People often characterize modern capitalism as cruel, of ‘being red in tooth and claw’ as T.H. Huxley would have it. In truth, the real flaw of contemporary capitalism is its botched attempts to be kind, which — thanks to the heavy hand of successive governments — it does tragically poorly. As a result, it has become a system that has forgotten how to fail, and — as Matthew Syed points out in Black Box Thinking — in being prevented from failing it has also been prevented from learning.
These attempts at kindness have led to the two principal instruments of capitalism, Price Discovery and Cost Discovery, being broken. When these work, capitalism is evolutionary, with collective knowledge (and thus, economic growth) compounding rapidly. When they become dysfunctional, capitalism becomes custodial, and firms persist not because they create value but because they are maintained in a persistent state of pre-failure.
In this world, consumers consume not because prices signal scarcity (and therefore buyers allocate their resources appropriately), but indiscriminately because prices have become meaningless via caps and subsidies. So now, the economic engine runs, but it doesn’t go anywhere. This is precisely where the UK finds itself.
Market economies are mainly criticised or defended in ideological terms such as fairness versus efficiency, freedom versus exploitation. However, the core operational feature that distinguishes a market from any other system isn’t ideological but informational. Markets work best because they discover information that no planner, regulator or manager can fully know in advance. Chris Bayliss and others have written about how the UK has forgotten this and has allowed its economy to become wedded to policy preferences and thus has morphed into a state-led, needs-based economic system.
Neo-classical economists would say that markets are best explained as allocation mechanisms. Schumpeter offered a far more interesting hypothesis: capitalism is an evolutionary system, in which markets function as decentralised learning processes rather than static allocation mechanisms. Evolution requires experimentation in the raw- progressing through variation, selection and elimination to progress. In this view, prices are hyper-compressed signals containing data concerning scarcity, urgency, substitution and human expectations and desire. Costs are equally illuminating: these are not mere accounting entries: they are entire feedback loops telling firms whether their use of labour, capital and time are justified by demand.
Schumpeter’s view of the economy is as a learning machine with the implication that interference in the machine limits its effectiveness, and so it shines a brutal light on where the governments of the 20th century (all obsessed with fairness, equality and above all “being kind”) have failed. When the learning machine functions, prices converge for different consumers, costs converge towards marginal efficiency, profits signal the creation of value, and losses help highlight and eliminate waste.
Without these effects emerging from the millions of transactions that take place every day, we are left with a system that can only be governed by political diktat. This is the world where resources are directed by information-poor managers and technocrats. Here, price discovery becomes politically contingent — prices are overridden, capped and/or subsidised whenever they offend prevailing sensitivities. This moralisation of prices (which happened gradually under successive Conservative governments but has been embraced with indecent glee by Starmer’s administration) has been one of the most corrosive shifts in public policy in modern times. High prices are no longer important signals, but injustices. Low prices (mainly achieved by taxpayer-funded interventions) are not warnings of oversupply and waste, but virtues to be applauded and repeated as often as the SW1 media grid will accommodate.
Thanks to this moralisation of market behaviours, too many companies have their fates decided by policy decree. The hospitality industry — with its Hogarthian connotations for Labour’s bob-wearing puritans — is currently on the end of a multiplicity of sin penalties, and as a result we are losing the British pub at a rate that, were it a species of animal, would have the BBC Natural History unit and Sir David Attenborough in fits of apoplexy.
Equally dangerously, the government’s favored children are being smothered with “help”. For these superficially lucky businesses costs rapidly become opaque- firms operating in these regulated sectors face softened constraints on their expenditures, receive guarantees (express or explicit) and expect intervention if the first two factors tempt them into distress. We end up with low productivity, underinvestment in efficiency and an economy where firms survive through lobbying rather than innovation.
And thus, we arrive back at the primary economic ghoul of the post-GFC world: the Zombie Firm. Zombie Firms are those which persistently fail to generate sufficient operating cashflow to cover their cost of capital, yet continue to shamble around the economic landscape because external support prevents their natural death. Far from being a temporary pathology, Zombie Firms have become a defining feature of modern economies, shaping capital allocation, suppressing productivity growth, and crowding out more efficient uses of labour and investment.
Their persistence is inseparable from the prolonged era of cheap capital that followed the financial crisis. When interest rates are suppressed for extended periods, risk to capital is no longer properly priced, and firms that destroy value are able to roll debt forward indefinitely at negligible cost. In such an environment, cost discovery breaks down: borrowing ceases to convey meaningful information about whether a firm’s activities justify the resources they consume, and survival becomes a function of financing conditions rather than economic merit.
Enron — often remembered as a morality play about greed — is better understood as a warning about what happens when cost discovery is mortally weakened. There, the use of mark-to-market accounting — which endlessly restates both profits and costs as external conditions change — hid the cash position of the business from markets, media, and Enron’s own executives right up until disaster was inevitable. The firm did not merely deceive others but lost sight of its own underlying economic reality.
So, what should happen when such distortions are allowed to unwind? Hanjin Shipping’s bankruptcy is perhaps the sine qua non in this instance. This South Korean company was — until 2016 — one of the largest container shipping firms in the world. It failed in a sector plagued by oversupply and defaulted on its loans. When it collapsed, ships were arrested in ports and excess capacity vanished almost overnight. Capital that should never have been deployed was destroyed, supply contracted, prices adjusted, and market forces reasserted themselves. Or, as Schumpeter might say, the machine learned and the world got better.
A strong argument could be made that we are the Zombie Firm, but at a state level
There was obviously some pain experienced during this realignment of supply and demand. Amidst this pain, Hanjin appealed to the government for rescue, citing job losses. The South Korean Government, recognising the correctness of capitalism’s cruelty, declined to do so. The feedback loop fed back, and equilibrium returned.
A strong argument could be made that we are the Zombie Firm, but at a state level. In the UK now, patronage towards certain consumers and producers not only obscures price discovery through subsidy and benefit payments, but also fatally hides cost discovery, as happened at Lay and Skilling’s Enron. As a result, we have an economy that appears stable, but struggles to grow, innovate or effectively allocate capital. The UK has essentially smoothed away that feedback loop, and as a result its businesses are perpetually dying.
Don’t mistake this for polemical hyperbole. Regulated and politically sensitive sectors — those in which intervention is the norm rather than the exception — account for roughly a quarter of UK economic activity, generating turnover equivalent to around 40 per cent of GDP. Energy, housing, transport, de facto public services (including contemporary corporate hybrids such as Serco), and the public sector itself together generate approximately £1.44 trillion in annual turnover.
Schumpeter foresaw all of this. He warned that capitalism would collapse not because it failed, but precisely because it had succeeded — innovation would become bureaucratized, and creative destruction would be politically channelled. That is exactly what has happened in the UK. Capitalism produces, consumes and employs, but it no longer is capable of the “red in tooth and claw” selection that is required to produce the data needed to learn. By denying price and cost truth and recoiling from the Darwinism of economics, we have starved the very learning machine that once delivered progress. What remains is an economy that promises fairness and efficiency, yet delivers neither.
