Review of Just Capital: The Liberal Economy by Adair Turner
Macmillan Publishing Ltd, ISBN: 0333 90071-5, (hb), pp 400, 20, 2001

The former director of the Confederation of British Industries has written an important book. Just Capital has been marketed as an attack on market fundamentalism. This has always seemed to me a straw man. In Europe, including the UK, there are no such fundamentalists with any political influence, whatever the case may be among a few academics. The true value of the book lies in its demolition of a number of fallacies often held by businessmen and politicians.

For instance Turner is quite right to say that there is nothing in globalisation which rules out the so-called European social model under which high taxes are paid to provide an extensive network of public benefits. If European workers really valued these benefits so much that they were prepared to accept lower take-home pay to finance them that would be their affair. The problem is that they do not; or the governments and unions who speak on their behalf do not; and the combined result of prevailing pay levels and payroll taxes is a level of labour costs which prices people out of work.

As Turner emphasises, these disadvantages need to be argued on their own terms and not because of mysterious financial forces or a superstitious fear that Europe will become uncompetitive. It is companies that become uncompetitive. Countries or regions can only be uncompetitive if their real exchange rates are too high: a disequilibrium which is often self correcting.

It is of course arguable that the so called globalised economy is merely a return to the conditions that existed before World War One. At that time trade was roughly similar to today as a proportion of the national income and capital flows between countries were at least as large, if not larger. Even so, it is still something to celebrate. After nearly a century of wars, crises and controls the world economy has recovered some of the freedom which it enjoyed in the heyday of capitalism.

Many people will say that the development of Information Technology has added a new element, as any development in any part of the world can be viewed on computer screens within a matter of minutes. But Turner is surely right to argue that the bigger breakthrough was made at the beginning and middle of the 19th century when we leapt from horse drawn transport and sailing ships to the railways and transatlantic cable.

The author’s heretical point is that the case for further liberalisation either on the trade or on the capital side is mainly political. Barriers between Europe, North America and Japan are now extremely low - with the important exception of agriculture. As Adair Turner reminds us, the vast bulk of world trade now takes place between these areas. Turner may not have given enough attention to the effect of non-tariff barriers. But it is still true that the main victims of the remaining barriers are the Third World and the former Communist countries. The real reason why conferences such as the Seattle gathering of the WTO failed was not just the riots, but that success was not sufficiently important to the western countries that called the shots.

It has taken us nearly a century to recover the degree of openness which the world economy exhibited in 1913. The most important forces behind the near century of retreats were wars and the interwar Depression. The latter provoked a widespread popular demand for insuring against market forces, which gave governments an excuse for insulating their financial markets and protecting their home producers.

The preservation of the degree of openness we have already achieved depends partly on unpredictable cultural and ideological forces. But it also depends on the success of world leaders in preventing either another depression or arunaway inflation.

I wish I could feel confident that the inflation targets, combined with fiscal rules that are now in fashion, were a sufficient recipe for avoiding such catastrophes in future. I would be more hopeful if these rules did not depend for their operation not merely on economic forecasts, but economic forecasts with an inbuilt tendency to over-optimism, especially at turning points.