Reinventing the State Chapter 13: The Limits of the Market

And at last we have the manifesto of the left of the party: not the manifesto of social liberals - we are all social liberals here. You could probably skip straight to this chapter. Paul Holmes apologises for straying beyond his remit, but it would have been interesting if more of the authors had done this. Many incomplete manifestos don't necessarily make a complete one.

My problem here is that Paul doesn't seem to distinguish between the effects of free markets on the one hand, and the worst excesses of right-wing governments and corporate greed on the other. He talks about water privatisation in the third world. But when people who cannot afford mains water are prohibited from collecting rainwater under laws sweetening the privatisation, this is not a free market situation in any sense. Involving the private sector does not necessarily involve markets. The title of the chapter "the limits of the market" should perhaps read "the limits of private-public rent-seeking deal-making to prevent free markets and screw ordinary people".

Failing to make this distinction leaves Paul making the same soggy compromise that defines Labour: "markets" are a necessary evil that we can't do without but must fight against most of the time. Or as Labour morphs into the Conservatives, this becomes "markets" (still meaning corrupt rip-off rent-seeking) usefully make money for those whose interests we represent and oil the wheels of politics.

Well this isn't what markets are. This evil is not a necessary one, it should be opposed with clarity and vigour. PFI is not a market mechanism, quite the opposite, it is a relationship almost completely devoid of competitive pressures. Markets on the other hand are a necessary good, always rough at the edges and reliant on peace, law, sound regulations, quality information and so on, but the greatest force there is for enabling opportunity and prosperity.

Paul defends the role of democratic politics as the only way to put health, the environment, public goods, monopoly prevention etc, above the profit motive. He is right. The rules of the game have to be set according to the common good, and not bought - as Adam Smith warned against - by special interests. If the rules of the game allow profiteering which destroys more value than it creates, then value will be destroyed, and the few will prosper from the suffering of the many. A simple example of this would be that if theft were permitted: a few bandit barons would be fairly rich, and the rest of us would be in grinding poverty. If you make money destroying the environment - stealing it from the rest of us - this is much like being such a bandit baron. A market system, in contrast, is one in which we only give up things of value voluntarily in exchange for things we value even more.

Democratic politics and markets are brothers. They are both expressions of the principle of power to the people. It does not upset me that one typically works better than the other for a given kind of decision - it is not enough to make me want to pit these allies one against the other.

So when Paul says, of desirable social outcomes that

The hidden hand of the profit motive in the free market, left to itself, will deliver the opposite of all these outcomes.

or

The key driver of Adam Smith's 'invisible hand' is the profit motive based on success or failure in cutthroat competition - not motives of fairness, humanity or the common good.

I must refer to Adam Smith too:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love...

Smith is of course not saying that people should not be humane, fair or pursue the common good - just that it would be unwise for us rely for our dinner on these sentiments in others, when self-interest can be turned to the good.

The left's objection to Adam Smith - which is a valid objection to right-wing interpretations of him - is that he is saying that we ought to pursue profit and ignore the good. Both left and right are guilty of very selective reading.

And so for most of the chapter Paul rails against "unfettered markets" or "markets on their own" largely in reference to policies which involve the private sector but not markets. If you read "the profit motive" for "markets", the arguments are quite good.

I am confirmed in my view that the left of the party, the social liberals who question economic liberalism, have misunderstood the rest of us, and not understood Adam Smith. Far from retorting to the Orange Book, this chapter confirms its importance.