The moral tyranny of the free market

As the Labour Party battles out who will lead them into the next election defeat, it becomes clear that the dominant theme in the party is now one of 'nationalisation' of industries and services. Both candidates advocate taking the railways into national ownership, a call more easily made than done, as the recent Observer editorial argued.

Those were the times - Nationalisation in 1947

In a space best characterised as an echo-chamber, the rank and file of the Labour Party are competing for the most extremist positions, underpinned by what Hannah Arendt once called the 'emancipation from reality'.

However, the more interesting question is why leftists have such a visceral hatred for the market in the first place. Marx himself was by no means disinclined to let market forces do their work in the inevitable demise of the capitalist order. And Lenin himself used the free market in the brief New Economic Policy period to improve people's material lives following the deprivations of the Russian Civil War. So, why do socialists a la Corbyn have such as dislike for free markets?

Much of this appears to do less with where Corbyn and others want to take the country than with where they have been. Corbyn seems to cherish the old nationalised railways exactly because the image of British Railway branded carriages criss-crossing the country offers the certainties of old times. His and his supporters' desire to nationalise industries are motivated more by the past than any exciting vision of the country's future.

A second reason may however be a fundamental misunderstanding of the moral nature of the free market. When asked about the role of private providers in the NHS Corbyn reliably talks about profit in healthcare (conveniently denying the fact the GPs are running business as well which need to make a profit too). Corbyn does not seem to understand that profit is not the only, and often not the main motivator for people to set up businesses. The main reason why people become self-employed is because it gives them the opportunity to shape their own destiny and be in control of their lives.

Running a business is thus a fundamental manifestation of personal freedom. As people establish businesses they exercise a right which is tied up with personal responsibilities, such as making and keeping mutual promises and entering contracts. Running a business thus has a moral side as people operate in a contractual sphere which imposes civic obligations on them which in turn allows them to disclose their moral commitment to civil society. The recent focus on those who have tried to escape their contractual commitments (Philip Green e tutti quanti) only reinforces this point as they are the exception to the norm.

It is this moral aspect of economic activity that Corbyn and his left wing comrades refuse to acknowledge when they argue in favour of nationalising industries. Where such a policy would lead is clear for everyone with only a cursory knowledge of the sophisticated discussions amongst Marxists and Revisionists since the 1880s. Or, alternatively, if once prefers the Soviet Russian debate, one may look it up in Trotzky's critique of Stalinism. Nationalising an industry only achieves one thing. It puts the 'means of production' into the hands of a bureaucratic elite whilst removing the notion of personal responsibility for success and failure of economic activity from everyone. Where everyone owns everything, no one feels responsible, and the result is usually a steady but inevitable decline. Anyone remember British Leyland?

The dizzy heights of public ownership

In the winter of 2007, in a bout of hopeless nostalgia for socialist times I decided to spend my New Years Eve high up in the clouds above Berlin. Well, not that high, 290 metres to be exact, in the Television Tower of East Berlin.

By chance, I ended up sitting next to a former manager of the East German Socialist Planning Agency. The Agency was responsible to project the number of consumer goods needed, everything ranging from car tyres to toilet paper (there was only one kind, of the grey and rough variety). Planning periods ranged from 1 year (the short term plans) to five years. The projections would then be passed on to the Ministry of Economic Affairs which instructed East German factories to produce the relevant number of goods.

I remember distinctly that, despite this being almost 20 years after the collapse of socialism, my neighbour at the dining table was remarkably upbeat about the future prospects of socialist planning. The reason it had all failed the last time, he argued, was because they (at the Planning Agency) had not yet had computers with sufficient calculating capacity. This was likely to be different soon as computer capacity would become so large that you could plan the needs of millions of people at any point in time. At that moment, people would finally see the light and socialism would come back.

I was recently reminded of this slightly unhinged reminiscing with a former party comrade in Berlin's television tower when I heard Jeremy Corbyn suggest that most of the UK's problems would be solved once the railways, utilities and pretty much anything else would be taken into public ownership.

What really astounded me however was not that he advocated what had failed before. Rather, of all people, Corbyn did not seem to have read much Trostky. Having turned his back on Stalinism in Soviet Russia, Trostky produced a stinging critique of public ownership arguing, in essence, that where everybody owns everything, no one owns anything, leaving a small party political clique (or union nomenklatura) in charge.

Sometimes I wonder why socialists keep climbing the same dizzy heights of economic planning time and again. But then perhaps, the view from up high might be very comforting. Everything looks small from there, as if we can move things around according to the plans we have for them.

How not to tackle crony capitalism

In the public debate there are largely two different types of arguments about how to tame ‘rampant capitalism’. Both approaches share the same diagnosis of capitalism's main problem: a managerial class taking more than their fair share of rewards while socialising the risks of entrepreneurial activity. Banks are an often cited example, but other large quasi-monopolistic service providers such as water, power and gas suppliers have come in for criticism too. 

The two arguments essentially run like this. For one class of observers and commentators, the excesses of capitalism are a symptom of poor regulation, insufficient oversight and lack of transparency in company governance structures which make it difficult for shareholders to exercise control over managerial decisions and pay. This type of argument is cumbersome, complex and not very sexy. 

The other argument offers a more simplistic account of the economy and the ills of capitalism. It goes like this. Large companies are run by a clique of evil selfish managers promoting their own narrow interests, are motivated by greed and ride roughshot over societies and communities.  Ed Miliband’s intemperate word about the ‘energy companies ripping off ordinary people’ is in this vein. 

Who is right? Essentially the opposing arguments offer differing interpretations or perspectives on the same phenomenon, a dysfunctional, insufficiently regulated capitalism that seemed to have produced considerably disparate results for honest work across the world. So in the battle between interpretations, observing the results of actual economic policies may help us to adjudicate. 

Argentina offers just such a case. In a unashamedly populist move, Argentina’s president Kirchner, suggested to push legislation through parliament that will allow her to nationalise a controlling share in YPF, the oil production company of Argentina, without compensating the Spanish shareholder, Repsol. 

The initial reactions across the world was condemnation on the right and widespread applause on the left. If Kirchner will get her way, this is the first large scale nationalisation of an oil company since the 1970s. 

The initial approval on the left has now however given way to some more balanced assessments and some serious reservations about Kirchner’s policies. The Observer’s Will Hutton, while broadly supportive of the move, calls it ‘clumsy and unfair’. 

However, the most significant hesitation about this re-nationalisation is articulated in between the lines in a different article the same edition of the Observer. Outlining the reasons for the original privatisation of the national company in the 1990s, Uki Goni writes that Argentina's ‘national economy was largely closed to the outside world and all utilities were state-owned, inefficient and overstaffed.’ Following privatisation, many jobs were lost as companies had to become competitive and eventually Argentina entered a boom phase. Year later and with the economy booming, Argentina started to engage in public spending largesse under the government of Kirchner’s husband, financed by government debt. Now Argentina faces the consequences of this profligacy, trying to rid herself of public debt by driving up inflation. 

In this context, Kirchner’s policy of nationalising YPF can only lead to disaster. Putting herself and some close advisers in charge of the oil company will allow her to avoid the difficult choices she refused to make so far. No doubt, she will now expand the number of employees on the government’s payroll, trying to alleviate the impact of mis-management and rocketing government debt. 

Sadly, Kirchner is not alone in thinking that nationalisation somehow permits her to escape the harsh realities of economic laws. Ed Miliband argues along similar lines in the UK. The fact is however that state companies, operating as monopolies in utility markets, are the worst of all worlds for customers and societies. 

Nationalisation means that governments arrogate an enormous amount of economic power in their hands, strengthening clientelistic (or outright corrupt) ties between government officials and company directors, and reducing transparency and independent oversight. As state owned companies expand their workforce at the behest of government officials who want to bring down unemployment, creating phantom jobs, prices for utilities actually increase, driving up inflation and exacerbating poverty and deprivation for the lowest paid in society. 

Will Hutton hints at his doubts about this policy as he dubs the nationalisation programme of Kircher ‘a move form crony capitalism to crony statism’. Or, to put it more bluntly, sexy solutions to complex problems are rarely the right ones.