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It’s a crisis of confidence, not of capitalismBy 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-leveraged financial markets 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 think

it is the latter. In a much more extreme form, of course, this contributed to the most dangerous development of the 1930s. In the west we have to confront this self-doubt before it takes root.Travel east and no one is talking of “capitalism in crisis”. The spread of free enterprise in Asia over the past 30 years has lifted hundreds of millions of people out of grinding poverty. The challenge for these countries is not stagnant incomes, but meeting the growing political aspirations that prosperity brings.

In the west there is no shortage of political expression. Indeed, when the Occupy movement starts penning articles in the Financial Times quoting Hayek, you could say that political expression has reached surreal new levels. The problem facing western democracies is doubt about the ability of government to deliver rising living standards: the promise that our children’s world will be better than our own. My argument 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.

First, there is the widely felt anger at the rising incomes of a wealthy few when the incomes of the majority have fallen. This is potent when rewards accrue to those participating in the very industry, financial services, that contributed to the crisis. I always thought it was incredibly short-sighted, even stupid, of banks to pay bonuses in 2009 when taxpayers had only months earlier spent vast sums bailing them out and propping up the whole system. It was reward for failure, which undermined a central premise of free markets.

What we need now is a greater application of free-market principles, not cosy protection for vested interests. Britain’s reforms to ringfence retail banks are designed so banks that fail go bust, without holding the taxpayer to ransom.

Second, people are starting to doubt the ability of western democracies to secure for the majority of their populations the rewards of globalisation. The answer from governments has been to construct ever larger welfare systems to redistribute income. Few deny some redistribution is desirable. But surely we know by now that it will not address the long-term decline in the relative living standards of the majority. Unreformed welfare systems have not only become unaffordable in an age of large

deficits but they have become increasingly difficult to defend when they have trapped millions in dependency and joblessness.

Some on the left, forced to give up on tax and spend, now want to legislate and regulate for outcomes that markets are not delivering. This may seem like a free lunch but we know from painful experience that trying to control prices and wages in a market economy is a recipe for unemployment and economic decline.Instead of trying to compensate people for lack of opportunity, we should devote our precious resources to increasing those opportunities and giving people a stake in the global economy. Our populations will be the losers from globalisation if they lack the human capital, good schools, world-class universities and investment in research and development that would enable them to charge more for their labour.

Finally, we must confront the fears that western political systems are not able to take decisive steps to deal with problems and think long-term. Paralysis in the US Congress and slow progress in the eurozone have not helped. We in the UK have our own problems but we have not fought shy of taking bold decisions, and I believe these decisions have inspired confidence in our ability to act. We need further bold decisions in the UK on controversial issues such as airport capacity, regulation and nuclear energy if we are to stay competitive. And the west as a whole needs to take bold steps to support enterprise if we are to bring greater prosperity.

A global free-trade deal is an economic no-brainer but everyone says the politics are too difficult. However, the politics of declining incomes are even worse, so in Europe let’s have the courage to deepen our single market and strike trade agreements with the likes of India, Japan and Singapore. Let’s have the confidence to open up our infrastructure to investment from sovereign wealth funds and not use national security as an excuse for protectionism. Let’s have the self-belief to open our economies to competition, not hide behind the crypto-protectionist language of reciprocity. Let’s work to strengthen institutions such as the World Trade

Organisation and the IMF, to show global markets are governed by global 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