George Kerevan: Capitalism must rediscover its ethical roots for good of all

Published on Wednesday 8 October 2008 23:13

IS THIS the end of capitalism? Yes, according to the front page of the Socialist Worker, which has a piece by my old mate Chris Bambery, thundering: "Capitalism isn't working!" If capitalism is in the dock, we'd better start by defining what we mean by the concept. Capitalism – a word Marx never used – is not reducible to the notion of markets, free or otherwise. Markets existed long before capitalism emerged in the 17th century.

In the pre-capitalist world, most folk survived through subsistence agriculture. The only other form of economic activity was pillage by the European aristocracy, or Chinese emperors taxing their peasants. These latter activities fuelled luxury consumption by the elites, rather than productive investment. As a result, economies did not grow.

The uniqueness of capitalism lies in accumulating capital. It is a mechanism for concentrating the economic surplus of society over what we need to stay alive and put a roof over our heads. Instead of blowing this surplus on building castles or invading the next kingdom, capitalism was invented to invest it in trade or manufacturing, to expand the economy.

The men and women who invented capitalism were North European Protestants, who saw it as a religious duty to live frugal, unostentatious lives. They were appalled by the corruption and profligacy of aristocratic society. The early capitalists lived by the Biblical injunction to invest their talents rather than waste them. These Puritans, Presbyterians and Quakers believed that conspicuous consumption and personal greed were the products of an earlier society where an aristocratic, non-productive class wasted any economic surplus. Taking that surplus away from the political and religious elite and using it to grow the economy was a revolutionary conception, and it changed the world forever.

Note the underlying assumptions of this model: the investing class is ethically motivated. The capital surplus is held in trust for society; it is not there for the capitalists to personally plunder as if they were a new aristocracy. Loans from the capital fund are made to responsible merchants for ends God would approve of. I know that included slavery. But I also know that it was those early religious capitalists who became the vanguard of the anti-slavery movement, for the very reason they associated capitalism with hard work, not living a life of luxury while slaves toiled.

This ethically-based model of capitalism took Scotland from being a poor, tribal society on the margins of Europe to being one of the richest economies in the world. Yes, I'm only too well aware of the poverty and degradation that existed in the margins of Scotland even at the height of its economic success. I'm also aware the spirit of personal and social responsibility that pervaded this system created universal free education that offered the one sure route out of poverty for millions. One of the reasons I'm a Scottish nationalist is that I want to recapture that ethical vision.

Following the Depression, the world became disenchanted with capitalism. The state began to play a major role in the economy, nationalising industry and directing investment. The theory looked good on paper: the state would invest long term, removing the booms and slumps of private capitalism and ushering in full employment. Profit-seekers would be replaced by the disinterested civil servants acting on behalf of the masses. But this experiment had its own problems.

The concentration of power in a completely socialised economy led to the totalitarian excesses of Stalin. In the West, we tried a mixed economy, but even with democratic safeguards the new system ran into trouble.

The point of capitalism is to gather the economic surplus and reallocate it as investment in the most productive sectors, defined by the highest returns. This keeps the surplus growing. But when the state controls the surplus, politicians follow their own agenda. They get captured by special-interest groups, especially inside the state. Faced with this multiplicity of begging bowls – many quite legitimate – the surplus is frittered away on subsidies, boondoggles, madcap schemes and graft.

The revolt against this state of affairs led to the rise of Reagan and Thatcher, and an attempt to revive capitalism. The problem was (as is now apparent) that we handed over the economic surplus – private savings, corporate earnings and accumulated pension funds – to financial capitalists who lacked the ethical boundaries of their commercial ancestors.

Yes, they sought high returns and there was fantastic economic growth. Swathes of human kind in Asia have been raised out of subsistence agriculture. But the greed of those doing the investing – abetted by politicians trying to buy votes by engineering a consumer-debt mountain – misled us into thinking we could get rich without working. Did we really believe the value of our house could rise forever on invisible strings?

Here is the question: how do we recreate an ethical capitalism that nurtures wealth, a work ethic and personal responsibility? We can and must design new banking institutions, forcing lenders and borrowers to bear risks directly. We must engineer a fiscal system that rewards saving. But we will have to go further, for this is not just a crisis of the banking system – it is also a moral crisis.

We have to return to an economy driven not by consumer debt, but by productive investment that generates a return. Strangely, now might be a good time to do it: during recessions, with nothing left to lose, entrepreneurialism is often reborn. It was in the depth of the Depression in the 1930s that radar, jet engines and television emerged.

Above all, we need new ethical capitalists, not a return to state direction of the economy, which will fail just as it has before. Some, like my old mate Chris Bambery, will consider the juxtaposition of "ethical" and "capitalism" absurd. Actually, it is when they don't go hand in hand that we run into trouble.