CASE STUDY 13

The State of Denial We're In

The Economist

TEN YEARS ON, WILL HUTTON IS STANDING BY HIS BESTSELLING CRITIQUE OF BRITISH CAPITALISM

“Did I get it wrong?” It takes a brave pundit to ask that question. So Will Hutton deserves credit for challenging himself and readers of his column in The Observer newspaper on January 9th to re-examine his bestselling critique of British capitalism, and try to decide whether it has stood the test of time. Much has changed, in Britain and elsewhere, since The State We're In was published in January 1995 – and much of the change has been different from what Mr Hutton expected. Yet after (no doubt) many long hours of soul-searching, Mr Hutton has found that he is as convinced as ever of his “core analysis”.

In essence, this analysis was that the increasingly market-oriented British model of capitalism was in trouble. It needed to be reformed in ways that, taking the best bits from the alternative models of capitalism, would reduce the power of short-termist shareholders and strengthen that of other “stakeholders” in companies, including workers and the state.

In 1995, British voters were preparing to bring to an end nearly two decades of Conservative Party rule. Their faith in the party's economic competence had been shattered by a deep recession, a series of corporate scandals and Britain's forced exit from Europe's exchange-rate mechanism, a forerunner of the euro. Mr Hutton's book caught the mood perfectly, especially among educated metropolitan sorts who had long hated the free-market rhetoric and reforms of the Thatcher and Major governments. Even the then opposition leader, Tony Blair, was impressed by the book – albeit only, as Mr Hutton notes ruefully, “for 10 days” after giving a speech based on it. Mr Hutton, in his own words, “changed from being another economics writer to someone the Daily Telegraph described as the most dangerous man in Britain”. He profited, not just from huge book sales, but also by becoming (for four years) editor of The Observer.

In the event, the past ten years have been the best decade for British capitalism since (at least) the 1950s, when Harold Macmillan, the then prime minister, famously declared that the British had “never had it so good”. GDP has grown each year, unemployment and inflation have been consistently low, incomes have risen – even at the bottom. And whereas in 1995 it was hard to think of one big British firm that was truly world class, today Vodafone, Tesco and BP lead a long and growing list.

The success of British capitalism is all the more striking when you consider the fate of the rival models of capitalism to which Mr Hutton unfavourably compared it. Japan was on course to become the world's biggest economy in 2005, he argued, thanks to its model based on the long-term co-operative relationships between its firms, banks, customers and workers, as well as the leadership given to business by the government. Alas, the Japanese economy has stagnated for most of the past decade. The state's role in the economy has come to be seen as largely negative. The keiretsu families of firms that tied together banks, firms and suppliers are loosening. Lifetime employment guarantees are disappearing. Above all, Japan's banking system – which Mr Hutton enthused about as he bashed British banks – has in effect gone bust and become a huge drag on business.

MODEL MISBEHAVIOUR

Mr Hutton was equally keen on Germany's consensus-based model of capitalism, with its long-term-focused banks and representation for workers on company boards. Germany's economy, too, has struggled ever since. Its banks are troubled, though not as much as Japan's, and are reducing their shareholdings in corporate Germany. The consensus between German bosses and workers is fast breaking down, as the bosses increasingly envy the freedom to manage enjoyed by their British counterparts.

Although it shares many of the short-termist stockmarket features of British capitalism, Mr Hutton was also more impressed by America's model of capitalism. Yet while the American economy has done even better than Britain's during the past decade, it has done so while exhibiting even more extreme short-termist behaviour than Britain's. This was exemplified by the stockmarket bubble – far bigger in America than elsewhere – and its aftermath. The short-termism of America and Britain may not actually be a good thing – Mr Hutton was right, and ahead of the game, to argue for better auditing and for institutional investors such as pension funds to devote more effort to corporate governance. But America's and Britain's relative success may indicate that financial short-termism is, on balance, less of a liability than a form of capitalism that is inflexible when faced with economic change (such as Germany's and Japan's), whether because of government rules or private arrangements.

Mr Hutton attributes the surprising (to him) success of British capitalism to two main factors. First, the efforts of the Labour government since 1997 to ease social tensions that might otherwise have impeded economic progress. This was surely never as big a risk as he feared. Second, that globalisation offered many parts of the British economy (notably in the service sector) opportunities that “could not be seen in 1994”. Well, maybe. But it seems odd of Mr Hutton to gloss over the fact that positioning Britain to benefit from globalisation was an explicit goal of those he criticised in The State We're In: advocates of the market-based reforms initiated by the Conservatives and (later) maintained, despite Mr Hutton's urgings, by Labour.

Will the British and American models of capitalism continue to outperform their German and Japanese counterparts in the coming decade? Will a new model triumph: Chinese capitalism, perhaps? What reforms to different models of capitalism might alter the outcome? While sticking to his core analysis, Mr Hutton has come to realise that “modern capitalism is an ever moving target: trying to understand it, and then making a compelling case for reform, is bloody difficult.” Quite so.