Crisis of Capitalism?
Diane Coyle asks whether capitalism is in crisis.
As Diane Coyle told guests at this year’s Grigor McClelland virtual lecture, there is a lot of talk right now about a crisis of capitalism.
But what makes things different in 2021, she said, is that this is not a purely anti-establishment phenomenon. “What we are experiencing now is a continuation of a sense of malaise in our market economies that has continued ever since the financial crisis of 2008 and post-crisis recession."
She said part of this malaise was due to a decline in share of GDP (Gross Domestic Product) going to labour. "Capitalism isn’t making people better off the way it used to. Since the financial crisis there has been a huge drop in real average earnings and there has been about 10 years of decline, much steeper than in previous slowdowns.
The last decade has been an assault on people’s living standards and there is a broader sense that it has become impossible for most people to get on, to make the kinds of gains that we have come to expect. The contract between generations in that parents expect their children to be better off than them seems to have broken down."
She said the explosion in top pay was one of the reasons for talk of a crisis. "The average CEO pay is £900 an hour, a good hundred times median earnings. There has been an upward arms race, a ratcheting up in top pay, and there is persuasive evidence that this has driven a short term focus. These kinds of ratios to what ordinary people can earn would have been outside any acceptable social norms up until the mid-1970s when capitalism was delivering broad based increases in living standards."
But she stressed that the underlying problem was productivity and the UK’s poor productivity performance. "Productivity is what fundamentally drives real earnings. Although it can be seen as worker effort it is actually much more to do with business. The amount that gets invested by businesses, the way they organise production, the way they sell things, the way they use knowledge and pick up innovative ideas."
In terms of particularly why the UK had such a poor performance, she said issues around skills, investment in infrastructure, and access to finance, all played their part.
What we are experiencing now is a sense of malaise in our market economies that has continued since the financial crisis.
Professor Coyle said an underlying sense of unease about the market economy was also driving debates about capitalism, in particular the fact that markets were getting more concentrated and competition was decreasing across many markets, such as in the digital field.
"While this concentration may deliver great value and products for consumers, there is a cost over time in terms of the lack of incentive for companies to innovate if they have a strong place in the market. And it is innovation that really drives long term gains in living standards."
She said there was now need for an urgent debate about how to best deliver increased prosperity, in particular given the pressures of climate change, and that it was time for businesses to take ESG (Environmental, Social and corporate Governance) issues more seriously.
However she added: "To be honest I’m a little concerned about the ESG frenzy at the moment. No doubt many people in business are somewhat confused about exactly what it is they should be measuring and doing. In my view what businesses need to be doing is thinking about assets such as human capital, knowledge capital, physical capital, and their natural capital, as part of their whole balance sheet. ESG metrics need to fit within this framework."
Shape of markets
She added that the wider debate about the future shape of markets was crucial, such as the extent to which nation state interests should override corporate interests.
"In an era of globalisation there is a mismatch between these boundaries. State aid has been very stringent in terms of telling governments not to subsidise national businesses and national champions. On the other hand we’ve had a period where a lot of business has been offshored, and post pandemic we have started to worry about supply chain resilience.
"There are some really big questions about the legitimacy of the market system, the way it interacts with the public sector, and who is taking decisions about what is going to happen in the future. But at the same time there are encouraging signs that the need to change is being taken seriously. We cannot think about the private and public as separate spheres. We need to shape a market economy in which businesses and governments work together and work out better ways of making decisions that deliver long term sustainability."