We often take for granted that we live in a free-market economy. But do we? At the heart of our supposedly capitalist system, capital is allocated by fiat. Central bankers believe they can allocate resources better than the market. Their conceit is corrupting capitalism.
Interest rates are supposed to represent risk. The cost of borrowing should reflect the risk of lending. At least, they would if interest rates were determined by the market.
But they're not. They're set by small groups of bureaucrats in central banks. The Bank of England base rate determines the cost of borrowing throughout the economy. It fixes the price of capital.
When you think about it, that's bizarre. We don't readily accept official price-fixing in any other sector of the economy. We don't want the state to try and set the price of butter or eggs. We know the result would either be a supply shortage or a useless surplus. So why do we accept it for capital?
Central bankers think they can price capital better than the market. They believe they can use interest rates to manage the economy and beat the business cycle. As Mark Carney demonstrated in yesterday's Treasury Select Committee hearing, they take credit for economic growth, but never the blame when the economy crashes.
The reality is the reverse. Keeping the capital price too low distorts risk. It makes borrowing too cheap. It creates asset bubbles. It makes investors chase risk. It depresses pension yields. It keeps capital away from productive sectors of the economy. It's what caused the financial crisis.
Left-wing critics of bankers' bonuses and crony corporatism blame capitalism. Statism, they say, is the solution. What they miss is that so much of what's going wrong with the global economy is caused by state-control over capital.
Earlier this week, I spoke at the Adam Smith Institute about how capitalism has been corrupted. Unless we recognise the cause, we won't be able to fix it.
"A revolutionary text ... right up there with the Communist manifesto" - Dominic Lawson, Sunday Times
Printed by Douglas Carswell of 61 Station Road, Clacton-on-Sea, Essex