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Its a crisis of confidence, not of capitalism

By George Osborne

There have been many parallels drawn recently between the current economic situation and the 1930s. It is easy to see how the collapse of over-levera ed financial mar!ets and the painful recovery from a balance-sheet recession lends itself to comparisons. But are we witnessing a crisis of capitalism or a crisis of confidence in the ability of western democracies to offer decisive leadership and rising living standards to their populations " I thin! it is the latter. In a much more

e#treme form, of course, this contributed to the most dan erous development of the 1930s. In the west we have to confront this self-doubt before it ta!es root. Travel east and no one is tal!in of $capitalism in crisis%. The spread of free enterprise in &sia over the past 30 years has lifted hundreds of millions of people out of rindin poverty. The challen e for these countries is not sta nant incomes, but meetin the rowin political aspirations that prosperity brin s. In the west there is no shorta e of political e#pression. Indeed, when the 'ccupy movement starts pennin articles in the (inancial Times )uotin *aye!, you could say that political e#pression has reached surreal new levels. The problem facin western democracies is doubt about the ability of overnment to deliver risin livin standards+ the promise that our childrens world will be better than our own. ,y ar ument is that the way to address this doubt is not to run away from capitalism but to run towards it. Let us look at how this crisis of confidence manifests itself. (irst, there is the widely felt an er at the risin incomes of a wealthy few when the incomes of the ma-ority have fallen. This is potent when rewards accrue to those participatin in the very industry, financial services, that contributed to the crisis. I always thou ht it was incredibly short-si hted, even stupid, of ban!s to pay bonuses in .009 when ta#payers had only months earlier spent vast sums bailin them out and proppin up the whole system. It was reward for failure, which undermined a central premise of free mar!ets. What we need now is a greater application of free-market principles, not cosy protection for vested interests . /ritains reforms to rin fence retail ban!s are desi ned so ban!s that fail o bust, without holdin the ta#payer to ransom. 0econd, people are startin to doubt the ability of western democracies to secure for the ma-ority of their populations the rewards of lobalisation. The answer from overnments has been to construct ever lar er welfare systems to redistribute income. (ew deny some redistribution is desirable. /ut surely we !now by now that it will not address the lon -term decline in the relative livin standards of the ma-ority. 1nreformed welfare systems have not only become unaffordable in an a e of lar e deficits but they have become increasin ly difficult to defend when they have trapped millions in dependency and -oblessness. 0ome on the left, forced to ive up on ta# and spend, now want to le islate and re ulate for outcomes that mar!ets are not deliverin . This may seem li!e a free lunch but we !now from painful e#perience that tryin to control prices and wa es in a mar!et economy is a recipe for unemployment and economic decline.

Instead of tryin to compensate people for lac! of opportunity, we should devote our precious resources to increasin those opportunities and ivin people a sta!e in the lobal economy. 'ur populations will be the losers from lobalisation if they lac! the human capital, ood schools, world-class universities and investment in research and development that would enable them to char e more for their labour. (inally, we must confront the fears that western political systems are not able to ta!e decisive steps to deal with problems and thin! lon -term. 2aralysis in the 10 3on ress and slow pro ress in the euro4one have not helped. 5e in the 16 have our own problems but we have not fou ht shy of ta!in bold decisions, and I believe these decisions have inspired confidence in our ability to act. 5e need further bold decisions in the 16 on controversial issues such as airport capacity, re ulation and nuclear ener y if we are to stay competitive. &nd the west as a whole needs to ta!e bold steps to support enterprise if we are to brin reater prosperity. & lobal free-trade deal is an economic no-brainer but everyone says the politics are too difficult. *owever, the politics of declinin incomes are even worse, so in 7urope lets have the coura e to deepen our sin le mar!et and stri!e trade a reements with the li!es of India, 8apan and 0in apore. 9ets have the confidence to open up our infrastructure to investment from soverei n wealth funds and not use national security as an e#cuse for protectionism. 9ets have the self-belief to open our economies to competition, not hide behind the crypto-protectionist lan ua e of reciprocity. 9ets wor! to stren then institutions such as the 5orld Trade 'r anisation and the I,(, to show lobal mar!ets are overned by lobal rules. What we are witnessing in the west is a crisis of confidence, not a crisis of capitalism. The open society has always had enemies. The fortunes of our populations will be favoured if we confront them. The writer is UK chancellor of the exchequer