The Free Market Delusion

I am so old that the commentariat includes a man whose father, from his Russell Group Professorial Chair, once described me in print as a “prophet”. Hope springs eternal when even in The Critic, Sebastian Milbank can now write:

Another British Prime Minister announces his agenda, and you can already hear the howls of pain and anger from the most tormented minds in Britain — the free marketeers. Poor Allister Heath in the Telegraph summed up the collective pain:

He is the seventh PM in a decade and evidently has no clue what to do. We are living beyond our means, an ever larger welfare state sucking the lifeblood from a quasi-stagnant private sector economy that is now too small, too constrained by red tape and taxes and command-and-control policies to fund our ruling class’s socialistic ambitions.

Now, I agree with much of this. The welfare state has expanded beyond all sense and reason, strangling public and private investment alike, taking young workers out of the labour market, and imposing unfair costs on those who contribute the most. There is no shortage, either, of poorly designed and excessive tax and regulation. But is all this “socialism”? And do we really have “command-and-control” policies?

This is what I call the free market delusion. The assumption is that late modern post-industrial powers like Britain are on the brink of economic dynamism and growth, if only the state was shrunk, and if only tax and regulation fell away. But if us traditionalist, communitarian Tory socialist types are often accused of “wanting to return to a past that never existed”, with how much more justice can this be applied to the Thatcher nostalgists?

They live in the endless delirious dream of an eternal 1980s, and the “consumerism, individual liberation, social mobility, mass home and asset ownership and economic boom that followed”. This shining moment is to be forever contrasted with its demonic opposite: “the 1970s, a period that most don’t even remember, a disastrous, bankrupt, impoverished, litter-strewn, strike-ridden decade that turned the UK into the world’s laughing stock and came to symbolise a very British declinism”.

But what if the Britain that they hate — welfare over investment, a stagnant private sector, a micromanaging regulatory state — were the product of the era they claim to love? Looked at on the facts, Thatcher is not the hero small statists claim her to be. In absolute terms, the size of the state increased, and at most it can be said she constrained the increase behind the pace of growth. Moreover, where she cut, and where she expanded, was precisely in the opposite manner to what might be expected. Spending on welfare and health increased significantly under Thatcher, whilst she cut back on public investment in education, infrastructure, defence (with the exception of a post-Falklands period of expansion which didn’t last) and industrial subsidies.

Privatisation was an unmitigated catastrophe. Our privatised utilities have given us the most expensive electricity in Europe. An ambitious plan to build ten nuclear power plants announced in 1980 could have given us energy security, but was derailed in no small part by the chaos of privatisation and the short-termism that characterised Thatcher’s government. Instead, since the 1980s, British energy independence has continually fallen. Far from the private sector modernising and investing in newly private industries, the thoughtless rush to take firms off the government books was generally a death sentence, with the denationalised shipbuilding industry collapsed to a third of its earlier size. Areas like steel, shipping and automobiles could have been modernised and gradually opened up to private investment, but instead were thrown to the wolves. Privatised water saw investment in water infrastructure collapse with no major reservoirs having been built since 1992.

You can blame overregulation for this lack of private investment if you want, but on every objective measure, the pre-1980s nationalised system of utilities produced greater capacity and cheaper prices for consumers. And as Philip Booth of the IEA (no socialist he) has pointed out, Thatcher was not really a deregulator even in the most famous case of the finance industry. In fact, according to Booth, she brought the worst of both worlds to the industry, destroying old codes of restraint and honour, and replacing them with a system that was both riskier, but at the same time excessively burdened with regulation:

The idea that the 1980s was a period of increasing regulation and not deregulation is not revisionist history. Contemporary accounts argued that, under the regulatory system that developed, the City has ceased to be a place ‘where you look after yourself according to a code of honour of conduct. It is a tough regulatory system’; that the regulator had a ‘very tough bunch of powers’; and that ‘There is a substantial risk, in fact, that we now have massive overkill of the supervisory structure in the financial industry’.

Privatisation often created more regulation, as well as a whole new ambiguous realm of quasi-state, quasi-private service provision. Whilst in the past the British state simply ran utilities, privatisation led to the creation of endless new quangos and regulators, from Ofgem to Ofcom to Ofwat. Thatcher was also an early proponent of environmental regulation, and centralised power away from local government. The modern managerial revolution was overseen by, you guessed it, the Iron Lady, who commissioned the Griffiths Report to bring top-down managerialism to public services, especially the NHS.

All that said, Thatcher did do some very good and necessary things. Breaking the stranglehold of increasingly militant trade unions and local councils on the country, and bringing taxes back under control were vitally needed changes. But there’s a strange parochialism to the British free market myth. The oil shocks of the 70s are ignored, the gas boom of the 80s is minimised in favour of the myth of deregulation-fueled prosperity. And the global conditions of today are barely considered.

Globalisation is a more powerful force than ever before. British companies are under constant competition from rivals, and under perpetual threat of acquisition should they seize an advantage. The strongest industrial power in the world today is a mercantilist, command and control economy — the nominally communist Republic of China. Low tax regimes can attract investment, but it’s not always the kind you might wish. The Irish economy has boomed thanks to becoming a tax haven for US corporations, but it has created a two-tier economy, and huge strategic dependence on America.

Cities like London and Dublin alike have become so expensive that the young professionals and entrepreneurs who should be building lives and businesses in their capital city are struggling just to get by, a cost in no small part driven by the flood of “investment” into land and property, and the torrents of mass migration, bringing social division and competition for work, housing and public services.

The Mecca of free marketeers is Singapore, but in many respects it bears more resemblance to pre-Thatcher Britain than it does the country she bequeathed to us. Singapore offers lower taxes, and simpler, but more strictly enforced regulation, combined with a state that plans and directly manages housing, energy, utilities and even engages in planning and policy to encourage higher birthrates and ethnic harmony. Brownite independent central banking is not a thing in Singapore, with a cabinet minister directly setting monetary policy. State investment in the economy is massive and wide-ranging. The state owns the largest bank, the ports, the post service, the national airline, public transport, the national broadcaster and 90 per cent of land. National wealth is also funneled into private investment nationally and internationally via a huge sovereign wealth fund. If Britain were to become more like Singapore, it would, amongst other things, entail reversing most Thatcher era privatisation.

The free market delusion equates strategic planning, direct state investment and high level coordination with micromanagement, expanding welfare and burdensome tax and regulation. As Singapore demonstrates, one can have all of the former and none of the latter — or vice versa in the case of modern Britain.

Britain’s problems are not merely one of deindustrialisation, but of financialisation. Cheap credit, unleashed in the 1980s, flooded into land and property. Housing and commercial property, rather than being priced at its value to workers, is priced based on its speculative value as a tradable financial asset, one that can be squeezed for passive income via rents. Regulation doesn’t just hurt the productive economy and the worker, it actively benefits this rentier economy by rationing the supply of housing and commercial property. Older voters, their homes suddenly become their chief store of value, are recruited into support of the system. Those at the bottom of the scale are compensated via another kind of rent-seeking — with taxation, which falls more heavily on productive labour than passive income, and is primarily used to fund an ever-expanding welfare bill.

If leftists are sometimes accused of airy abstractions, the simple faith that some on the right have in the “market” puts them to shame. I’m not without my sympathies here. It’s certainly true that the dynamic, voluntary decisions of individuals and private associations are better at setting and agreeing prices in most situations than a Whitehall committee doing the same. But the idea that broken economic systems will magically right themselves if the state just gets out of the way, rips up enough laws and lowers enough taxes is a fairy tale. Even leaving aside the economics, cutting back the state is not tenable in a democracy unless you can mobilise alternative and affordable provision of services from the private sector or civil society.

Like academics in obscure Marxist journals debating the finer points of economic theories that will never be implemented even by communist regimes, there’s a touch of ideological make-believe about free marketeers today. It’s taboo to entertain the notion of state ownership or planning, yet as Singapore and a dozen other international examples could demonstrate, state intervention can be directed towards growth and supporting private enterprise. In many respects, they are their own worst enemies, ensuring that the powers of the British state instead continue to be recruited to passive rent-seeking and an unsustainable, morally and financially ruinous welfare system.

And like old socialists, free marketeers will always assure you that real capitalism has never been tried, that the Thatcher revolution was never completed, that the market has been stabbed in the back by shadowy regulators and wicked NIMBYs. Yet the nightmarish 70s, and its supposedly shackled economy grew at a yearly average of 2.7%, higher than every subsequent decade including the 1980s. Ideological capture of economic and industrial policy has not served us, and it is time for a rethink.

Britain should indeed break the shackles of excessive regulation, but this must mean an effective and interventionist state willing to move our economy away from welfare to work, dependency to investment, and from rent seeking to production.