The 1970s and 1980s saw the revival of faith in market forces -reversing 50 years of disenchantment. Belief in reducing the economic role of government became a universal clich? even before the collapse of the planned economies of eastern Europe.
The victory of the market system was prefigured in the battle of ideas. The leading intellectual apologists for markets (no longer apologetic) found an attentive hearing in the 1980s under radical right wing governments in both Britain and the US. They are mostly American-although the doctrines they preach are partly attributed to the Austrian, Friedrich Hayek and, implausibly, to Adam Smith. They include political philosophers such as Robert Nozick and Ayn Rand; aggressive free market economists such as Gary Becker and George Stigler; and another school of economists-led by James Buchanan of the University of Virginia-who have developed a sceptical view of government action: the theory of public choice. I will label these individualist philosophers, neo-classical economists and conservative politicians "the new right."
The premises of the new right are austere. Private property is the most important social institution; self-interest the central human motive; insecurity the engine of progress. Government is inherently coercive and corrupt; fairness and justice mean respect for other people's property; trust is established by good attorneys and watertight contracts. If there is a place for nobler sentiments, such as altruism and sincerity, it is in our family lives, not in commerce; the social responsibility of business is to maximise profits.
Maybe this harsh view of human nature is realistic. There is ample unhappy experience to justify it: the dictators of eastern Europe seized economic power on behalf of the people, but used it to maintain their privileges; African politicians who took control of their economies often stole what they controlled. As we uncover the ecological disasters in the former Soviet Union, we understand that the environment is best protected when somebody owns it.
The new right position is self-reinforcing; people who are told that there is no need to apologise for selfish behaviour tend to behave selfishly. Perhaps Ivan Boesky went too far in proclaiming that greed was good-or so the courts thought when they sent him to prison-but he captured the spirit of an age. Senior executives justify their large salaries and stock options by reference to fairness and market forces. Thirty years ago, such behaviour was constrained by unwritten codes of behaviour; corporate managers were no more expected to use their positions to help themselves to the money which passed through their hands than were judges or policemen. Thirty years ago, high unemployment, or homeless people living rough, were assumed to be politically unacceptable. Today both these are politically accepted.
Even if these new right doctrines are persuasive, they remain unattractive to most intelligent and sensitive people. Perhaps economic efficiency, market forces and progress go hand in hand with selfishness and insecurity. Perhaps uncertainty, homelessness and growing inequality are the price we have to pay for high and rising output. Satisfying the demands of greedy executives and financiers may be the best way to protect our savings and acquire our cars and pot noodles. We may wish it were otherwise, but experience has shown that appeals to nobler feelings are not enough to fill the shelves of the supermarket or load the video recorder. We should just be thankful that there is more to life than economics.
These claims by the new right are false. The association of market economics and philosophical individualism, which is at the heart of the new right doctrine, is flawed. Libertarian philosophy needs to be defended in its own terms; it does not acquire legitimacy from the success of capitalism. Competitive markets may be an efficient system of organisation, but this does not mean that we have to accept the values of the new right.
Markets are social institutions; they operate within a social context. Yet our market models do not recognise this. As a result, they fail to explain a number of obvious facts. Switzerland and Japan-respectively the richest and (until recently) the fastest growing of the bigger economies-are not considered to be individualistic societies. Indeed, among the world's most successful economies, individualism seems to be the exception rather than the rule.
Moreover, the large corporation is the most important modern economic institution-an awkward fact for advocates of the new right. Economists go through contortions to avoid confronting this, describing companies by a principal-agent model in which shareholders, too numerous and busy to manage the company themselves, hire salaried managers to mind the store. Business journalists treat large companies as extensions of the personalities of individuals: General Electric is Jack Welch, Microsoft is Bill Gates. These descriptions bear no resemblance to the reality of corporate bureaucracies.
Individualism as an economic system revolves around the establishment and exercise of private property rights. The costs of such a system are high. Defining property rights is central; much time and expense are devoted to it. If rich individuals dispute property rights in the courts, poor people dispute them in the street. This is why individualism is associated with high levels of criminal behaviour, and this too has its costs, as those who have property must defend themselves against those who do not. Because trading in property rights is encouraged, individualistic societies have over-extended financial services sectors, in which considerable talent is devoted to activities of no real value.
Individualistic societies do not, on the whole, manage well those activities which need to be undertaken collectively: commodities such as environmental services and education are inadequately supplied. Politics degenerates into a clash between conflicting economic interest groups. And individualistic societies perform less well in commercial activities whose success depends on trust and co-operation between individuals and companies.
Criminal behaviour, environmental services and education are the main social and economic problems confronting the US. In these areas, non-individualistic market economies such as those of Japan, Norway, Singapore or Switzerland perform markedly better: all have low crime rates; the absence of lawyers in the conduct of Japanese business is as marked as their obtrusive presence in the US. True, Singapore and Switzerland have big financial services sectors, but this is because foreigners find their institutions more reliable than those at home. Public education operates to high standards; the streets are clean; and, save in parts of Japan, the atmosphere is unpolluted. Trust and co-operation in business also yield hard-nosed commercial advantages: Japan, Norway, Singapore and Switzerland are rich.
This may sound like an anti-American tirade; it must be qualified. An individualistic model of capitalism has its advantages. The US economy's record of technical and organisational innovation is far ahead of that of any other country; and its capacity for innovation is closely associated with its individualistic culture. American business is open to new ideas and change. Furthermore, the US may be the most individualistic of successful economies, but trust, co-operation, mutual respect and collective action are still important to US commerce. Nigeria is probably the most individualist of modern economies; it does not work. The US is at one end of the spectrum of effective market economies; but we should not universalise a stylised version of its economic system into a general model of how markets do-and should-operate everywhere.
there are several labels around for non-individualistic market economies such as those of Japan and Switzerland: social markets, stakeholding or communitarian societies, Rhenish or alpine economies. I shall call them "inclusive economies." The new right stresses autonomy-the individual's right to pursue freely his or her own interests and objectives. The alternative is to emphasise inclusion-the right, and also the duty, to be part of a community. The injustice that most concerns new right thinkers is coercion-a term they use to cover taxation and economic regulation as well as more direct restrictions on personal freedom. But another injustice is exclusion-the inability of some to participate in a society which they would dearly like to join. In inclusive economies, the exercise of property and other economic rights is not absolute; it is conditioned by prevailing social values.
Shared values, collective activity and broadly accepted concepts of fairness are not incompatible with the functioning of markets. In fact, they play a role in making markets work. This sounds as though inclusive economies rely heavily on appeals to our better nature; they don't. Experience has taught us that altruism as a basis for business behaviour does not work. Inclusive economies do impose sanctions on those who engage in inappropriate behaviour, but these are social and commercial, not legal. They are not coercive in the libertarian sense. You won't be put in prison if you fail to observe the conventions of Swiss or Japanese business behaviour, you simply won't be very successful. The coercion is subtle, yet entirely real. Some people find it oppressive.
Inclusive societies encourage the development of trust and confidence. They foster co-operative behaviour. This stimulates the acquisition of skills, the exchange of information, as well as flexibility within and between companies and their suppliers. Above all, inclusive societies provide security: they offer social security in the narrow sense; they also offer the security that comes from the stability of business relationships-in employment, finance and supply. Inclusive economies encourage long term behaviour; individualistic societies do not.
The result is not just that inclusive economies are nicer places to work-although mostly they are. Trust, co-operation and security have tangible benefits: they are the source of a company's international competitive advantage, providing the basis for high levels of product quality based on a combination of assembly line discipline and exceptional component reliability; they enable firms to undertake just-in-time inventory management and to share information in trust-dependent areas of financial services; they allow fast and co-operative reactions to changing fashions and markets. Close relationships along the chain of production have enabled firms to shorten model cycles. Japanese hegemony in automobiles and audio equipment and Swiss leadership in production engineering owe much to these values.
Security has direct as well as instrumental value. This is the political issue of the moment. In many respects, the performance of the British economy today is remarkable: low inflation, falling unemployment, stable growth. The widely noted absence of a "feel-good factor" is a description of the increased economic insecurity faced by individuals-the result of waves of restructuring by corporations and public agencies, but also the product of fluctuations in asset prices, especially in the housing market.
insecurity is not a force of nature, and it is no coincidence that it is particularly acute in individualistic economies. The conventional view is that it is an inevitable product of technological change and international competition. Many job losses, particularly in the public sector and privatised industries, have been the result of the elimination of long term over-manning. But the belief that large companies can no longer "afford" to provide job security does not stand up to scrutiny. There has been a steady increase in stock prices, dividends, and in the share of profits in national income since the early 1980s. Companies can afford to provide job security; but in the face of changes in social attitudes and pressures from the capital market, they have chosen not to.
At the same time, the social legitimation of individualistic behaviour has meant that the profits made by successful organisations are concentrated on fewer people. "Lean and mean" is the slogan. Its implication is that when companies create wealth, they are encouraged to distribute it to those who deem themselves responsible for that success. Thus we see well paid people working harder than they wish to, and others, not necessarily less competent, unable to find jobs at the going wage.
The effect of these changes has been to widen pre-tax and benefit income differentials and to transfer much of the cost of structural change in the economy from the shareholders of corporations to individuals. Much of that cost has fallen, via the benefit system, to the state: housing benefit, unemployment and social security expenditure directly (or indirectly) attributable to job losses have been the most significant elements of growth in public spending in the last decade. This rise in public expenditure is a direct result of individualism.
This may seem paradoxical. We have been conditioned by a political debate which assumes that economic power can be exercised only by individuals, or by the state. These are the terms of a traditional right-left, capitalist-socialist, free market-planner dichotomy. Both sides of the political spectrum have traditionally accepted this characterisation, disagreeing only on where the lines should be drawn: socialists find the concentration of economic power in the hands of individuals offensive, those on the right believe that its exercise by the state is coercive.
This polarisation becomes inappropriate once we realise that most economic activity is conducted through intermediate institutions which are controlled neither by government nor individuals, and that social values are a greater constraint on commercial behaviour than rules and regulations. When we attack the social role of intermediate institutions in the name of individualism, as we have done in Britain and the US, we may find that we increase rather than reduce the economic role of the state, as well as public expenditure.
Are Switzerland and Japan more or less regulated economies than the US? There is no simple answer. Neither the Swiss or the Japanese have anything resembling the rule book of the Securities and Exchange Commission. Both would find the hundreds of pages of codes and protocols, which the US has produced as the basis for the deregulation of its telecommunications industry, ludicrous. But the absence of formal regulation in Switzerland and Japan is made possible by extensive self-regulation-regulation by values rather than by rules.
This is why, often, less state regulation of economic activity is required in inclusive societies than in individualistic ones. The present British government has established more new agencies of economic regulation than any government before it: the financial services sector is an example of the substitution of an elaborate system of formal regulation for an older tradition of self-regulation based on tacit rules and shared values. In Britain and the US today, the right has been forced to face the fact that the role of government and its share of national income are no less than they were when their experiments began.
so what, if anything, can governments still do? The individualistic era in Britain was a reaction to a period of corporatist excess; but the alternative to individualism need not be corporatism. There is a huge difference between a market in which economic behaviour is influenced by widely shared values, and a centralised economy which is directed by those who determine what these values are.
The most effective inclusive economies operate within a fuzzy governance structure. Switzerland and Japan achieve the same outcome, but in entirely different ways. The chaotic, multi-level Swiss democracy precludes the exercise of much economic power by any single authority. In Japan, most centralising institutions lost their authority as a result of the second world war and allied occupation-allowing the strongly consensual nature of Japanese society to flourish at the level of the corporation and its keiretsu. The fuzziness of these societies has proved to be an economic virtue, not a vice, requiring adherence to a widely accepted set of social values while preventing any particular group from controlling their nature or evolution.
We should not simply aim to emulate Singapore, Switzerland, or Japan. Rather, we should recognise that there are many different social environments within which market economies operate. Aggressive individualism is not the only model-nor is it the best one. While there are strong elements of individualism in British society, there are also very different strands of thought: a long-standing recognition that property confers obligations as well as rights; a substantial tradition of public duty and public service; and an approach to political and economic crisis more often characterised by solidarity than recrimination. A free market economy does not require us to discard these things.
Governments cannot legislate for the social context of markets. But political debate can influence attitudes, and if the terms of that debate have contributed to the rise of individualism in the last two decades, the same mechanisms can be used in the opposite direction. One might begin, therefore, by asserting that unashamed self-interest is a vice, not a virtue; that the usefulness of an activity is not necessarily measured by its profitability; that what someone earns is not always an indicator of the value of their talents and abilities, still less of their moral stature. Profit is central to a market economy, but it is not its objective: if we admire Bill Gates as the most successful businessman of the 1980s, it is because he changed the world, not because he made several billion dollars.
There is much that government can do to promote the growth and legitimise the status of "intermediate institutions"-organisations which are neither controlled by single individuals (or small groups) nor by government. They include local authorities and public companies; autonomous bodies engaged in welfare provision such as occupational pension schemes; as well as organisations which are involved in the delivery of goods and services, such as housing associations, passenger transport executives, universities, training and enterprise councils. The breakdown of the traditional state has added to the number of such institutions. But little thought has been given to the governance and financial structures of these new institutions. Too often it has been assumed that the only alternative to direct state ownership is the plc. The plc framework has been adopted in contexts where the objective of greater autonomy from central government is desirable, but it is inappropriate for services such as water supply businesses or the railways. Even historically successful commercial organisations which are not plcs are finding themselves forced to adopt this mould because of a lack of adequate legal support for any other framework-as with mutual building societies and insurance companies, Lloyd's of London, and accountancy partnerships.
We invariably confuse market discipline with a particular capital market-led form of private ownership. But there are ways to achieve autonomy, accountability and legitimacy without being a plc. The most effective means of ensuring accountability is the measurement of managerial performance by comparison with other companies engaged in similar activities. And the simplest measure of performance is the delivery of goods and services which customers want. That is why competitive markets are often sufficient answers to issues of accountability and legitimacy. But the less it is possible (or desirable) for institutions to operate in competitive markets, the greater the need for accountability and legitimacy to be achieved in other ways.
Utility privatisation has illustrated this problem. Privatisation has produced substantial improvements in the efficiency of organisations by giving managers commercial freedom in the day-to-day running of their business. But the continuing unpopularity of the utilities is evidence of a governance structure which lacks legitimacy. The attempt to establish a "regulatory contract," under which firms maximise profit subject to an external constraint, is an unavoidable source of dissatisfaction. We must move away from the plc structure, while retaining the advantages of managerial autonomy and commercial discipline in a framework focused on customers, not the capital market.
the problems of individualistic societies have helped us to identify the issues which inclusive economies must address. The crime crisis in the US reminds us that the inclusion of disaffected communities, rather than the mere enforcement of the right to private property, is the only long term solution to crime. Then there is the litigation disease which, having swept the US, is now threatening Britain. The language of rights-perhaps because it has become the only political language available-has begun to be misused by the political left as well as the new right. We are in danger of forgetting that sexual harassment or treatment of the disabled are questions of values and behaviour, not procedure and compensation.
And the emphasis on trading in individualistic economies has its costs. We need to have markets which trade in stocks, bonds, foreign currencies, even derivatives; but only a fraction of the volume of trading which takes place in them is necessary. In inclusive societies, these activities do not command much respect. This in turn acts as a restraint on the volume of trading. In individualistic societies, no such sanctions operate; rather, we are encouraged to believe that what is profitable is valuable. But it is difficult to justify market economies as a means of creating wealth when the largest rewards have gone to those who trade in existing assets. This fever has spread back to the industrial and commercial companies, whose senior executives are obsessed with deal-making-merging, de-merging, and so on. We need to put sand in the wheels of these mechanisms; we must not bring them to a halt (there is no successful modern economy without efficient financial institutions), but slow the pace at which they revolve.
These are some of the issues-crime, litigation, financial services, utility regulation-on which it is possible to take principled, market-oriented positions which differ from those of the new right. The merits of market organisation are clear. The price mechanism has proved superior to central planning in managing the information and control systems needed for the functioning of a complex modern economy. Competition is a powerful stimulus to efficiency, innovation, and customer service. We can believe these things-and should, without feeling obliged to accept the political agenda of libertarian individualists. The language of inclusion provides the basis for so doing.
