If This Is Capitalism, Why Is Everything Getting Harder?

Why are state intervention and political privilege being mistaken for free-market failure?

The UK today is frequently described as one of hyper-capitalism, where the market supposedly reigns supreme. The Prime Minister has staked his premiership on undoing 40 years of neoliberalism.

Just look at the large and multinational corporations generating record quarterly profits, distributing eye-watering dividends for shareholders and bonuses for executives. Also, we have trillion-dollar companies being listed on global stock exchanges, private equity funds buying up housing blocks, venture capital firms pouring billions into private start-ups, and individual shareholders extracting wealth from virtually every corner of daily life.

Yet something feels deeply broken for a wide range of society.

People are facing a relentless economic squeeze year on year. Home ownership has drifted out of reach for an entire generation. Energy bills continue to strain household budgets, with UK electricity costs among the highest in the developed world. Real wages have barely grown since the global financial crisis. Basic services feel increasingly dysfunctional. The promise of greater prosperity for everyone appears to be receding even as corporate profits, executive compensation and financial asset prices reach record highs.

The instinctive public diagnosis is that this is what happens when you let the free market run wild without any protection for the public. Unchecked corporate greed has hijacked society. Markets have been given too much freedom. Individual self-interest has produced exploitation, inequality and insecurity. In his first statement to Parliament, Andy Burnham said that from the 1980s, this country took a series of wrong turns, where political power was centralised and economic power privatised.

The obvious solution, we are told, is for the government to step in with tougher regulations to maintain the integrity of the market and protect the public. The current Labour government has clearly signalled a shift towards greater state ownership and control.

But before accepting that diagnosis, shouldn’t we ask a more basic question: Are we actually living under a system of free markets and individual liberty?

What is a free market?

A free market is voluntary exchange between individuals under the rule of law. It depends on secure property rights, open competition and the freedom to make economic decisions without political direction, provided that individuals do not use force, fraud or coercion against others.

In a free market economy, people are free to decide what to produce, what to buy, where to work, what to invest in and with whom to trade. No central authority determines the value of a product or service, directs investments or decides which businesses should succeed.

This does not mean that every decision will be wise or every outcome will be equal. A free market does not guarantee equal wealth, equal ability or equal success. It provides a process through which millions of individuals can coordinate their plans voluntarily, each using their own knowledge, preferences and judgement.

Three features are particularly important to a free market:

Prices act as honest signals

Prices provide signals about scarcity, demand and the availability of resources. They help consumers, workers, entrepreneurs and investors decide how to use their limited time, money and resources without requiring a central planner to direct them.

Failure is an essential feedback mechanism, and as important as success

Profit rewards businesses that create value for customers. Loss disciplines those that do not. A genuinely free market therefore allows businesses to fail, investors to lose money, and inefficient firms to make way for better competitors. This is not a flaw in the system. It is the feedback mechanism that keeps markets dynamic and honest.

The state is a neutral umpire

The state’s role is to establish and enforce the rules that allow voluntary exchange to take place. It should protect property rights, enforce contracts and punish force, fraud and coercion. It should not pick winners, guarantee profits, subsidise failures or direct economic outcomes. There is a fundamental difference between establishing the rules of the game and deciding who should win it. The state should act as the umpire, not as a player directing the result.

This is why we need to draw a sharp line between being pro-market and being pro-business.

• A pro-market system protects the process of open competition. It allows new businesses to enter, established businesses to be challenged, and consumers to choose between competing products and services.

• A pro-business system uses state power to protect incumbent companies from competition. It provides subsidies, guarantees, privileges and regulations that make it harder for potential competitors to emerge.

When private enterprise is mistaken for a free market

The existence of private companies, buying and selling, and business profits does not by itself prove that markets are free. The important question is how those profits were earned. Were they earned by serving customers in an open and competitive market, or were they secured through political protection and state-created barriers?

What is the system we actually live under?

With the above description of what a free market looks like, how free is the economy we actually live under?

How free is an economy when government restricts the supply of land, regulates entry into professions, subsidises favoured industries, protects failing institutions and relies on a central bank to influence the price of money? How free is a market when the state can change the rules, redistribute resources and alter the incentives facing almost every participant?

The answer is that we do not live under an economy governed primarily by free-market principles. We live under a mixed or managed economy. It contains private businesses and voluntary exchange, but these operate within an increasingly extensive system of state intervention and political direction.

Christopher Snowdon of the Institute of Economic Affairs has recently given one part of this a name: The capitalist command economy. He notes that firms remain in private hands, but government tells them how much they can charge, what products to sell and what political objectives they need to serve. For example, energy price caps were dismissed as “Marxist” when Ed Miliband proposed them in 2013 but became permanent after Theresa May adopted them in 2017. The Zero Emission Vehicle Mandate requires carmakers to sell a rising share of electric cars, with fines of up to £15,000 for each petrol or diesel car sold above their quota. In 2026 the Chancellor pressed supermarkets towards a “voluntary” food price cap and, when that was dropped, announced powers to fine firms for “unfair price rises”.

Government does not have to plan every outcome directly to shape the system as a whole. The state influences what can be built, what can be produced, who can enter a profession, which industries receive support, how businesses are taxed, how money is created and which institutions are rescued when their decisions fail. Politicians interfere with the free market, many times being cheered on by a large proportion of the public, but take no responsibility for the outcomes. Instead, capitalism and greedy corporations and entrepreneurs are blamed.

The result is a system in which private companies may remain nominally private, but the conditions under which they operate are increasingly shaped by political decisions.

When corporations and vested interests become partners of the state

We need to distinguish between a free market and a system of political allocation.

Command and cronyism are not always opposites. They are two ways of replacing open competition with political decision. The state directs and disciplines some firms, and protects and rescues others. A large company can find itself on both sides: squeezed on prices by ministers while shielded from new entrants by the same rulebook.

Access can matter more than merit, and even more so in a crisis. In 2020 the government ran a “high priority lane” for PPE offers referred by MPs, ministers and senior officials. In 2022 the High Court ruled it unlawful, in breach of equal treatment, though the judge also found the two firms at the centre of the case would probably have won them anyway.

In a politically managed economy, success can depend just as much on access to government as on serving customers. Large corporations lobby for subsidies, tax advantages and state guarantees. They may also support regulations that make it harder for smaller competitors to enter the market. Established businesses can use political influence to protect their position, while presenting those protections as necessary for stability, safety or the public interest.

This is not competition on equal terms. It is a form of corporatism in which the state and large vested interests increasingly work together to shape the market. A system that allows businesses to keep their profits while transferring their losses to taxpayers is not a free market.

The clearest example is the rescue of the banks in 2008. The National Audit Office put peak support to the sector, in guarantees, loans and share purchases, at £1.16 trillion, of which £133 billion was cash. Shareholders and executives had enjoyed the upside for years. When losses arrived, taxpayers absorbed them. Defenders argue that letting the banks fail would have cost more, and the NAO agreed at the time. Whether that defence is true or false, one thing is clear: it is not a free market when the largest institutions in one industry received state support that would never be available to a new or smaller competitor or other industries. As we noted earlier, in a free market profits are a reward for value creation and losses are the consequence of not creating value.

The state may claim to be protecting the market, but in practice it ends up deciding who is allowed to compete within it.

The monetary system and the illusion of prosperity

We are told that rising asset prices are evidence of prosperity and that the resulting inequality is a failure of capitalism. Yet the price of money is not simply left to market forces. It is heavily influenced by central banks, monetary policy and the expansion of credit.

When the supply of money increases, it does not affect everyone equally or at the same time. Those closest to the new money, often financial institutions, governments and asset owners, are able to spend or invest before prices have fully adjusted. Those further away experience the effects later through higher prices, rising rents, more expensive homes and a reduced purchasing power of their wages and savings.

This is a transfer of purchasing power that can quietly reduce the real value of people’s productivity. A worker can work harder, receive a pay increase and still find that their purchasing power has fallen. A saver can act responsibly and still see the value of their savings eroded. Meanwhile, owners of property and financial assets may benefit from the increase in nominal values.

This is not a new observation. In 2013, the Bank of England’s Andy Haldane admitted that policymakers had “intentionally blown the biggest government bond bubble in history”.

Is this really the result of free markets, or is it the consequence of a monetary system shaped by political decisions? When purchasing power is steadily eroded, why is the resulting hardship blamed on capitalism rather than on the institutions that influence the supply and value of money?

Regulation: protection from competition and a brake on innovation

Some rules are essential to a free society. Laws against fraud, theft, violence and coercion protect the conditions necessary for voluntary exchange. The problem begins when regulation moves beyond protecting rights and starts attempting to manage economic outcomes.

Every new regulation creates costs. Large corporations may be able to absorb those costs through dedicated compliance departments, legal advisers and extensive resources. Smaller businesses and potential new entrants often cannot. In any case, these additional costs are in the end always borne by the final consumer through higher prices of the product or service.

This means that regulation intended to protect the public can sometimes protect established companies from competition. It can make it harder for new businesses to enter, harder for entrepreneurs to experiment and more expensive for consumers to access alternatives.

Over time, the rulebook becomes so complex that permission, licences and official approvals are required before a business can operate. Innovation is no longer simply a matter of developing a better product or service. It becomes a matter of securing regulatory acceptance.

At what point does regulation, especially in the name of safety, become central planning by another name? Who benefits when compliance becomes so expensive that only the largest companies can afford to compete?

Beyond the questions of power and privilege, these interventions raise a deeper question: can any central authority possess the knowledge required to coordinate an entire economy?

This is the knowledge problem at the heart of central planning.

The knowledge problem of central planning

The central planning problem is not simply that politicians and officials may make poor decisions. It is that no central authority can possess the knowledge required to coordinate an entire economy effectively.

This point was explored most famously by the economist Friedrich Hayek. His argument was not that individuals are unintelligent or that governments are always incompetent. It was that the knowledge necessary for economic decision-making is dispersed throughout society.

A farmer knows the conditions of their land. A worker knows their skills, ambitions and personal circumstances. A business owner understands their customers, suppliers and competitors. A consumer knows what they need, what they can afford and what alternatives are available.

This knowledge is local, practical and constantly changing. Much of it is not written down or easily communicated. It is discovered through experience and adjusted as circumstances change.

No central planner can gather all of it.

Yet every time the state attempts to direct an economy, it must make decisions that depend on precisely this knowledge. It must decide which industries should receive support, where resources should be directed, which technologies should be encouraged, what goods should be produced, how much they should cost and which risks are worth taking.

How can a small number of officials know what millions of individuals know separately? How can they anticipate changing consumer preferences, local conditions, entrepreneurial discoveries and future shortages before they occur? And when their decisions produce unintended consequences, how will they know which part of the plan was wrong?

This is why prices matter so much. Prices are not simply amounts attached to goods. They communicate information about scarcity, demand, opportunity and risk. They allow people who may never meet, and who possess completely different knowledge, to coordinate their actions.

A rising price may encourage producers to increase supply and consumers to economise. A falling price may signal that resources are becoming more abundant or that consumers are seeking alternatives. These decisions happen without anyone directing the entire process.

The price system does not need to be perfect to be useful. It only needs to communicate information more effectively than any central authority could.

When governments interfere with prices, the resulting shortages and surpluses are often mistaken for market failure. A shortage may then be blamed on greedy businesses. Rising prices may be blamed on excessive profits. Weak investment may be blamed on insufficient government support. The proposed solution is often further intervention, even though the original problem was created by interfering with the process of voluntary coordination.

This does not mean that markets are always right or that every price reflects some perfect truth. Prices can be affected by mistakes, uncertainty and changing conditions. Businesses can misjudge demand and consumers can make poor decisions.

But markets contain a process for correcting these errors. Profit attracts resources towards activities that consumers value. Loss pushes resources away from activities that do not create sufficient value. Competition provides further pressure to adapt.

Central planning lacks this same process of discovery and correction. Decisions are made in advance, often with incomplete information, and then protected from criticism by further layers of administration. When the plan fails, the response is usually to adjust the plan rather than question the assumption that one authority should have been planning in the first place.

The issue, therefore, is not whether government officials have good intentions. They may genuinely want to improve people’s lives. The issue is whether good intentions can overcome the limits of knowledge.

Central planning is ultimately an attempt to replace the decisions of millions of individuals with the decisions of a few. It may be presented as rational, efficient and compassionate, but it cannot escape the basic problem that the necessary knowledge is dispersed, incomplete and constantly changing.

The free market is not a perfect system because it is operated by imperfect people. It is valuable because it allows knowledge to be used where it exists, decisions to be tested through experience, and mistakes to be corrected through competition and failure.

Why is the state repeatedly invited to solve problems it helped create?

If central planning is limited by the knowledge problem, and state intervention often distorts the incentives and prices people rely on, why do we keep turning to government for solutions?

The answer is largely psychological. When people face rising costs, declining services or growing insecurity, they understandably want something to be done. Government appears to be the one institution large enough to act. It can pass laws, redistribute money, regulate behaviour and promise protection.

The problem is that the state is often invited to solve problems that its own policies have helped create. The pattern is remarkably consistent:

1. The state intervenes in an area of economic life.

2. The intervention produces distortions, unintended consequences or new forms of dependence.

3. Those consequences create hardship.

4. The hardship is then presented as evidence that the market has failed or that government intervention has not gone far enough.

5. The state responds with further intervention.

I’ve written at greater length about how state intervention and redistribution in particular becomes a one-way ratchet which continually erodes individual liberty and distorts the marketplace.

This is not to suggest that every government policy produces only negative effects or that every private business decision is beneficial. It is to recognise that interventions cannot be judged solely by their intentions. We also have to examine the incentives they create and the consequences that follow.

Government intervention therefore develops a ratchet effect. It is politically easy to introduce a new rule, subsidy or entitlement in response to a problem. It is much harder to reverse it when the costs become apparent.

The state is then treated as indispensable because so many parts of life have been shaped around its previous interventions. People become dependent on subsidies, regulations and public institutions, while the voluntary alternatives that might once have provided resilience are weakened or crowded out.

We have now arrived at the central confusion. When the consequences of state intervention appear, the intervention itself is rarely examined. Instead, the resulting hardship is attributed to the market, and the state is invited to correct the damage by exercising even more authority. Before asking what government should do next, we should first ask whether government should step back from policies that helped create the problem.

The free market did not do this

We can now return to the question we began with: if this is capitalism, why is everything getting harder?

The answer is that much of what is called capitalism today is not a genuinely free market. It is an economy shaped by monetary intervention, planning restrictions, political allocation, corporate privilege and increasingly complex regulation.

The existence of private companies and business profits does not prove that markets are free. The relevant question is whether success was earned through open competition or secured through political protection. Nor can inflation, unaffordable housing and rising energy costs simply be treated as the natural consequences of voluntary exchange when they have been shaped by decisions made by governments, regulators and central banks.

The problem is not that markets have been given complete freedom. It is that they have been constrained and distorted by politicians, activists and government policies, while the consequences are then blamed on the market. The state intervenes, creates unintended consequences and then presents itself as the solution to the problems those interventions helped produce. Before giving government more power to repair the damage, shouldn’t we first ask whether government intervention and policies helped create it in the first place?

The free market did not do this. A system of state intervention, political privilege and central planning did.

Jilan Shah is an insurance and reinsurance professional in the London Market with a keen interest in individual liberty, free markets and sound money.