Last week I was at a Conservative Policy Forum making the case for capitalism. I will lay out my arguments for capitalism in this article as it will allow me to expand more on my arguments that I put forward in the forum. I am unapologetic about being an activist in promoting a free-market system however we need to make one thing clear before I go on. “Capitalism” has many origins but one of the most popular is from the father of communism, Karl Marx, in his work Das Capital as a critique of the system of privately owned means of production for the pursuit of profits. As the word is famously used as a critique of policy I support, I will not be using the word “capitalism” again in this article and will instead use the much more accurate term “free-market”.

Now onto more important points, as this is a conservative policy forum I would like to point out that the conservative party has been rarely putting forward pro free-market policy for as long as I can remember (I’m 26 and only really lived under Blairism and it’s conservative offshoot, written about by Callum here). Many people think Blairism is Thatcherism with slightly more public spending, well this is far from the truth and the Conservative Party has only been going down the Blairite road since Cameron won the minority government in 2010.

According to the IMF Blairite New Labour saw the second biggest rise in public spending from their win in 1997 until their loss in 2010. If the Conservatives were for a free-market you would expect to see a drop in public spending, however you do not as shown in the graph below (source):

As you can see post 2010 public spending only dropped once in 2013, however remains at levels above the New Labour years, despite cries of austerity throughout the years.

However there is more to this than public spending, a free-market system does not necessarily mean there can be no public spending whatsoever unless you are a free-market fundamentalist. Taxation is another area free-market activists like to look at as a general gauge for how pro or anti free-market a country is. Once again, the Conservative party fails to be pro free-market here also. As shown below from the OBR’s data, the forecasted tax burden will be at the highest levels since the 1940’s:

Unfortunately there are militant anti free-market campaigners around the UK that won’t even allow for any sort of tax cut, or even stop the promises of tax increases! This was shown quite evidently over Liz Truss’ time in number 10, as her “tax cuts” wouldn’t even take the tax burden down to 2019 levels, which were still highest from when the Conservative Party won in 2010! This was constantly regarded as a “far-right libertarian” budget despite there being only 1 tax cut.

(Source: https://www.resolutionfoundation.org/publications/cutting-tax-cuts/)

The current government has also been doing badly in free-market indices . According to the Fraser Institute, the UK has a generally free market, with scores consistently above 8 over the past 4 decades. Post 2019 we are now moving to below 8 making us the 22nd freest market economy, down from 11th in 2019, and all major parties seem keen on moving that even further down:

In an ideal world for free-market activists we would see this line go up, as countries at the top of the rankings, like Hong Kong and Switzerland, have very strong economies. It just so happens there is a very strong correlation between successful economies and their free-market index, why not aim to be at the top?

Before I move onto the questions there is another quick point that needs to be made: our economy is on the verge of breaking, and there is not an awful lot we can do about it. Christopher Snowdon wrote a substack article as Liz Truss was being blamed for the rocky markets after the mini-budget announcement. The summary of our economic condition is this: We currently have a public debt of over £2tn, have had artificially low interest rates for over a decade and record inflation all because successive governments have been addicted to it since the 2008 crash. People claim we are in a time of unfettered “neoliberalism” which was simply the free-marketeer’s answer to the problem of post-war consensus Keynesianism, the type that led to the inflation in the 70’s. Well now we simply live in the world of the Keynsians again, only now they’ve tried to answer the problems the neoliberals such as Thatcher managed to answer.

This answer was quantitative easing, which the Bank of England explains in detail (think of it as money printing with extra steps). To summarise, a central bank will buy bonds, that bond money is then invested into shares or other private assets to yield higher returns than the bond to pay it off. Some of these bonds are bought from private banks, artificially increasing the reserves the banks have, this in turn decreases the banks interest rates artificially allowing for banks to hand out loans at artificially low interest rates. Sounds like free money, however half of that £2tn public debt is through quantitative easing, the bonds need to be paid off, so they do this through printing money or liquifying the private assets, nullifying the free money. Of course this affects the private banks too, they may have more reserves but now that inflation is hitting their reserves value, the artificially low interest rates have allowed the banks to hand out loans they would not have under market conditions. This creates a problem in that more loans than under market conditions have been handed out by the bank, such as mortgages, but the reserves for the banks are dropping and so these loans will need to be called in earlier or money will need to be printed to bail them out. This is economic orthodoxy now, almost every central bank in the world is doing this, every country is suffering from the economic hangover of central banks trying to get free money, and whoever is in power when this orthodoxy is questioned get hounded out for causing the issue that has been brewing for decades.

No free-market activist has been in favour of quantitative easing, and many free-market think tanks have been begging for an end to the practice along with planning reforms, an end to Net Zero policy, the end of nanny-state policies and much more. Policies that the conservative government constantly enforce and only once in a while break, such as the opening of the new coal mine in Cumbria.

Now that I have set the scene for the Conservatives position on free-markets, I can now go forward and get into my case for the free-market. The Conservative Party Forum has 7 questions up for discussion, and I will be going through each one and making my case for the free-market, with plenty of case studies to support my point.

Q1. If you had 30 seconds with someone to make the case for capitalism, what would you say?

This is a tough question because it really depends on who you are talking to. If it is an ardent communist it’s easy “show me where communism works while I go through the top 5 highest rated countries on the free-market index and show why this is the cause of their success.”

Most people fortunately are not communists, however according to the IEA, about 75% of young people like the idea of socialism and want it implemented by the government, such as by nationalising many private sectors such as energy and water. About the same amount blame the housing crisis on “capitalism” while the issue is mainly driven by supply-side restrictions such as planning and demand side being inflated by huge amounts of immigration.

For these people there is a bit more issue, as in school they do not learn of the tragedies that nationalised industries caused in the 70’s, such as the winter of discontent, and only hear about Thatcher as a “milk-snatcher” and closer of coal mines. Turning this narrative upside down for them is quite a challenge, especially since most of them believe we have lived under Thatcherism for the past 40 years, but I believe it can be done.

For these people I would summarise my argument as such:
“Nationalised industries were, and are, awful as there is only one way to hold them accountable, that’s at the ballot box every 5 years, the government will only act on the industries every 5 years cynically for your vote. If their industries were private, you’d get choice into where your hard earned money goes, you don’t like what Nestle has done with water supply in South America? Well you have plenty of alternatives to their products to choose from. If your government was doing that centrally, you can only protest or vote them out in a few years. You can affect private companies immediately by taking away from their bottom line, you have to pay for nationalised industry regardless and you get less of a choice in the services and goods they provide you. Which sounds more fair to you?”

Now this is away from why we talk about the economy, which is how we should use our resources most effectively? Most voters don’t care about this, they simply care about the system being “fair.” Socialists have done a very good job of convincing the public, mostly younger people, that socialism is the only fair way forward, so you need to attack them on these grounds but the government has not been helping with this argument for free-market activists because ironically they are making things more unfair via anti free-market policy.

Q2. How might we best promote capitalism to the next generation? 

Young people especially are in a tight spot, many want to be able to afford a home to call their own, they want a job market that gives them opportunity to progress to higher salaries, they want to feel like they can afford a child while not working so much they can’t actually see them. Economic news to these young people has been dire for as long as they can remember, I myself was born in 1996 and memories of economic news only exist post 2008 crash, house prices have been rising ever since, median salaries in real terms have not risen substantially according to the ONS, what exactly has the economy over the past 15 years given reason for young people to be hopeful?

Since many young people wrongly think this is due to a free-market economy it should be the Conservative Party’s ambition to destroy this narrative. Labour are not wrong when they say the system isn’t working for many people, I myself was working for £12,000 a year after university working just under 60 hours a week in a part-time job and unpaid internship to get the experience needed to get into my career. I was lucky with this as I have excellent parents who were supporting me through that time, but not everyone is as lucky as me and would not have that opportunity.

If we had a free-market economy, we wouldn’t have minimum wage, which would mean my internship could have been a paid one under current minimum wage, but I’d be working less for about the same amount of money and getting more on the job training. Planning law reform would mean houses wouldn’t need to be new builds costing half a million pounds and more would be built reducing the prices making it a possibility for many young people to buy before they’re 35. These are just a few examples on how we can push back the narrative that the free-market is to blame for our economic woes, for now however I will move on.
 

Q3. What international example do you think best exemplifies the benefits of capitalism?

As mentioned previously, any of the top 5 from the free-market index list, Switzerland is probably the best example to compare to the UK as they are both in Europe and outside the EU. Switzerland is currently 3rd highest on the free-market index at the Fraser Institute, and currently boasts record low absolute poverty at 0.1%, while in the UK it is 0.7%. Happiness in Switzerland is 3rd highest in the world, while Britain is 17th. In short it is successful in a lot of metrics that young people care about, though not inequality but that is something I do not care about and would try to explain to them why but that is for another article.

The reason Switzerland is such a good example of the free-market being successful is that a lot of assumptions made by many in the British public are refuted by Switzerland’s policies, shown in detail here but I shall go through key points.

First, Switzerland has a very decentralised government as opposed to the UK, 95% of our tax revenue is gathered at the national level, this is incredibly high compared to every other country in the world, and leads to the word “Whitehall” only having negative connotations, but many in Britain would be ok with that if the money was being spent how they saw fit. However it never will as you simply cannot satisfy 66 million people this way.

This is why Switzerland’s system would be better, much of the tax revenue is funnelled to Canton governments, they’re the Swiss version of counties. These cantons enjoy a level of autonomy that counties and cities in the UK can only dream of, allowing for good local public transport systems that the Swiss national government has little say in, while many UK public transport projects need to be looked at on the national level, just because that’s the way we’ve always done it.

These Cantons are also in constant competition with each other, if one raises taxes they start seeing people moving to other Cantons with lower tax rates. Cantons with better public services will be more attractive to people too, meaning more people move in and more tax revenue for the Canton’s government. This is free-market theory in action on a local government scale, as shown by the high free-market index score Switzerland’s Cantons are also in a race to allow their inhabitants to be free and trade, which again will increase tax revenue with the increased flow of trade that the local government gets a share of, and the local people can have a better input into how the local government is going to spend the money. If they find it too badly run to bear, the Canton next door may be much more suitable!

Switzerland also succeeds with a market-based healthcare system. For years in the UK we have seen headlines that the NHS is failing and now we have a waiting list of over 7 million people. Not only that but the NHS is one of the worst healthcare systems in the world for cancer survival rates and stroke patients.

Switzerland’s system is very much based on free-market principles, unlike the UK, there are no state-funded health services, only private health insurers that by law you must pay for as a Swiss resident. Due to competition in this free-market system, insurers are trying to provide the best service for the best price and in 2018 the Euro Health Consumer Index ranked Switzerland’s health care system number 1 in Europe, with the Netherlands which has a similar system a close second.

Finally the housing market in Switzerland is much healthier than the UK, in the UK, like the NHS, people think that greenbelts and other strict planning laws are needed to protect the British countryside from being tarmacked and concreted over. However Switzerland has no greenbelt policies and more relaxed planning laws, wish a slightly smaller population density to the UK you’d expect these worries of concreted land would be shown in Switzerland but it is lauded throughout the world for it’s natural beauty, there is no reason to think that the UK would be any different.

Q4. What international example do you think best highlights what can go wrong when capitalism is neglected?

Venezuela is a classic example of what happens when socialists take over a country and ignore economic laws and destroy the free-market. Venezuela was a breadbasket of South America, huge oil reserves, gold mines and even diamonds. Venezuela was in a perfect position to have an economy similar to Norway’s, where the market is generally free and the tax from exploiting natural resources could fund government social programs.

It was squandered quite spectacularly, as almost every other socialist country has squandered economic prosperity before it. In 2006 Venezuelan president Hugo Chávez introduced the idea of “21st century socialism” to his supporters, promising a radical change to the way the economy worked, which at the time was already quite anti free-market. From the 70’s to 80’s the government focussed on exploiting the oil reserves to sell, tax at a high rate, and spend lavishly on social programs, like education and health. Already this sounds good to anti free-market types, spend other people’s money better than they can. However, as Margaret Thatcher once said “The problem with socialism is that eventually you run out of other people’s money.”

Venezuela after oil prices peaked started to see lower returns on their oil exports in the early 80’s, and by the mid-90’s government debt increased from 30% to 70% of GDP. By the time Chávez came to power, the government had tried to control the economic issues they had run into, using an axe-relax-collapse cycle. Make public spending cuts (axe), debt increases less and the economy is under control (relax) oil prices drop again as does tax revenue (collapse). Chávez’s left-wing populism then came into play, blaming external forces and “neoliberalism” for the country's decline.

It all started well for Chávez, oil prices started to rise just a few weeks before he came into office in 1999. For Venezuela oil, this wasn’t just a rise, it was a fivefold increase in oil revenue, this meant Chávez could actually deliver on his promise to increase public spending, rising from under 30% of GDP to over 40%. However Chávez went further, incorporating economic policies not seen before, like price and exchange rate controls, any free-market economist would tell you it is a bad idea to put limits on prices.

These interventions either had an undesirable effect, such as less rice being produced by private enterprise as it would sell at a loss. Chávez simply seized the private assets, including foreign owned rice plants in 2009. These arbitrary actions by the government of nationalising industries as a disciplining tool, rather than carefully thought out centralised systems to provide goods and services deterred further economic activity in Venezuela. Why would businesses risk their assets in a country that would simply take them?

Due to this despotic government, and reduced economic activity, Venezuela saw food shortages. With even the Guardian having to report in 2007 that the economy is booming yet basic food like eggs, milk and sugar are either not in shops or when they are they have to be rationed. Come 2013, when oil prices were still high, more and more basic food and toiletries simply could not be found in many stores, and not just the economy but social cohesion was in decline with rising crime and political polarisation.

Since Nicolás Maduro was elected in 2013 on a similar platform to Chávez of bringing in socialism, problems have not improved. In 2020 there were large-scale protests against the Venezuelan government in protest of further shortages of basic goods. The government’s standard reaction was to send out riot police and firing rubber bullets on people who simply wouldn’t have these problems in a free-market system. Even with the luck of high oil prices when these governments were in power, socialist governments still manage to make life a living hell for large portions of the population.

Q5. Please share any helpful short quotes from world leaders making the case for capitalism.

This is quite difficult as many world leaders are not really for free-market economics as you need a small government to have a free-market system, however:

Margaret Thatcher - “Socialism lays a bad egg by killing the capitalism that lays the golden eggs”

Winston Churchill - “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

Ron Paul - “Capitalism should not be condemned, since we haven't had capitalism.”

Ronald Raegan - "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

William Gladstone - “The establishment of freedom of trade and of a general disposition to remove from trade every possible restriction and every possible burden...has been the main agent in raising the commerce of the United Kingdom to that extraordinary position it has now attained. I apprehend that I am stating the matter very moderately if I put it thus, that in the course of the last 30 years our population has increased somewhere about 25 or 30 per cent., while our trade in the same period has increased in the ratio of certainly something not much under 400 per cent.”

Bertrand Barère de Vieuzac - “Let Pitt then boast of his victory to his nation of shopkeepers”

Q6. What should capitalism look like when translated into policy in each of the following areas?
 

i. Cost of living

The cost of living crisis in Britain has been the result of poor economic policy and regulation by our government. One of the biggest issues is housing, the house price to earning ratio is 7 for all of the UK (meaning average house prices are 7x the average salary), with it being up to 11.75 in London and lower than average in the North.

Compared to other countries this is simply excessive, there is no need for this, simply look at the British home price to income compared to other countries:

There is one simple thing that these countries are doing that we are not, building. This problem is so bad that despite a fall in net migration, GDP and less demand for urban housing during the pandemic, house prices rose by 7.5%! If universal drop in demand for housing and a drop of 10% of GDP doesn’t cause a drop in house prices then we have something seriously wrong with the housing market.

Many people point out that mass migration increases demand for housing and this is true however since we are talking about free-market principles I shall mention this and move on. Planning reform needs to be put in place and greenbelt regulation either needs to be changed or completely scrapped. I am aware this is an unpopular opinion however as seen in other countries building houses is a great way to reduce the cost of living burden on people.

Planning reform is as simple as making it easier to build, though I am not saying we need to ignore people already living in towns, cities and villages, there needs to be something in it for them too. After all, their houses are going to be less valuable now, which is where the Canton system in Switzerland works so well. If we have a less centralised planning system, have less of a national tax burden and instead allow for local councils to set their local tax rates, and then spend the tax money locally on what their population want. This introduces incentives to lax planning permission that will be seen along with higher tax revenue as more houses are being purchased to fund local projects and services to a higher standard. This should make up for a lot of the house price loss (they are ridiculously inflated in Britain) and it should allow house prices to fall, meaning lower rates for renters and shops. We are about 30 years behind with the housing supply, and that would still be the case if we had no foreign born people in the country.

When it comes to other issues with the cost of living we are a bit too late, a reason as stated before for rapid inflation is our addiction to quantitative easing. The furlough scheme during a government enforced lockdown that was questionable from the start doesn’t help as it was simply giving people money to do almost nothing. Finally sanctions on Russia have affected oil prices though these have fallen we still see high oil prices. However as it is traded on a global market and other countries would have sanctioned Russia anyway it doesn’t make much of a difference if we sanctioned them or not.

ii. Energy security

Economic sanctions on Russia, while they may be justified, wouldn’t make too much of a difference here as oil is traded globally. However I have written before on how we may see energy security via private enterprise whether it be renewable or by nuclear or especially if fracking regulation wasn’t so tight it was effectively banned. The government also recently opened a coal-mine, though it is mainly for use in steel production clearly there is precedent to start the much more environmentally friendly process of fracking.

iii. NHS health and social care

As mentioned before, Switzerland has the best healthcare in Europe, so why not emulate their market based system? There is also the less expensive yet similar German Bismarck system, where everyone pays about 3% of their income to a private insurer of their choice. When a German needs health or social care, the insurer will pay out the money they need to cover their medical bills or they will give you the money to spend on more informal care if you so wish, politicians never get their hands on the money.

The free choice and privately owned hospitals of the successful systems in Europe encourage competition for better and more cost-effective care. In the news every year it always seems the NHS is in crisis, why not change it to a system where this doesn’t happen?

iv. Global influence

Trade means influence, the more you have to offer in terms of goods and services, the more people rely on you and will follow your influence. China for example had to move away from communism and have special economic zones which opened up markets and allowed for more global trade. This is where China’s global influence comes from, the largest influences in the world rely on free-market principles, as it requires the mutual benefit of all involved. When this breaks down and instead we see coercion, short term war may increase influence but as we see from Russia this quickly dwindles.

Q7. Is there any other observation you would like to make? 

I would simply add a reading list for those interested in how free-market principles allow for prosperity and how socialism is always doomed to fail:

Basic Economics - Thomas Sowell

The Wealth of Nations - Adam Smith

Socialism: The Failed Idea that Never Dies - Kristian Niemietz

The Road to Serfdom - F. A. Hayek

Capitalism and Freedom - Milton Friedman

Freedom and Reality - Enoch Powell

Why Nations Fail -  Daron Acemoglu and James A. Robinson