Clerical nostalgia won't solve unemployment

We are in a new game, which everyone is operating: market capitalism. Some will operate it better: more ethically, more efficiently
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The Independent Online
If you are surprised by the way the policies of the two major parties here have converged, look around the world and see a much wider convergence than anything that has happened here. All countries - well, virtually all - vie with each other to extend the market system to the remaining state-run parts of their economies.

So when, as he did this week, Tony Blair suggests that the privatisation programme will continue under a Labour government, all he is doing is putting into practice the same policy as, say, Ecuador, which is currently privatising its hydro-electric power utility.

Take another policy issue which, thanks to the Council of Churches, has come to the forefront this week - what governments might do about unemployment - and look around the world. Exactly the same agonising is taking place in, say, Morocco as in Germany and France: how to hold the budget deficit at 3 per cent of GDP in the face of very high unemployment. To read the view of our clerics you might imagine that this is entirely a British problem, whereas actually it is a universal one.

So what will differentiate policies in the future? What will differentiate countries? What is the nature of comparative advantage in a world where everyone is operating the same economic system? Is it just a question of competence: who can run market capitalism best?

Of course competence is essential, but I think that comparative advantage will require something more. And we are just beginning to see the outlines of what that might be. You can see it in some of the recent books emerging on both sides of the Atlantic. Thus, in America, Jeffrey Garten, dean of the Yale School of Management, argues in his new book on the emerging markets, The Big Ten, that one should differentiate between the "hardware" of market capitalism and the "software". The hardware is establishing securities markets, privatising public functions and so on. The software is establishing the ethical and legal framework within which these activities function. The hardware is the easy part - for example, everyone knows how to privatise - so the competition is in the software: issues like regulation, ethics and so on.

Here, some of those issues have been explored by Professor Richard Layard, of the London School of Economics, in his recent book What Labour Can Do. This is a political book - it carries an endorsement from Gordon Brown on the cover - but it is helpful in setting out some of those areas of "software" competition. Among the things he identifies as priorities for government attention are basic educational skills, long-term unemployment, competition policy and corporate governance, and fiscal and monetary stability.

But running an efficient market economy goes far beyond the confines of what an elected government can do. Another - less political - way of looking at this new form of competition is to ask what are the broader features that make a market economy work well.

Assume that fiscal and monetary policies are conducted sensibly. Assume that the government is competent at handling its own finances, that it raises money in a non-distorting way and spends it wisely. (You may think these are heroic assumptions, but one of the effects of globalisation is that bad governments are disciplined swiftly and brutally by the financial markets.) What else, then, is needed? I suggest that a successful market economy has at least three additional requirements.

One is a financial system which is able to allocate savings efficiently. Money will flow anywhere in the world where there are investment opportunities. But you need rules to make sure that markets give the right signals to investors. If you distort the markets, you get lousy investments. You can see this most clearly in Japan, where financial markets were rigged through the 1980s, and where massive errors of investment were made, for example over-investment in property. Those errors have piled up bad debts in the banking system which have inhibited the ability of banks to lend on new and more worthwhile projects, and hence made it very difficult for the Japanese economy to recover from recession. That is now appreciated in Japan, which is bringing forward financial market reforms on the lines of London's Big Bang of 1986.

A second area of competition is in legal affairs. Obviously the market system cannot operate efficiently until there is basic order in the streets, and property rights are established and enforceable. Russia is now discovering the costs of disorder, and Hong Kong businesses may discover that they have lost an advantage when the British-established legal system no longer provides an umbrella for their activities. But this is not just an issue for new converts to market capitalism. The US may well be at a comparative disadvantage because of an excessively expensive and cumbersome legal system. A lot of international business is carried out under UK law because, for all its faults, it is cheaper to operate under than US.

A third area of competition is regulation. The mood of the 1980s and 1990s has largely been one of deregulation. You can see that happening now in telecommunications, or just this week, in European air fares. But while many countries have successfully obtained an advantage by removing damaging regulations, it may well be that the next 20 years will see countries seeking to gain an advantage by clever re-regulation. That will not necessarily be done by government. Indeed national governments may be the wrong type of bodies to regulate efficiently in a global environment. The big trend may be towards light but effective self-regulation imposed by professional organisations or multinational corporations, who see that it is in their commercial self-interest to provide a stable and ethical framework. That is exactly what happened in the last quarter of the last century, a period which saw a similar process of globalisation as the present.

There is no hiding place. We are in a new game, a new open system which everyone is operating: market capitalism. But some of us will operate the system better than others - more ethically, more efficiently. Apply that test to political statements whether they come from professional politicians or from the Council of Churches. Might these ideas enable the market system to operate better? Or do they look backwards, with nostalgia, to a half-remembered past?