Why is it that politicians of all parties still shrink from giving enterprise, competition and consumer choice their head so as to spread increasing bounty ever more widely?
Economics is the most scientific of social sciences for two reasons. First, the measuring rod of money provides a universal system of comparing values. Second, economic life exhibits a more consistent motivation than appears in what passes as political science, to say nothing of the discipline—or is it the indiscipline—of sociology. In Mill’s words, the ruling psychological law is ‘that a greater gain is preferred to a smaller’, which I notice applies even to my socialist friends. Thus the working hypothesis in economic analysis is that consumers tend to maximise net advantages of employment and, less confidently, governments to maximise some measure of national welfare.
In this Third John Bonython Lecture, my aim is to tackle a question suggested by the two previous Lecturers. Professor Kirzner outlined the Austrian concept of the entrepreneur, ever alert to new opportunities, who blazes the trail of economic progress for others to follow. Professor Hartwell then offered a potted history of the resulting capitalist advance and exposed its ideological critics as being at once elitist and self-serving. Capitalism having been thus intellectually expounded and empirically vindicated, the following question arises. Why is it that politicians of all parties still shrink from giving enterprise, competition and consumer choice their head so as to spread increasing bounty ever more widely?
As a professional economist, I make no apology for discussing progress chiefly in terms of the conditions favourable to the creation and re-creation of wealth. Nor is this preoccupation to be scorned by Bishops and other comfortable critics as mere materialism, since rising standards of living bring promise of further cultural, social, medical and even political advance. Economics is the most scientific of social sciences for two reasons. First, the measuring rod of money provides a universal system of comparing values. Second, economic life exhibits a more consistent motivation than appears in what passes as political science, to say nothing of the discipline – or is it the indiscipline – of sociology. In Mill’s words, the ruling psychological law is ‘that a greater gain is preferred to a smaller’, which I notice applies even to my socialist friends. Thus the working hypothesis in economic analysis is that consumers tend to maximise net advantages of employment, and, less confidently, governments to maximise some measure of national welfare.
Nature and Causes of Prosperity
Plainly all but Bishops value increasing standards of living – and if they don’t I bet some of their wives would. But my argument in a nutshell is that most of us are schizophrenic. We welcome progress and prosperity but we also value stability and the status quo. The human dilemma was nicely summed up in the title of a little-known book by a New Zealander, A.G.В. Fisher,* called The Clash of Progress and Security, published 50 years ago. In short, we want the fruits of economic progress but we resist change, which is both the condition and the consequence of progress. Consider the transformation of material and social welfare since Adam Smith wrote An Enquiry into the Nature and Causes of the Wealth of Nations in 1776.
Even in my own lifetime I have witnessed the widening enjoyment of such amenities as modern plumbing, fitted kitchens, central heating, wall-to-wall carpets, TV, videos, the telephone, colour photography, motoring, eating out, and foreign holidays. They exemplify the progression whereby luxuries not available even to privileged minorities a couple of generations back have spread to become the conveniences, even necessities of the masses. Yet every advance was won by displacing old, outmoded forms of production and work. Where did this popular prosperity come from? Scientific discovery and geographical exploration were necessary but not sufficient conditions. Earlier civilisations were capable of rare feats in building, the arts and manufacture of ingenious contrivances, but their enjoyment was confined to a favoured few. What brought the benefits within reach of the masses?
Professor Max Hartwell’s answer was as follows: Many long-term factors were at work in Europe from the Middle Ages onwards – changes in science, religion, philosophy, political theory, law and government – but the crucial and determining change came when mercantilism gave way to laissez faire, and individuals were increasingly liberated from the controls of the state with stimulating effects on inventiveness and effort, and hence on production. (The Anti-Capitalist Mentality: PostMortem for an Ideology, Centre for Independent Studies, Sydney, 1985:10)
The industrial revolution that continues unabated is a product of developing knowledge and enterprise, animated by competition, including such scorned handmaidens of 20th century prosperity as marketing, advertising and consumer credit.
Economic Freedom and Government
It is a truism that all economic progress depends on ceaseless change in methods of production, natural resources and synthetic materials; on the invention of new products and services; or on shifts in fashion, sources of supply and marketing outlets. Little illumination is derived from many textbooks that emphasise the formal economic theory of static equilibrium based on given wants. It has taken the Austrian economists to direct our attention to the ubiquity of unforeseen change in a dynamic economy and to the role of competitive enterprise as what Hayek has called the optimal discovery procedure. As new possibilities of production are revealed, the requirement for progress is that resources, both material and human, are shifted from old uses, where returns are low or declining, into new applications that promise higher rewards. The entrepreneur is the prime mover in this continuing progression from relative poverty to increasing prosperity.
He seeks private profit but is led by the invisible hand of competition to render public benefit, thereby providing an example of the unintended consequences of much human action. Let me offer my first quotation from Adam Smith: It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner but from their regard to their own interest. Smith and the classical economists accepted that the most powerful mainspring of progress is competitive individual striving based on self-interest or – as I prefer to say – selfchosen purposes. But economic freedom never meant pure laissez faire, which seems to have replaced Hell in the demonology of Bishops. As in sport, competition yields its best results within the agreed rules of the game.
So we have to restrain entrepreneurs and others from enriching themselves through force and fraud. Government therefore has a number of essential duties. It must provide a framework of law, enforceable contracts, honest weights and measures, with remedies against false description of goods. Government is necessary to enforce the overriding national interest, for example in guaranteeing eecurity of person and property through enforcement of law and order – the lack of which largely explains the gulf between prosperous Hong Kong and stagnant black Africa. It also has to ensure the supply of services known to economists as ‘public goods’ – from national defence to street lighting and sewers – which yield indiscriminate benefits and which the competitive market could not, therefore, provide. Government has also to regulate what economists call ‘third-party’ or ‘external’ effects like pollution, from prohibiting open fire in smokeless zones to making polluters pay for their effluent. Not least, government in Britain has accepted since Tudor times some responsibility for diminishing poverty by giving cash or kind on proof of need. But I should add that concern for the poor does not justify the provision of so-called ‘free’ medical care or education to the entire population. Zeropricing simply preserves the fiction that everyone can live off free lunches at the expense of everyone else.
Consumer versus Producer
So under the classical liberal dispensation, the entrepreneur is free within an appropriate framework of law and institutions to act as pathfinder of economic progress. In deciding which new ideas to implement by risking his capital, he is guided by the prospect of profit. But success depends on finding customers for his product or service in sufficient numbers to justify his investment. The arbiter of success is not the ingenuity of his innovation, nor the approval of government, nor even the receipt of a knighthood or peerage.
The final judge and jury are the paying customers, as indicated in my second quotation from Adam Smith: Consumption is the sole end and purpose of all production, and the interest of the producer ought to be attended to only so far as is necessary for promoting that of the consumer. There is, however, a major difficulty with this vision of entrepreneurs as agents of the consumer, winning universal acclaim by launching cheaper or improved products on the market. The snag is that new competition is not welcomed by investors or workers in existing production. At the very least, change brings disturbance, inconvenience, uncertainty. At worst, it threatens existing investors with lower returns or even baankruptcy, and workers with unemployment. Caxton print wonorkers are unlikely to welcome computer typesetting.
his difficulty is aggravated by the fact that the hundreds or thousands of prospective losers are more easily identified than the scattered millions of consumers who stand to benefit from economic progress. Although the universal, long-run consumer interest far outweighs the partial, short-run producer interest, the threatened power of capital and labour is highly concentrated and can be more easily mobilised and orchestrated.
Once again, Adam Smith provides a shrewd warning: People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. Smith and the classical economist were rightly obsessed with the danger of monopoly and restrictionism in exploiting the consumer and frustrating progress. It was this fear that led them to elevate free trade at home and. abroad into a grand principle, if not a panacea. But who was to prevent Smith’s system of ‘natural liberty’ being overthrown by that equally natural ‘conspiracy’ of producers to preserve their incomes by keeping out uncomfortable new competition? The implication of the doctrine of classical liberalism was that the government should perform this role as guardian of the public interest. By withdrawing from protectionism and withholding monopoly and other privileges, it would hold the ring for competition and maintain the sovereignty of the consumer interest.
Political Vote Motive
Well into the present century innocent economists have tended to treat government seriously and respectfully as the impartial umpire seeking to uphold the public interest. Yet again, Adam Smith provided advance notice against putting too much faith in the politician, whom he described as: that insidious and crafty animal, vulgarly called a statesman or politician, whose counsels are directed by the momentary fluctuation of affairs. Even as a political virgin on the Cross-benches, I would add it is not that party politicians are all especially venal, but that they are exposed to the special pressures of the vote motive. Thus the spread of the franchise made democratic politicians ever more sensitive to wire-pulling from industries threatened by fororeign competition and from workers facing imports from cheaper or more efficient sources of supply.
Over the last century the English common law against restraint of trade fell into disuse and the emerging trade unions persuaded nominally Liberal government in 1906 to add immunity from damages to the so-called ‘right to strike’, supported by what passed as ‘peaceful picketing’, which amounts to the use of force to prevent employers from engaging alternative labour. The same government sought to buy off the infant Labour Party by introducing minimum wages and conceiving the embryo of the modern welfare state on the huckster’s promise of ‘ninepence for fourpence’.
From these modest beginnings, we can trace the corruption of democratic government from being guardian of the public interest to becoming the plaything of special interests. From impartial umpire, parliament is well on the way to being the captive of campaigning lobbies competing to win subsidies, protection or other privileges, frustrating change and thereby slowing down the pace of economic progress. As the scent of this corruption in most democratic countries reached the nostrils even of cloistered academics, economists were the first to offer a general explanatory theory. Starting in the United States, home of pork barrel politics and Tammany Hall, economists led by Buchanan and Tullock have developed and refined the analysis of competition in the political market place.
The Power of Pressure Groups
Let us give politicians the benefit of the doubt. Let us assume they are no worse, if no better, than the rest of us. But let us recognise that their self-interest is in maximising votes to win and keep power. The most expedient way is by promising favours in return for support through the ballot box; in short, by buying votes, alas, no longer with their own money. Instead of asserting the general public interest against subsidies and protection so as to promote prosperity and progress, parties compete in wooing sectional interests like farming, business, trade unions, or specific industries like textiles, coal, shipbuilding.
They vie in offering more generous treatment for pensioners, home-owners, council house and private tenants. The voters soon take the initiative and spawn single-issue pressure groups with real or imagined grievances, like single-parent families and other improbable causes. Although the individual stands to lose, as both consumer and taxpayer, from this reckless buying of votes, he is at a disadvantage in the perpetual tug-of-war with the mass pressure of concentrated, organised, orchestrated lobbies of special interests. In Arthur Seldon’s telling phrase, Demos has been dethroned by demos. As the unequal contest continues, the individual soon learns to abandon hope that the general interest will be upheld. Instead, he looks around to find a pressure group that will protect his own sectional interest from the depredations of all the others. Hence the spread of white collar unions in Britain to the very apex of the civil service.
Let me take two topical British illustrations of the impotence of mere majorities. Why have the many millions of newspaper readers not prevailed sooner on the government to prevent themselves being exploited by a few thousand print workers? The brief answer is that the consumers have a few pennies day at stake, while the workers not only have hundreds of pounds a week at risk, but can make their pressure effective both on employers and on at least one political party. a If these enemies of progress are at last being challenged at The Times by a tough employer from afar with an urgent reason to adopt modern printing technology, let me take a different example of a battle lately lost. Whatever their personal preferences about shop opening, all MPs must acknowledge a significant majority of.
British public opinion in favour of freedom to trade on Sunday. Yet this popular reform was defeated in the House of Commons by an unrepresentative pressure group formed from an unholy alliance between a minority shopworkers’ union rampant and a handful of bishops militant. Accordingly, on Black Monday, the 16th of April 1986, MPs in the Labour, Conservative, Liberal and Social Democrat parties voted down the second reading, often in defiance of their own judgments but in obedient response to pressure from sectional interests exerted through their mail bags. As The Times concluded, in this battle between the ancients and moderns, ‘the ancients are in the ascendant’.
Spread of Collectivist Convolvulus
The multiplication of special interest programs is seen throughout the welfare sector in medical care and education. The persistence of dissatisfaction, despite ever-mounting costs, reflects the success of producer interests in medical and educational unions and professional bodies, reinforced by the central bureaucracies, in capturing control of resources and resisting change. Not even a government as determined as Mrs Thatcher’s has been able to withstand the influence of these producer interest groups in opposing any real extension of choice for parents and patients, which can come only throrough competition from an expanding private sector.
In Triumph of Politics, David Stockman concludes: ‘The triumphant welfare state principle means that the economic governance must consist of a fundamental trade-off between capitalist prosperity and social security’. Social security, protectionism, farm support, etc., all ‘seek to bolster the lot of less productive industries, regions and citizens by taxing the wealth and income of everyone else’ (p.418). In a recent book, dramatically entitled The Rise and Decline of Nations, Professor Mancur Olson has proposed a grand hypothesis that the longer any society continues without the shake-up of revolution or war, the more it will fall prey to collusive organisations and pressure groups and so lag behind newer more dynamic societies in its economic growth and capacity to adapt to changing needs and opportunities. believe this analysis provides a large part of the explanation for the superior performance of Germany, Italy and Japan after defeat in 1945, compared with the economic sclerosis that became known as the British Disease.
The enemies of progress are thus revealed as all those organised obstructionists, imbued with the myopic trade union mentality, who seek prosperity not through competition in open markets, but by importuning government for beggar-your- neighbour restrictionism, which ends up impoverishing the whole society. The results are seen well beyond Britain in the cumulative spread of what I now call the collectivist bindweed.
This blight of increasing government intervention, protection and subsidies leads to unbridled welfarism paid for by over-taxation and borrowing, erupting periodically into high and unstable inflation. Workers are driven by taxes into the black economy and by social benefits into voluntary retirement. As more and more electors attempt to enrich themselves through the ballot box at the expense of everybody else, the requirements of a vigorous, flexible and progressive economy have been increasingly suppressed. I have no doubt that the new malaise of large-scale unemployment in Europe is largely due to the resulting economic rigidity, which impairs adaptation to unprecedented change and so aborts the birth of tomorrow’s jobs. As Walter Wriston argues in Risk & Other Four-Letter Words, not only has the pursuit of safety-first slowed down progress, it has also perversely increased the risks of insecurity and now threatens our spiritual and political freedom into the bargain.
Radical Reaction
From the Cross-benches in the Lords I have been known to praise the present Conservative Government for its unconservative endeavours to bring about radical change; though when I watch the slow, tortured processes of legislation and amendment I sometimes recall Olson’s law and think that Guy Fawkes had a better idea. On my analysis much more must be done to deprive organised interest groups of their continued power to slow down economic progress. All state industries, including coal, railways, health and education – not excluding universities – should be exposed to real competition so that their employees look for their income not to government, but to the customers they are supposed to serve. Welfare benefits should increasingly be channelled selectively to people in need so that taxes can be reduced to enable more people to provide for themselves and their families.
Reduced taxation, especially on lower incomes, would also help bring people back from the black economy and make earning wages more attractive than voluntary unemployment on social benefits. At the same time, wage rigidity and national wage bargaining should be replaced by more flexible rewards which incorporate a significant bonus element that reflects the varying ability of employers to pay, as in Japan. If wage costs were more responsive to the changing fortunes of trade, firms would have less incentive to sack workers when competition threatens to price them out of the market. I am not concerned with party politics.
Over many decades in Britain, Conservatives and Liberals, hardly less than Labour, sold the pass of progress in return for a mess of political pottage. The banner I commend is that of radical reaction. We should be deeply conservative, even reactionary, about the fundamental values of personal independence, responsibility, and choice in a free society. But we should be radical, even revolutionary, in applying these values to the collectivist institutions and changing circumstances of the day.
Beyond Thatcher
Widespread evidence of government failure has been powerfully reinforced by the recent intellectual counterrevolution, led by Hayek and Friedman and supported by the IEA, CIS and their multiplying allies in many lands. The market philosophy is undoubtedly in the ascendancy. Yet we have still to free politicians from the grip of special interests that remain the prime enemies of further progress. Our American friends have raised the banner of constitutional reform, which would entrench limited government by restricting total ‘public’ (that is, political) spending and borrowing. Hayek’s more radical variant is a new constitutional settlement that would prevent politicians conceding arbitrary privileges by confining laws to ‘general rules of just conduct’.
In Britain Mrs Thatcher has proceeded more pragmatically by leading a succession of magnificent forays against trade union abuses, professional restrictions, nationalised industries, the growth of farm subsidies. Together with the imposition of monetary-fiscal discipline and the abolition of exchange control, the Thatcher effect has undoubtedly been to transform attitudes. But it has proved a long, drawn-out, continuing, wasting confrontation, with set-piece battles against a never- ending succession of special interests, including teachers, students, miners, railwaymen, shop workers, opticians, lawyers, local authority workers, welfare claimants, conservationists. Instead of a multiplicity of marginal reforms, taking on the enemies of progress one at a time, I commend Milton Friedman’s strategy of a ‘package deal’ proposed in Tyranny of the Status Quo.
Indeed, I would go further. Let a radical government draw up an agenda of economic disarmament listing the major special interest legislation that obstructs change and progress, with a brief time-table for reform or outright repeal. For most producer groups the loss of their own subsidies, protection and privileges would be more than made up by their gain as customers and citizens from lower costs, prices and taxes. The exaggerated screams of protest by every ‘special case’ would be drowned – and mocked – by the squeals of outrage from all the others. Anyway, there is a limit to the decibels audible to the human ear. All but the most subjective special pleaders would at least have to acknowledge the government’s evenen-handedness in tackling everyone else’s rackets along with their own.
Since no government can rebuild the market millennium in one e term of office, even of four or five years, its aim must be a sufficiently large instalment of freedom to yield such benefits as will secure support for a second and third term. Where socalled ‘welfare’ is to be cut back, phased out or ninated, the aim must be big enough economies to finance massive cuts in taxation that will produce both immediate pleasureа and long run inimprovements in economic perforprmance and progress.
Envoi
Collectivism is increasingly seen, even in Eastern Europee and China, as obstructing the glittering prospects of new technology. The costs of government, even in the USA, are e so high that obscure political entrepreneurs like Gramm-RudmanHollings and Packman have seen a market for selling lower budgets and less taxes. With the empirical evidence and intellectual argument powerfully in favour of freedom, let us challenge all democratic parties to join in competition for restoring competitive economics as the indispensable condition of freedom and progress.
