Until very recently, the march of capitalism had seemed unassailable. The Reagan and Thatcher era reforms in America and Britain were credited with driving rapid growth, rising living standards and increased consumer choice. That set in train a global trend towards low taxes, smaller states, privatisation, open markets, free trade and deregulation. By the late 1980s, the self-evident superiority of the capitalist model brought about the collapse of communism, prompting Francis Fukuyama’s notorious claim that the world was approaching “the end of history” and the universal triumph of liberal democracy.
Indeed, by the 1990s, Western left-wing parties were jettisoning what remained of their socialist baggage. President Bill Clinton and Tony Blair, his British counterpart, claimed to have discovered a Third Way that reconciled capitalism with social justice. Peter Mandelson famously declared “New Labour” to be “intensely relaxed about people getting filthy rich as long as they pay their taxes.” This era of hyper-globalisation reached its zenith in 2001 with the entry of communist China into the World Trade Organisation, a body that had been conjured into existence just six years earlier to police the global rules-based trading system.
Yet the tide has clearly now turned against the old capitalist consensus. Suddenly the state is back as a key economic player, intervening in markets at a scale not been seen for decades. Donald Trump brought 70 years of trade liberalisation to an end when he initiated a trade war with China. His successor, Joe Biden, far from reversing Trump’s economic nationalism, has gone further, legislating to allow the US government to provide vast subsidies for investment in semiconductors, green technology and electric vehicles. The European Union is similarly lavishing support for green investment and Britain has got in on the act by subsidising a new battery gigafactory, electric car manufacturers and the steel industry.
What used to be known as the Washington Consensus has been undermined by a series of global shocks. During the financial crisis of 2008, the global economy was only saved from meltdown by vast injections of public money to bail out some of the world’s biggest banks. During the Covid-19 pandemic, enormous sums of public money were again required to support businesses and families through lockdowns, while the limitations of the global rules-based trading system were exposed as export banks left some countries struggling to access supplies of PPE and vaccines.
Russia’s invasion of Ukraine has underlined the risks of becoming over-dependent on foreign suppliers
More recently, faith in open markets and free trade has been shaken by geopolitical developments. China’s growing power and assertiveness is raising fears of a new Cold War, leading governments and companies to reassess trade links. At the same time, its model of state capitalism, using vast subsidies and technological theft to seize leading positions in key industries, has dashed hopes that it might evolve towards liberal democracy following its entry to the WTO. Meanwhile Russia’s invasion of Ukraine has underlined the risks of becoming over-dependent on foreign suppliers of critical resources such as oil and semiconductors.
The retreat from capitalist orthodoxy isn’t solely a reaction to global trends. The reality is that domestic support has frayed as it’s become clear that Thatcher and Reagan-era dogma has not delivered on its promises. The capitalist creed held that wealth would trickle down. Yet too often it appears only to have trickled up. In recent years, levels of inequality have widened in many western countries. In Britain, wages have not risen real terms for fifteen years, leading to an unprecedented cost-of-living squeeze. Quantitative easing vastly inflated the value of financial assets, increasing the wealth of the already wealthy and the gap between rich and poor.
One result is a younger generation without access to the Bank of Mum and Dad struggling to put a roof over their heads. Even after recent falls in response to rising interest rates, the average house still costs close to a peak seven times the average wage. Meanwhile the average age of the first-time buyer is now 33, up from 29 in the 1990s and 23 in 1960. At the other end of the demographic spectrum, the first generation to enter the workforce following the closure of most final salary pension schemes to new members is approaching retirement. The average-size pension pot for those with defined contribution schemes is a paltry £30,000.
Even the central claim of capitalism, that it can allocate resources more productively than the state, is increasingly being called into question. Why are Britain’s rivers and coastal areas awash with sewage? Why do swathes of the country still have inadequate mobile or broadband coverage? Why were school buildings not fixed before they became too dangerous to use? Far from fuelling investment, decades of low taxes created a consumption boom while infrastructure has been allowed to crumble. Privatisation was supposed to free utilities from reliance on government funding, enabling them to fund investment in the public markets. Instead, shareholders borrowed to pay themselves generous dividends.
No wonder public support for capitalism is in retreat, and nowhere more so than in Britain. A poll conducted in 2022 for the Institute for Economic Affairs and the Fraser Institute, an Australian think tank, found 43 per cent of Britons thought that socialism was the ideal system, rising to 53 per cent among 18-34-year-olds. Even in America, where a majority supports capitalism, numbers have fallen. According to a Pew Research Report this year, 57 per cent of Americans now view capitalism favourably, down from 65 per cent in 2019. At the same time, support for a much more active role for the state is rising. Indeed, in Britain, 29 per cent of young people say they support communism, and eight per cent fascism.
No wonder, too, that Western governments are gravitating towards a new model of capitalism, one that better reflects the challenges faced in this new era of instability and insecurity. In a speech in July, Jake Sullivan, the US national security adviser, rejected accusations that “Bidenomics” resembles Trump’s economic nationalism, “that it is somehow America alone, or America and the West to the exclusion of others.” Instead, he insisted that the administration is forging a “new Washington consensus” based on coherent and consistent principles. The objective, he said, is not autarky but “resilience and security in our supply chains… This is about crowding in private investment – not replacing it. It’s about making long-term investments in sectors vital to our national well-being – not picking winners and losers.”
Yet there are good reasons to worry about where this new Washington consensus may be leading. Of course, it is naive to imagine that governments can resist political pressure to intervene to support domestic industries when foreign governments are lavishing subsidies on their own companies. Yes, there is a compelling case for governments to help incentivise the take-up of emerging technologies that may help deliver wider public policy goals such as tackling climate change, as the rapidly tumbling costs of offshore wind power and electric vehicles proves. And it makes sense to reassess the resilience of their supply chains in the wake of recent shocks.
Far from fuelling investment, decades of low taxes created a consumption boom while infrastructure has been allowed to crumble
Nonetheless, these are powerful economic weapons in the hands of politicians – which is why the economic history of much of the preceding 50 years had been one of trying to constrain their ability to deploy them. The risk is that the New Washington consensus, or Bidenomics – or what Rachel Reeves, the shadow chancellor, has dubs “Securonomics” – will turn into a reheated version of the industrial policy of the 1970s. Former US Treasury secretary Lawrence Summers spelt out this risk when he recently likened advocates of industrial policy to generals. “The best generals are the ones who hate war the most but are willing to fight when needed. What I worry about is that people who do industrial policy love doing industrial policy.”
The danger is that intervention descends into a subsidy war and a global race to the bottom; that incentivising the take-up of new technologies elides into picking winners and backing national champions; that boosting the resilience of supply chains becomes a justification for outright protectionism, undermining what remains of the rules-based trading system. The result would be that many of the benefits of capitalism in the form of greater innovation, better allocation of capital and higher productivity will be lost. What may emerge is a world of heightened fiscal risks as over-indebted government’s bad bets turn sour and heightened geopolitical risks as rising trade barriers exacerbate global tensions.
The West today faces very different – and arguably far more complex – challenges to those confronted by Reagan and Thatcher in the 1990s. Capitalism, like democracy, may be the worst form of economic organisation- apart from the alternatives. How to refashion it for the emerging world order is the urgent task of our times.
Simon Nixon has recently launched the Wealth of Nations political economy newsletter on Substack
