Forget fairness

This is my latest Perspective column for Fund Strategy.

“That’s so unfair”. The familiar shriek of teenagers when exasperated by their parents. Politicians also seem to have taken it up with fervour when discussing contemporary capitalism.

Earlier this month the leaders of both Britain’s main political parties were at it. David Cameron, the prime minister, gave a speech on moral capitalism with fairness playing a central role. Shortly afterwards Ed Miliband, the leader of the opposition, gave a speech during a visit to Which? magazine in which he promoted responsible capitalism.

Both followed remarks made a few days earlier by Nick Clegg, the Liberal Democrat leader, who called for the creation of a “John Lewis economy”. For him employee ownership should be at the centre of an improved model of capitalism.

Indeed, the pattern of each leader’s speech was the same. They wanted to distance themselves from responsibility from the recent economic turmoil, while at the same time promoting their own initiatives.

Cameron’s preferred model included more apprenticeships, corporate social responsibility, environmental responsibility, improved operation of the market and less regulation. As a Tory he cited historical Conservative figures such as Edmund Burke and William Pitt to give authority to his ideas.

Miliband’s countered by saying that Cameron was not serious about the responsible capitalism agenda. By implication then the Labour leader accepted the prime minister’s proposals but simply doubted his ability to deliver. Miliband might not refer admiringly to Burke or Pitt but other than that there was little difference between the two leaders. The Labour leader also used the opportunity to describe his party as “champions of the consumer”.

None of these ideas was new. As Cameron acknowledged last week he raised the possibility of a new popular capitalism at the World Economic Forum in 2009. At the same event Angela Merkel, the German chancellor, and Nicholas Sarkozy, the French president, called for a new moral capitalism. Meanwhile, Barack Obama has frequently used the concept of fairness to promote his initiatives.

The problem with such calls is that they owe more to public relations than to politics. It is hard to imagine anyone promoting their policies as unfair. The notion of fairness allows politicians to absolve themselves of responsibility for economic problems, while promoting policies they would have pursued anyway.

At the core of the idea of fairness is that everyone should get their just deserts. Those who work hard should be rewarded accordingly, while those who do not should receive correspondingly less. There should also be rewards for those who have the skill and imagination to make contributions to society by succeeding in the marketplace.

Most notions of moral capitalism include proposals that, it is claimed, would make life fairer. These can include rules to ensure bonuses are in line with performance as well as employee participation schemes, implemented by companies such as John Lewis.

The question of fairness is one of the thorniest in political philosophy so it cannot be fully resolved here. But it is possible to make tentative remarks about some of the main misconceptions on the subject.

First, it should be recognised that, for better or worse, inequality is deeply embedded in capitalism. The market economy depends on having both a group of entrepreneurs who run businesses for profit and a pool of workers who sell their ability to work. This is a core relationship in all forms of capitalism.

Although this sounds like a simple premise it is often misunderstood. For a start it does not follow that inequality is natural. It is possible to point to many pre-capitalist societies that were much more equal.

The difficult question is whether it is possible and desirable to replace the market economy with something different. It would only be worth considering if the alternative was likely to be more productive.

Capitalism’s main virtue is that it is far more dynamic than any previous economic system. As a result the living standards of the mass of the population are way ahead of those of earlier generations. The market system combines huge relative differentials in wealth with a quality of life that in absolute terms is far better than in the past.

The other big misconception about fairness is the idea that it is relatively easy to redistribute wealth. To put it in bald terms it is often thought that, given the political will, it would be possible to turn America into Sweden.

But the record shows that the market economy is resistant to such redistribution schemes. For example, high rates of income tax are routinely avoided by clever schemes implemented on behalf of the wealthy. To the extent there are differences between different countries, and these are often exaggerated, they tend to exist for deeply embedded political and cultural reasons.

Nor are wide income differentials necessarily the impact of a deliberate policy. The emergence of a financial bubble played a big role in the widening of inequality in the West from the 1970s until recently. Relatively wealthy people benefited from the rise in asset prices while the poorer sections of society could not afford to make such investments.

In that respect one of the less appreciated effects of the recent crisis is that it has probably narrowed inequalities. The net worth of many rich people declined as a result of falling prices of mansions, share portfolios, private jets and so on. Of course they did not suffer in the same way as the average person, but it is likely that differentials have nevertheless decreased.

In that sense there is a strong argument that the recent crisis, despite all the pain it has caused, could be classified as “fair”. But that should not be taken to mean it is in any way desirable.