February 20th 2016 issue). They advocate a mix of spending on long-term infrastructure projects and tax cuts for the poor, funded where necessary by increased borrowing, to stimulate growth and create jobs. The fact that the club magazine of the global capitalist elite is advocating policy options that will please Keynesians everywhere means that this is a rare opportunity to revive something akin to the Third Way. The centre ground of politics is less crowded than it has been in decades. Surely someone must fill it.
In-work benefits and the minimum wage
Much of economic policy debate right now is focused on how best to alleviate the suffering of low-wage workers. David Cameron has made a newly negotiated “emergency brake” on in-work benefits for migrants a key pillar of his EU referendum campaign. The social democrat in me is repulsed by the petty meanness of this policy, especially in light of the evidence that, overall, migrants actually make a positive economic contribution to the UK. In November 2014, The Economist reported the results of a study into the economic impact of European migration to Britain between 1995 and 2011. It found that migrants had made a net positive contribution of more than £4 billion to the exchequer over that period. To put that number in perspective, over the same period, native Britons made a negative contribution of £591 billion.
But are in-work benefits a good thing in the first place? I’m quite taken (as The Guardian’s Jonathan Freedland evidently also is) by Bernie Sanders’ argument that the Walton family – owners of Walmart – are in effect America’s “biggest welfare recipients” because the low wages of their employees are topped up by taxpayer-funded benefits. Arguably therefore, in-work benefits are a classic example of well-meaning policy-makers intervening in the capitalist economy in a way that creates precisely the wrong incentives.
Sanders’ solution is to dramatically increase the legal minimum wage (his goal is $15 an hour; Hillary Clinton promises a more modest $12 an hour). But this approach too is fraught with danger and the potential for unintended consequences. Raise the minimum wage too far and firms simply stop hiring. The notion of a stable corporate elite that can be endlessly milked and squeezed by the state looks increasingly outdated in this age of globalisation, disruptive innovation and reports of the end of work. The average lifespan of Fortune 500 companies has declined dramatically over the last half century – from 75 years to less than fifteen. And more than half the UK private sector workforce is employed by SMEs – companies that don’t have deep pockets like the Waltons do.
These are difficult issues to get right and they call for pragmatic flexibility rather than ideological rigidity. One good example of the pragmatic, flexible approach is Seth Harris and Alan Krueger’s plan to create a new category of worker, somewhere between a contractor and an employee, to take account of the new reality of the gig economy created by Uber et al. Similarly, on the minimum wage, perhaps we should consider not just having different levels in different parts of the country (to mirror cost of living), but having different levels for different sizes of company (to mirror the employer’s ability to pay). It’s high time that policy-makers found a way to turn on its head the common perception that, on issues like tax, there’s one rule for big multinationals and another for everyone else. A higher minimum wage for the likes of Walmart and Starbucks could become an effective tax on scale. Meanwhile, local businesses and start-ups would be incentivised to keep hiring with a lower minimum wage.
Protecting low-wage workers is undoubtedly important, but we shouldn’t lose sight of the bigger picture: how to create a high-wage, full-employment economy? To do that, we mustn’t fight against the creative power (and, yes, creative destruction) of capitalism: we have to work with it. Resistance is not only futile but ultimately counter-productive when it comes to trends like automation. Luddite anger at the machine that can do your job better and cheaper than you can has long been the Left’s equivalent of the Right’s anti-immigration rhetoric. Both are misguided. We need to embrace the potential of machines and immigrants to boost productivity and increase the value of work.
At the level of national policy, we need to channel investment towards infrastructure projects, renewable energy, education and the arts – creating jobs in the short term, whilst boosting economic output, sustainability and happiness in the long term.
Above all, we need to stop seeing capitalism and social democracy as opposing forces. They are the yin and yang of modern society: neither can survive for long without the other; both are stronger when they work together.