Capitalism after Covid

Think tank: Adam Smith Institute

Author(s): Matthew Lesh

January 26, 2022

This report from UK think tank the Adam Smith Institute looks at the case against disaster corporatism.

This latest paper, by Matthew Lesh, ASI Fellow and Head of Public Policy at the Institute of Economic Affairs, argues that businesses and governments must return to their proper roles in order to kickstart the post-pandemic recovery. Free markets, limited government, democracy and individual rights have delivered immense human prosperity. They have raised our standard of living, provided social mobility and protected human freedom. But some are now, particularly in response to the Covid-19 crisis, calling for a new settlement. They claim the crisis has shown the need for a bigger state as well as a new mission for business that downgrades the importance of profit. These claims are nothing new. Many were suggesting the same prior to the crisis. Nevertheless, this crisis – combined with the public’s declining faith in both governments and corporations – could be hijacked in a form of Disaster Corporatism to reshape society in an unconstructive manner. If this is to be avoided, we must learn the right lessons about state capacity and the role of business from Covid-19.

These lessons are the opposite to what has been often suggested. If governments and businesses are to regain public confidence and improve their effectiveness, there must be a reassertion of their purpose and a return to their traditional competencies. Many governments struggled to provide an effective pandemic response: they failed to respond in a timely manner and restricted tools, like testing, that could have prevented the virus from spreading. Meanwhile, businesses, albeit with challenges and state-support, have largely responded successfully to immense challenges and delivered life-saving vaccines and therapeutics. The crisis is revealing and should help refocus attention. The state failure evident in response to Covid-19 undermines the case for a greater government role in the direction of the economy. It is bizarre that many are calling for more power and more responsibility for the very same bureaucracies that have shown catastrophic failures. The state must, to regain public trust, focus on effectively delivering traditional demands for essential public services and safety.

The extent to which the state was effective during the crisis—such as in providing financial support to keep businesses afloat or in procuring and partly funding vaccines—does not necessarily set a model for how the state should act during a non-emergency. If the economy is going to flourish after the crisis, the state will need to allow the private sector to adapt to its new circumstances. It must avoid continuing to crowd out private sector activity, propping up unproductive ‘zombie companies’, and encouraging subsidy entrepreneurs. Not only do some want the state to be more involved in the affairs of business, many also want business to be more involved in the affairs of the state. This applies across social and environmental issues under the guise of ‘stakeholder capitalism’, replacing traditional profit-driven ‘shareholder capitalism’. Businesses, it is claimed, should accept lower profits in order to contribute towards social and environmental goals. The perpetrators of this false dichotomy are harming support for a liberal economy. Profit is socially responsible.

A business that returns a profit to its shareholders can provide quality and value-for-money products for their customers, pay wages to their workers, procure from their suppliers, and pay taxes to fund public services. Businesses that adopt a social justice agenda risk being perceived as incompetent – since they cannot live up to lofty goals that often require political collective action – and often face accusations of being cynical and hypocritical. The failings of the alternative, corporatist model of capitalism provide a warning to those who now want to reshape liberal market economies. The Wirecard scandal reveals the dangers of downplaying market forces in favour of broader social goals leading to the cover-up of unlawful corruption. Both the state and businesses must relearn their place if the successful liberal free market system is to survive, and flourish, after the crisis.