Only one man can save capitalism in Britain

Adam Smith recognised that cronyism and excessive profits undermine the public’s faith in markets

‘How selfish so ever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” With these words, Adam Smith emerged from the academic shadows and began forging his reputation as the father of modern economics and leading figure of the Scottish Enlightenment. For this was the opening paragraph of The Theory of Moral Sentiments, Smith’s first great magnus opus, published in 1759.

I cited these words last week, during an Edinburgh fringe debate on Smith hosted at Panmure House – his only surviving residence, now beautifully restored. Smith remains ubiquitous. He adorns the £20 note, his ideas still inspire countless political speeches and he is the subject of numerous biographies, the latest by Conservative MP Jesse Norman.

Yet, while rightfully seen as an architect of capitalism, Smith is as misinterpreted by his acolytes on the neo-liberal Right as he is by detractors on the Left. Often associated with untrammelled free markets, the reality is more nuanced.

Writing as the Industrial Revolution dawned, Smith understood that, while capitalism could generate wealth for business owners, it would work only for the broader population, and gain public consent, if certain conditions were met. Some 226 years after Smith died, we need to heed his words.

For, amid corporate scandals and polarising wealth inequality, UK capitalism faces a crisis of confidence. Ministers have failed to display the grit needed to face down vested interests, rein-in excess and make sure punters don’t feel constantly ripped off. They need to brush up on their Smith.

Moral Sentiments develops his belief, encapsulated in its opening paragraph, that human sympathy and altruism can play a role in restraining naked self-interest, the kind of bad corporate behaviour that riles the public. Such moral restraint, though, while often present, isn’t enough. Also required is the stiff breeze of genuine competition – the economic restraint on corporate self-interest – as Smith explained in 1776 in the second of his two blockbusters, The Wealth of Nations.

By far his best-known work, Nations backed the “division of labour” ( job specialisation that made Britain “the workshop of the world”) and “the invisible hand” (putting faith in the laws of supply and demand). Taken in isolation, these arguments present him as a heartless advocate of unrestrained greed. Yet Smith also warned of the dangers of unchecked capitalism, arguing that both moral restraint and competition can be usurped, giving way to abusive corporate practices that do widespread harm.

“People of the same trade seldom meet together, even for merriment and diversion,” Smith wrote, “but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” And it’s in industries with just a few large firms, of course, where such “conspiracy” and “contrivance” is most likely.

Since the fall of the Berlin Wall, capitalism has lifted billions out of poverty. Across the former Soviet economies and the developing world, the share of the global population in “extreme poverty” has plunged from two-fifths in 1990 to under one tenth today – an unalloyed triumph, driven by capitalism. Across the West, though, stagnant wages and spiralling corporate profits are fuelling a sense that capitalism is rigged, with benefits accruing to an elite few at the expense of the many. In the UK, from telecoms to energy to house building, industries are increasingly “concentrated”, resulting in bad outcomes for consumers – including less choice, poorer service, “super-normal” profits, under-investment and high prices.

A new International Monetary Fund report laments the sharply rising “economic wealth and power” of the corporate giants – in sectors from technology to pharmaceuticals, airlines to audit. Among the “advanced economies”, average “mark-ups” – the amount firms push prices above costs – have risen 43 per cent since the 1980s. Across the fast-growing and increasingly prosperous “emerging markets”, in contrast, over the same period, effective competition has kept mark-ups healthy, but relatively flat.

As summer ends, the Government needs to understand that British capitalism – in its increasingly cronyist guise – is doing the public a disservice. Scandals such as Carillion and BHS have seen customers, suppliers and taxpayers exploited, as bosses took massive unearned profits. They’re a Corbynite alibi to massively expand the frontiers of the state.

Smith saw that we need limited but strictly enforced regulations, ensuring low “barriers to entry” for new firms. Vigorous “anti trust” actions are also required to root-out crony capitalism, smashing oligopolies, allowing competition and common decency to combine so capitalism works for all.

“The rate of profit is always highest,” he observed, “in the countries which are going fastest to ruin.” Being pro-market doesn’t always mean being pro-big business. It often means precisely the opposite.

FOLLOW Liam Halligan on Twitter @Liamhalligan; READ MORE at telegraph.co.uk/opinion