Vaclav Havel, the writer and first president of the Czech Republic, put it like this:

‘Though my heart may be left of centre, I have always known that the only economic system that works is a market economy. This is the only natural economy, the only kind that makes sense, the only one that leads to prosperity, because it is the only one that reflects the nature of life itself. The essence of life is infinitely and mysteriously multiform, and therefore it cannot be contained or planned for, in its fullness and variability, by any central intelligence’.

Ironically the left has in many respects been a shrewder operator of capitalism than capitalists (think of the social-democrat economies of Northern Europe). But, as the Havel quote hints, it has been less clear thinking about markets, to which the left gives too little attention because it persists in conflating them with ‘capitalism’ as a whole, and by extension with big business, which is the current economy’s most conspicuous beneficiary.

The confusion between capitalism and business on the one side with the market economy on the other, and the baleful consequences that result, was one of the main topics explored by John Kay in a characteristically subtle (and completely unreported) LSE lecture at the beginning of June. Capitalism, said Kay, was no longer a helpful framework for thinking about the economy. The economic significance and value of capital markets were greatly overstated. Big companies being almost entirely self-sufficient as to capital needs (think of Apple’s $150bn cash pile) the so-called capital markets in practice serve the purpose of financial engineering and releasing capital, while the stock market is just a casino for secondary investors to gamble in. Financial-market considerations get allotted far too much attention and say in corporate affairs, from governance downwards.

It’s not surprising that the right, making the same conflation as the left, should fail to make the crucial distinction between being pro-market and pro-business. But it is dismaying that the left has been seduced, or seduced itself, into favouring the interests of existing business over the interests of the real market economy, that is the markets for goods and services. The consequences came into sharp relief in the ‘intellectual vacuum’ that greeted the crisis of 2008, charged Kay, when having spent 100 years preaching the takeover of capitalism’s commanding heights, the left was so terrified the system might collapse under the weight of its own contradictions that not only did it not nationalise the banks in order to run them down in an orderly fashion, it spent vast amounts of taxpayers’ money propping up dysfunctional companies in a way that practically guarantees another crisis in a few years time.

Being in favour of markets, said Kay, does not require genuflection at the altar of greed, scale, competition red in tooth and claw, rational economic man, or market perfection. Rather, it recognises that in conditions of radical uncertainty, where it is impossible for anyone to predict the future, or even the range of futures possible, the market economy’s ‘disciplined pluralism’ does a better job of both exploring new possibilities and closing down failed ones than the alternatives. Neither necessarily fair nor efficient, like democracy it is the least worst option; like democracy too, being socially embedded, it needs constant, pragmatic care and attention to keep it functioning properly.

Nurturing a functioning market economy requires very different policy prescriptions from those currently offered by either right or left. Through the price mechanism and ease of market entry and exit, the market economy is above all a process of discovery. Privileging value creation over value appropriation, it needs, said Kay, a ‘steady stream of unreasonable optimism’ in the shape of entrepreneurs willing to take their chances with innovative new products and services.

Its biggest enemy is vested interest and concentrations of economic power which since time immemorial have given shelter to predators and rent-seekers more interested in using their position to extract value from employees, customers and society as a whole than in undertaking the harder, uncertain work of product and market innovation. Castles on the Rhine, 10 per cent commissions on shares, lobbying and entertaining in expensive restaurants to shore up established interests, are all manifestations of rent-seeking. More insidiously, and worryingly, the version of strategy espoused by Michael Porter, ‘the most cited scholar in economics and business…[whose] ideas are the most widely used in practice by business and government leaders around the world’, is all about identifying ways of ‘avoiding competition and seeking out above-average profits protected by structural barriers’ – in other words, rent-seeking. Small wonder that potlical lobbying has become a more lucrative occupation for CEOs than developing relationships with customers and suppliers.

Unfortunately, regulation based on behaviour, rather than structure, is also vulnerable to rent-seeking as individuals seek constantly to push the envelope by treating any activity that is not formally outlawed as permissible. The result, noted Kay, is ‘regulation that is extensive, intrusive and ineffective’ – the worst possible combination. Meanwhile, in sector after sector public policy has confused the health of the industry with the health of individual firms, protecting vested interests to the detriment of experiment and the development of new markets.

Can we get a better functioning market economy? Yes – but only if the left understands that that means getting tough on business and breaking up the concentrations of power that are solely dedicated to prevent others nibbling at their over-calorific lunch. Unless and until it does, public policy will continue to be undermined by ‘a wealthy elite that is pulling strings not behind the scenes but quite publicly – people who are not traditionally wealthy, but who have acquired wealth through rent-seeking and value extraction’.