Michael Mainelli: 'What do we mean when we talk about the free market?'

From a lecture by the executive chairman of Z/Yen Limited, given at Gresham College in the City of London

We haven't defined capitalism properly. Variety within capitalist systems is great. We have countries with over 50 per cent of GDP taken by tax, others with as little as 15 per cent. Some capitalist societies nationalised health or transport or telecoms or energy or broadcasting, others not.

While communists may believe solely in the "visible hand", social democrats make sure the visible hand stays in sight at all times as they try to remedy what they see as the inevitable market failures inherent in the system. In contrast, an overly-pure Chicago School disciple believes that, as the market always provides what is best, then this is the best of all possible worlds, except where even freer markets would make it a better world.

So, even if Francis Fukuyama's thesis is correct, that liberal democracy and capitalism are the end of the road, the new challenge is to decide within liberal democracy and capitalism what is best done by the "state" and what is best done by the "market". We move from a few macro-decisions to many micro-decisions, and this provides us with lots of other little puzzles to ponder.

At a firm level, why do the great multinational corporations look more like centrally planned bureaucracies than challenging capitalist hothouses? At a state level, why is a state with a chronic water problem at the heart of the US agricultural industry, producing almost all of America 's grapes and three-quarters of its strawberries? If the distortions of subsidised water are not altering behaviour badly enough, California also managed to manage its energy market into a joke, a joke full of brown-outs and black-outs.

At a country level, why do we have corporation taxes? Corporations are owned by us - directly or through our investments such as pensions. "Corporation tax" is a fiction - we pay the taxes as shareholders and the resultant confusion hampers the debate on the correct level of overall tax. At an international level, why does Europe persist in subsidising sugar beets well up in the northern hemisphere? Why do we still have poverty in a world where overall production is sufficient? If distribution is the problem, why can't markets fix this?