Contents 1. 2. 3. 4. 5. 6. 7. 8. 9. Capitalism imperfect but still the best economic system going?

? Definition and origins Early signs of dysfunctional consequences greed, poverty, child labour, disease The Great Debate Free market advocate, Jamie Whyte vs Marxist, Alex Calinicos Does wealth actually trickle down in market economies? In order to ensure wealth trickles down, the state must step in Are inequalities intensifying in capitalist systems? Dj vu? Margaret Thatchers tax cuts on the rich legitimized selfishness and glorified greed Do restrictions on market capitalism limit peoples freedom? Jamie Whyte thinks so.

List of Participants (Click on the name for more information on the participant) Michael Portillo host and narrator of Capitalism on Trial, British journalist, broadcaster, and former Conservative Party politician and Cabinet Minister. Interviewees Alex Callinicos Trotskyist political theorist, and Director of the Centre for European Studies at Kings College London Ha-Joon Chang one of the leading heterodox economists and institutional economists specialising in development economics Gareth Stedman Jones British academic and historian John Kay leading British business economist of centrist persuasion John Mullan Professor of English at University College London Gillian Tett British author and award-winning journalist at the Financial Times Jane Whittle historian of rural England in the late medieval and early modern period with particular interests in economic development Jamie Whyte philosopher and free market advocate whose style attempts to dissect confused logic and nonsensical arguments

1. Capitalism imperfect but still the best economic system going?

Scratchy recording of male voice likely from early 20th century We hold that the analysis, our analysis of capitalism, brings us to the conclusion that capitalism alone is responsible for the problems that confront mankind poverty, unemployment, recurring wars and others. So long as capitalism remains, so long will those problems exist. Gillian Tett After the collapse of the Berlin Wall, and after the Soviet Union imploded, people assumed that capitalism had essentially triumphed. And they took for granted that all capitalism was basically the American version of capitalism, and that was the winning brand if you like. Michael Portillo (MP) In the Americas, Europe and Asia, even in Moscow and Beijing, one economic system holds sway. In the 21st century, capitalism is all but universal across the globe, and its ideological rivals have abandoned the field of battle. Yet the shock of the banking crises and public revulsion over bonus payments have caused me to ask whether capitalisms survival is under threat. Ha-Joon Chang Ive lost count over how many financial crises we have had in the last 20-30 years all over the world.

MP Indeed recent events have made me question whether what we have right now is already a departure from capitalism. Gillian Tett Much of what happened on Wall Street and the City of London in recent years has taken place under the banner of capitalism and free markets because that suited many of the people who were running the big banks, but the reality is it often hasnt lived up to these ideals and principles at all. MP As a former politician I think about whether we can maintain public support for a system that many associate with inequity and unfairness. Ha-Joon Chang Theres a huge range of discontent erupting all over the world that is created by inequality and discontent in many societies as proven by riots recently in this country. MP What benefits do you think capitalism has brought to us? Jamie Whyte Wealth, principally. Its the most fantastically productive way of organizing our economic activity. MP The philosopher Jamie Whyte, whos head of research at Oliver Wyman, a management consulting firm. Jamie Whyte Its a liberal regime. It satisfies peoples actual preferences, not the preferences of some administrator or politician or king. Ha-Joon Chang Its still the best economic system that humanity has invented in terms of creating wealth. MP Those people who say, in defence of capitalism, thats its been responsible for technological advance, scientific advance, huge social changes, improvements in the position of women, improvements in the wealth of even the poorest classes, all of that would be right? Ha-Joon Chang Yeah, I mean it has changed the world enormously. The process has been very brutal in certain cases. A lot of people have been sacrificed and so on, but, you know, give me capitalism any day. I mean I dont want to live in feudal societies. John Kay A market economy enables people to make lots of experiments so people are free to set up businesses, to introduce new ideas and businesses and dont have to get the approval of big bureaucracies in order to do that. But a market economy is also good at cutting off experiments when they dont work and gives people encouragement to imitate the kinds of experiments that do work. MP The economist John Kay with his take on why capitalism is efficient.

2. Definition and origins

MP Im conscious that Ive reached this far without attempting to define capitalism. Thats partly because its so hard to do so. The term was invented only in the 19th century to describe something that had already existed for a long time. Most famously Karl Marx identified its key features. Alex Callinicos Marx is the theorist of capitalism. We owe to him the very word capitalism. And whats particularly powerful is that he has a very strong sense both of the productive, the liberating aspects of capitalism and also the ways in which it is unstable and destructive. MP What, according to Marx, is capitalism?

Alex Callinicos For Marx, capitalism is defined by two fundamental features. First, that exploitation Marx assumes that capitalism is a class society, based on exploitation takes the form of the exploitation of wage labour in other words, a people who are compelled to sell their ability to work in exchange for a wage. Secondly, capitalism involves this is a long phrase, but anyway the competitive accumulation of capital; in others words, the capitalists arent a unified class, theyre what Marx calls a band of hostile brothers. Theyre fragmented. They compete with each other. They struggle over to put it crudely the loot that they extract from the workers. That gives them an incentive to invest, to accumulate, in Marxist terms, and that produces both the dynamic growth of capitalism but also the crises that mark its history with great regularity. MP Historians now recognize that capitalism did not originate as a purely European phenomenon. But perhaps its easiest to consider the example of Britain and recall what preceded capitalism. I spoke to two historians, first Gareth Stedman Jones of the University of Cambridge and then Jane Whittle of the University of Exeter. Gareth Stedman Jones If you look at all previous eras you find that theres a very fixed notion of what need is, and the ideal practiced by most primitive states is to keep a sort of equilibrium between what they think appropriate need is and the resources necessary to produce it. And that in turn creates a rather static situation in which standards of living and economic development occurs at a very, very slow pace. Jane Whittle You can have elements of capitalism so industry and towns, lending money, land markets, a degree of wage labour that goes back in England, certainly back to the 13th century you know, long distance trade and so on is present in the ancient economy. But these are just particular elements of capitalism, whereas I would see an entirely capitalist economy is one which has become completely market-dependent. Say the early 16th century Id be quite happy in saying England was still a peasant economy. By the early 18th century I dont think it was anymore. The majority of the population was no longer small farmers. They were actually working as wage labourers or working in industry. Gareth Stedman Jones What really mattered was a huge increase in agricultural productivity. Youd never have had the industrial revolution without that, and also youd never have had that form of agricultural increase in productivity without a change in the ownership of the land. What came into being was a capitalist landlord, a capitalist farmer, tenant farmer, and wage labour. But, of course, its net affect was to produce a lot of out-migration into the cities because the land was becoming more productive. And that was the basis upon which the industrial revolution was made possible. MP In the 18th century, they didnt use the word capitalism. What makes you feel confident that the phenomenon that exists in the 18th century, that writers are writing about, that it is really early capitalism? John Mullan Its actually a word that we use much more often in our discussions, much more often in news bulletins and so on than the word capitalism the market. And its in the 18th century that the market comes to dominate ordinary peoples awareness of how the world works. I mean the Bank of England, the stock exchange, the whole credit economy, thats invented in the 18th century, paper money as an everyday fact of peoples lives. So the sort of financial system is an 18th century invention, but the day to day reality of a market in which what you do, what you produce is valuable inasmuch as theres a price for it other people are prepared to pay. Thats the kind of key determinate of our sense that this is when capitalism really gets underway. MP And people are producing goods not just foods and they dont know who the buyers are going to be and they dont know where the buyers are going to be that buyers are not necessarily going to be

in their village or their town? John Mullan No. Thats absolutely right. MP And slowly the world of the homemade and the home grown of local markets and local producers gave way to another.

3. Early signs of dysfunctional consequences greed, poverty, child labour, disease

MP Even though affluence has continued to grow it seems that discontentment is now on the rise again. Has capitalism made us not only richer but also more materialistic, selfish, greedy, and dishonest? When there were riots in London and other English cities there was a lot of talk about greed, of people referring to looters or the bankers. Is greed something that was thought about and written about from the earliest days of market economics? John Mullan Before people were actually even conscious of market economics existing, greed was taken for granted as being a really bad thing. Christianity taught that greed was a sin and I think it was a rather sort of strange and novel thing in about the 18th century when people started arguing really for the first time that even if greed was morally rather ugly perhaps in other ways in might be quite good or just simply a natural inclination of people which should be harnessed rather than deplored. MP So Gordon Gecko in Wall Street was not the first person who saw that greed could be good? John Mullan No. Actually, I think the first person to say influentially in print, in English, was an interesting man called Bernard Mandeville. He published a really incendiary book in the very early 18th century, The Fable of the Bees, whose subtitle became a sort of dictum throughout the 18the century, which was Private Vices, Public Benefits. And he said something like what Gordon Gecko said. He said People behaving very, very badly, people pursuing their appetites and wanting to actually get as much as they possibly could, may be morally bad; it may be deplored by priests but actually economically its extremely good and we should encourage it. Gareth Stedman Jones Adam Smith takes that reasoning further to say that its capacity for development which is the main defence of commercial society, in particular commercial society is that which nurtures the development of the division of labour. Although the rich perform a certain service in consuming goods and therefore creating employment for the poor and so on, they must also invest as well as consume. MP Its interesting to note that in England the Poor Laws were introduced just as capitalism began to change our society. They could be seen as a response to a new and threatening kind of poor, itinerant wage labourers out of work and landless indigents. Early critics of the new economic order blamed it for entrenching poverty and exploiting the weak. Gareth Stedman Jones There was a lot of condemnation in the first half of the 19th century concentrated, it must be said, mainly upon the inequitable form of the state. There was some condemnation of new factory masters, and of course the classic one you find in Charles Dickens Hard Times. John Mullan Its there in Dickens, its there in Elizabeth Gaskell, its there in prints and then later in photographs of the period. Capitalism is factories, its mills, its utterly imisserated, sort of slave workers, I mean theyre not actual slaves but they look as though theyre enslaved to these terrible sort of machines of production.

MP Disease and child labour. John Mullan Yes, absolutely. And its coal mines and its steel works and above all its cotton mills.

4. The Great Debate Free market advocate, Jamie Whyte vs Marxist, Alex Calinicos
Jamie Whyte One of the moral objections to the free market is the idea that it promotes exploitation. So, for example, you will get a situation where, lets say, a large multinational firm has moved in to some area of, lets say, Mexico and theyre employing people on very low wages, lets say, $2 an hour, or something like that. And people will say thats exploitative, or thats dreadful. Well, no. They are not forced to work for that firm. That firm has come into that area, provided them with an alternative that is better than any they have previously had. They elect to work for it. It is nonsensical to describe that as exploitative. Alex Callinicos Well, its exploitation because, in the first place, what are his choices? If he had to make his life up for himself, he might like to have a small holding on which he and his family lived, but he doesnt have that kind of choice, so its a constrained choice. And then what Marx argues is that its the worker were discussing and his fellows, the other workers, who create the value, part of which a capitalist appropriates in the form of profits. MP But maybe Im offering him his first opportunity as a capitalist. Alex Callinicos Sure. Its not that I think capitalism brings no benefits, but it brings those benefits in a necessarily exploitative and unequal framework. Jamie Whyte There are market mechanisms for getting rid of inequalities. The most obvious one is competition. But inequalities are actually an important part of the way the free market system works. If they werent there the motivations for people to change their behaviour in ways that are more productive or better adapted to satisfying peoples preferences, they wouldnt work. I mean, suppose that it didnt matter what I did for a job I always ended up with the same amount of money, the price mechanism would no longer work to get people to apply their skills where theyre most valued. So its an important part of the system that it has these inequalities. I personally dont have as much of a problem with inequality as many people of the left, for example, do. I dont see it as an inherently evil situation. MP Capitalism is driven by a blind process of competition which produces enormous inequalities in situation and in prospects for people. You know, when you look at the scale of inequality on a global scale, theres no way that those inequalities reflect peoples merits or inputs or exercise of creativity or, you know, different appetites for risk or anything like that. There are huge undeserved inequalities that are generated as a matter of course by capitalism. Jamie Whyte Abject poverty is dreadful. And, of course, one would want to eliminate that. And capitalism does. Capitalism has proved over the centuries to be the best economic arrangement for getting rid of abject poverty. Alex Callinicos No, I dont think you can say that. I mean, I think that theres much less abject poverty in a country like Britain. But also, if we look on a world scale, a large majority of the worlds population lives on around the poverty line of $2 US a day. Thats abject poverty. Jamie Whyte You can redistribute wealth up to a point before you completely undermine the

mechanism of free market. So once you start defining poverty, as many do nowadays, in relative terms, even if absolute terms of poverty are not bad, and I see that as a threat to the market mechanism that creates the wealth that stops people from actually being materially poor.

5. Does wealth actually trickle down in market economies?

MP Even harsh critics of capitalism may concede that it makes societies wealthier. But given that inequality is at its heart, since it depends on the notion that through enterprise some may do much better than the generality, does capitalism also produce its own leveling effects? Does wealth actually trickle down in market economies? John Kay Depends what you mean by trickle down. Its not a matter of we should be grateful that, you know, the hedge fund managers use the services of taxes. Its rather that process of economic development, which over the long run in most countries has made most people better off, tends to be unequally distributed. And so if we put too much emphasis on equality and distribution, that has had some tendency to reduce the base of economic development. MP Do you think that free markets have their victims? John Kay Of course they do. One of the things we need in order to legitimize the operation of a market economy is to ensure that people who do badly out of it dont suffer too much.

6. In order to ensure wealth trickles down, the state must step in

MP So in sophisticated market economies the state has quite a big role, if Im hearing you correctly? John Kay I think the state has quite a large role. And more than that, social institutions have a large role. MP For the state in the advanced capitalist economies of Europe, one role is to provide welfare assistance to those at the bottom of society. Ha-Joon Chang believes that governments have merely opted to soften capitalisms hard edges. Ha-Joon Chang Europe has relatively low inequality only because we have introduced so many measures. We have the welfare state, you have progressive income tax, free education. And if you go to countries like Brazil and South Africa, the level of inequality is something unimaginable for people who have lived in Europe.

7. Are inequalities intensifying in capitalist systems?

MP I accept that inequality is inherent to capitalism. But are those inequalities intensifying? I asked Gillian Tett, US editor of the Financial Times and a former anthropologist, whether in capitalist systems the gap between rich and poor tends to widen. Gillian Tett There is an ever-present temptation for the gap between those who do well and those who dont, to widen. Obviously those who have a lot of money want to ensure that they hang on to it and pass it on to their heirs. And if you have educational systems or social systems which encourage elitism they will be effective in doing that. But theres quite a lot of evidence that extremes of inequality, extremes of income, and above all else, inequality of opportunity causes tremendous stress. And so if people do generally believe that if they work hard, study hard, they can get on and get ahead, then thats one thing. But if people feel trapped in a situation where the rich are

getting richer over time, thats pretty dangerous for social stress in the longer term. Alex Callinicos Its certainly true that in the last generation, which is a generation which has been celebrated as an era of unrestrained capitalism, that weve seen inequalities grow spectacularly both within the societies and on a global scale. And this is as true of the so-called emergent market economies that are supposedly the future of capitalism Brazil, China, South Africa and so on as it is of countries like the Britain and the United States. MP Do you think inherently that theres a tendency within capitalism for the disparities of income to become greater with the passage of time? John Kay No I really dont think there is. But I think there have always been, not just in market economies but in almost all societies with any upper level development at all, problems of a kind of self-reinforcing cycle in which people gain a degree of economic power, use that to enhance their political power and that in turn increases the economic power which they enjoy. You see one manifestation of that in what the oligarchs in Russia are doing. Though the manifestation of that we have today I think in Britain and the United States is in the financial sector where groups of people largely in investment banks have been able to operate that cycle to their own benefit. And I think in the end if we dont deal with that its something thats capable of undermining both the stability and the legitimacy of a market economy. MP I would defend capitalism on the grounds that its inequalities are not fixed. Those at the bottom have the opportunity to rise. When I was in government I served under prime ministers who were respectively the daughter of a Grantham grocer and the son of a circus trapeze artist. We believed firmly in social mobility as an ideal and we linked it to free markets. Margaret Thatcher <recording> The time is long overdue when the balance between the individual and the state has to be readjusted in favour of the individual. Popular capitalism. Do you know more blue-collar workers own their own homes than ever before? More young people, more people have the chance of owning shares. More people, I hope, have a chance of savings, and the savings keeping their value. MP The ideal of progressing from rags to riches has a long pedigree, as John Mullan explains. John Mullan In the 18th century, its not that there wasnt poverty but generally speaking writers didnt think that commerce made the lot of the poor any worse. The lot of the poor was pretty bad, and it was likely to stay pretty bad. But commerce actually, as far as some people were concerned, gave at least the possibility that some might climb upwards, and indeed almost all the sort of early English novels, in the novel invented in the 18th century, are sort of stories of social mobility. Theyre stories of people who start off as servants, or foundlings and eventually become wealthy and happy property-owning land-owning citizens. Now some of this was an illusion and lots of social historians say there was much less mobility than people liked to think at the time. But it certainly became a kind of ideal. Gillian Tett The myth that anybody can get rich if they work hard enough has been an extraordinarily powerful ideological tool, an extraordinarily powerful piece of rhetoric that the elites in America have used to great effect in recent years. Because up until now America has tended to grow quite rapidly and its been very much founded on a pioneer culture which assumed that there was no resource constraint. If you ran out of land in the east you simply went west young man. And its going to be very interesting to see what happens because American at present doesnt have many cultural mechanisms for dividing the pie up in a way that ensures everyone continues to buy in. And so its entirely possible that as the fights for that resource allocation become more intense, and if growth keeps stalling in America, you may well see people start to challenge this idea that inequality is okay because everybody has a chance of getting rich. Because the reality is

in America today, they dont. MP Jamie Whyte agrees that the American dream is a myth. Jamie Whyte Well not only is it a myth, its false. Its clearly not true. Many people are born with disadvantages, which means that theyre never going to reach the top. These disadvantages arent all social disadvantages; some of them are genetically inherited. Some of them are inherited but not genetically, so having bad parents is terribly bad luck. And youre probably not going to get to the top if youre burdened with bad parents. The argument for the free market isnt that it corrects social injustices or that it corrects cosmic injustices, is a better word. Our birth is an accident from our point of view. We just find ourselves there. And I dont for a minute believe that were all born with equal opportunity. Thats a ridiculous idea. If capitalism were founded on that myth, it would be a stupid idea. I just dont think it is. Now the other question, is it a useful myth? Well it may be a useful myth. So it may be that even though its false, the myth that youve got a good shot at the top may increase your chances of making the most of the situation youre in. MP Does capitalism at least offer people an opportunity to rise? Alex Callinicos It offers some people an opportunity to rise. Capitalism is a more dynamic and open system than feudalism. As Ive learned as a good Marxist, I can point to you passages in [Das] Kapital where Marx notes that the United States was a more open and mobile society than the Europe of his day. So sure capitalism offers opportunities for some people but it doesnt offer that way out for most people. So poverty is built in to the functioning of capitalism. If you didnt have those very powerful inequalities then most people wouldnt be under the economic pressure to work for capitalists on terms that lead to their exploitation. MP Of course governments can attempt to reduce inequalities. They can tax the rich and redistribute wealth. After World War 2, governments in a number of capitalist countries assumed a much bigger role in social engineering. Gareth Stedman Jones I think its no accident if you like that the period of the 1940s through to the 1970s was one in which all classes benefited at least in western Europe from economic development, whereas since then its tended to be the wealthier at the expense of other classes whose standard of living has remained stagnant. I think that had something to do with the existence of the Cold War, which, in turn, put pressure on politicians to offer populations as a whole something more generous.

8. Dj vu? Margaret Thatchers tax cuts on the rich legitimized selfishness and glorified greed
MP Those post-war years are sometimes called The Golden Age of Capitalism when high growth rates, driven by the need to rebuild after the destruction of the war, secured near full employment, rising wages and expanded welfare provision. But Ive always believed that you reach a point where the redistribution of wealth destroys the competitiveness of the economy. I believe we reached it in the 1970s, as I discussed with John Kay. John Kay The growth in trade unions, and trade union power, was clearly, in retrospect, seriously damaging to the economy. Perhaps the largest single central achievement of the Thatcher years was to reverse that particular trend. She also extended markets, the scope of markets. But theres also an enduring legacy that we still havent coped with in Britain. Firstly of legitimizing selfishness, which is actually mostly bad for the effective functioning of a market economy, and also this description of how essentially individualistic description of how markets work.

MP What are you referring to there? John Kay The kind of glorification of greed and the belief that any restriction on that kind of greed or its consequences actually is going to be economically damaging. I dont think markets are primarily about encouraging people to be greedy. And I think they can function effectively only by virtue of a variety of both social and institutional constraints and expectations on how people behave. MP Im pretty sure actually that Margaret Thatchers view was that as rich people paid less tax they would feel more keenly their personal obligation to do more particularly in a philanthropic way, and that that would produce not only greater efficiency because people spend their own money better than states, she argued, but also a morally superior society because people would recognize their personal obligations and not feel that they had acquitted them simply by paying their taxes. John Kay Umm. Its been less true, I think, than one might have hoped. There are some people who do have a sense, as it were, that having taken a lot out they have an obligation to give a lot back. But also a large number of people who believe that having received a lot makes them morally superior as well as wealthier.

9. Do restrictions on market capitalism limit peoples freedom? Jamie Whyte thinks so.
MP I share John Kays sense of disappointment. But theres another argument for the defence. Not surprisingly most of the discussion so far has been about whether capitalism should be thought moral or immoral in money terms. But one of the strongest ethical arguments for free markets is that they bring, permit or even guarantee political and personal freedoms. Some early thinkers were struck and excited by that connection. John Mullan In the 18th century, theres much more of a sense that what we call capitalism because they didnt call it that, they sort of called it commerce was actually a liberating and progressive and a word which was much debated in the time a modern thing. Voltaire, when he came to London in the 1720s because hed been exiled from France because he was politically a difficult person he came to London and he thought it was a land of freedom and he said commerce, which has made the English rich, has made them free. Margaret Thatcher <recording> This is giving people the resources to care for their own families, and the resources themselves to do something for the community. They cant do it without their own resources. Its spending money youve earned and being allowed to keep it. And we are producing more than ever before across the economy as a whole. Jamie Whyte When you limit peoples economic liberty you are limiting their liberty. The question seems to be If we have capitalism, if we have a free market economy, will that help or hinder liberty? As if liberty isnt something that goes on in the economy. Its interesting that many on the left are great lovers of liberty outside the economic sphere, but inside the economic sphere they dont want liberty. And it seems to be that they dont really take economic activity seriously. Somehow what I say, books I read, all that really matters and we must have liberty there but my desire to consume certain kinds of goods or start up a certain kind of business, that all doesnt really matter. We can just toss all that aside, and weve still got liberty, they seem to think. Alex Callinicos Its absolutely true that capitalism liberates individuality but it does so in quite a limited kind of way more freedom for some than for others. And it also tends to appeal to, on the whole, rather unattractive motives like fear and greed.

Jamie Whyte They underestimate the interconnectedness between our economic activities and our apparently not-economic activities. So that if you start trying to take really full control of the economy youll find that youve got to take full control of everything else too because theyre really not that separate. Alex Callinicos The thing that Marx focuses on in his account of capitalist exploitation is formally where citizens were equal but in fact were profoundly unequal economically most of us end up doing jobs that we dont like and being exploited, in addition to that. MP After so many conversations, despite strong arguments that have tested my convictions, I still believe that no system rivals capitalism in its ability to create wealth, lift people out of poverty and pay for welfare and health services. I suspect that other systems offer fewer freedoms and no less inequality. But in next weeks program Ill be moving on from the morality of capitalism to ask whether it still works. Its worth recalling why Daniel Defoe, author of Robinson Crusoe, and a great advocate of capitalism, strongly opposed allowing dealings in shares. John Mullan I think they found shares-dealing frightening. I think that they thought that it relied on a kind of mystery of inflated value which we might think it doesnt rely on and those who were suspicious of it and who often represented those who dealt in it as kind of necromancers, as people who were in touch with some sort of sinister and mysterious knowledge, they seem to be vindicated because one of the great events of the early 18th century, which got into lots of Alexander Popes poetry about it, was the South Sea Bubble. MP Ill be examining whether the invention of ever-more obscure financial instruments led us into just such a mystery of inflated value, and has left us with a system whose volatility is beyond regulation or control, as I continue to put capitalism on trial.

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