BOOKS

Humanity and markets

Samuel Brittan

BRINGING THE MARKET BACK IN by John L. Kelley Macmillan Press, £45, pp. 270

WELFARE AND VALUES edited by P. Askonas and S. Frowen Macmillan Press, £42.50, pp. 225 THE POLITICAL ECONOMY OF ECONOMIC FREEDOM by Alan Peacock Edward Elgar, £60, pp. 341 Until the mid-1960s it looked as if the war of economic ideologies had been won even in the US, the traditional home of free enterprise, by a domesticated version of social democracy. This was the period of the 'end of ideology'. Kennedy's advisers proclaimed the need for technocratic stud- ies of specific problems. These were the days of great trust in cost-benefit analysis, economic fine-tuning and anti-poverty and anti-discrimination programmes.

This dream, which was not ignoble, was shattered by events. Above all there was the simultaneous eruption of both unemployment and inflation at the end of the 1960s after the mainstream textbooks had declared that both problems had been licked. If anything, the failures were magnified by a public opinion obsessed with the rise of Japan and other economic newcomers. The Vietnam war contributed to disillusion with big government.

Events in themselves do not, however, produce new ideas. The ground for the revival of market economics had been care- fully prepared by three main groups of thinkers. First there was the Chicago School, which carried out careful investiga- tions which showed that government regulation often created more evils than it cured. There was, for instance, the phenomenon of 'regulatory capture' by the very industries the regulatory agencies were supposed to monitor. State- sanctioned cartels were said to create monopoly profits of $50bn in 1968. Milton Friedman's work suggested that inflation was due to too much money being injected into the economy and could not be cured by forbidding businessmen to raise prices. He also produced evidence that the Great Depression of the 1930s, which gave capi- talism such a bad name, could at least have been mitigated if the Federal Reserve (the US central bank) had prevented a record shrinkage in the US money supply. Secondly, there was the Austrian School, named after some economists from that country who had taken refuge in the United States. They taught that capitalism was above all a system of change and a method of making use of dispersed infor- mation, which could not be replicated by the best computers. It was a discovery mechanism and could not be realistically judged by departures from some perfect static equilibrium which existed only in mathematical textbooks.

Thirdly, there was the Public Choice School, which is more comprehensible if renamed the 'economics of politics'. Mem- bers of that school turned the analysis of failures and imperfections which the inter- ventionists had used against free markets to shed light on the political process itself. Their motto was that people did not become platonic guardians of the public interests if they became Congressmen or bureaucrats. They were still just as con- cerned as business executives to pursue their own interests. The link with the public good provided by the need to be re-elected was too tenuous compared with the disci- plines of the business marketplace. A par- ticular defect of the political market-places was the incentive for business itself to divert effort from serving the public to the extraction of favours from government — a process called 'rent-seeking'. US supporters of market capitalism did not rely just on academia or on education by events. Dozens and dozens of think- tanks arose with the object of disseminat- ing the free-market message. Indeed John L. Kelley's book, which originated as a PhD thesis, is largely concerned with the history of these movements and should Just gimme me 24 hours, chief — I gotta have 24 hours!' serve as a standard reference.

There was, however, one writer who attracted far more readers than all the economic schools and think-tanks put together. This was the late Ayn Rand, who had fled communist Russia to settle in the US, and who proclaimed a no-holds-barred individualism without the subtleties of the more academic writers. She made a successful living as a novelist and writer of film-scripts, even though her work was ignored by the literary establishment. Like all cults, Rand's had its high priests, rene- gades and heretics, and it could do with an objective historian who could place it as an American cultural phenomenon of a kind little understood in Europe.

But that does not end the exotica. For there is actually a US Libertarian political party which combines free-market views with a wider belief in personal freedom which is anathema to the Republican Right. Members oppose anti-drug laws, anti-abortion laws and the like as fiercely as they do controls on pay and prices. The party originated in an attempt of those who opposed bloated state power in economic matters to find common ground with anti- Vietnam war campaigners; and it has put up candidates for the presidency since 1972. Alas, it has never done better than the Goldsmith movement in the last British election.

Despite this partisan failure, one might have expected that Kelley's book would end on a note of triumph. The fall of the Iron Curtain brought to a dramatic end the most extensive experiment in collectivism ever undertaken. A Democrat president, Bill Clinton, has abandoned most of his interventionist platform, returned welfare to the individual states, has come near to balancing the Budget and preaches to Europe the virtues of deregulated markets.

Yet Kelley ends on a note of disillusion. He is pessimistic partly because the Reagan administration, which adopted some of the libertarian rhetoric, never succeeded in reducing the share of public spending in the national income. Nor, the author notes, did the Thatcher government in the UK.

His disappointment is aggravated by an exaggerated idea of what could or should be achieved. The three economic schools mentioned above contributed to a healthy scepticism about what governments could accomplish, but their leaders never laid down a precise boundary line. Somehow, not only the Libertarian party but many other free-market think-tanks were captured by the ideology of the night- watchman state, confined to external defence and internal security. Indeed some, who call themselves anarcho-capitalists, consider that even such a minimal state is going too far.

As these beliefs are based on an a priori definition of human rights, it is difficult to argue with them. Card-carrying libertarians believe that the relief of poverty is best undertaken by voluntary effort without state compulsion. They have not, however, solved the free-rider problem — how do I ensure that other citizens make their con- tributions? Moreover, they assume that property rights, which come into being through heredity or luck as well as through effort, are inherently just, which is difficult to swallow.

How far the libertarians are from con- vincing their fellows is shown by Welfare and Values. This has been prepared by a group of British theologians, economists and others who are concerned to reduce the influence of human selfishness on the provision of help and welfare for the less fortunate. The majority of contributors assume that these are inherently state func- tions and that the problem to overcome is public reluctance to pay more taxes. Few of them face up to the fact that the UK public sector already spends or rechannels 40 per cent of the national product and this should surely be enough, if distributed more wisely, for a War on Poverty that would put Lyndon Johnson in the shade.

To my surprise the theologians come out better than the economists. Stephen Frowen and Gavyn Davies fall into the trap of presenting some temporary thoughts from a time when the UK had still not fully emerged from the 1992 recession as perma- nent wisdom and call for lower interest rates to boost demand with less emphasis on counter-inflation. This is particularly ironic in the case of Davies, as his contribu- tion has reached book-form just at a time when he is urging the Bank of England to engage in overkill in dealing with the pre- sent inflationary threat.

The most refreshing theologian is Dr Peter Vardy. He disputes the old Hegelian idea, now newly fashionable in Blairite clothes, that people obtain their identity only as members of a group. He provides other contributors with a very necessary reminder of the element of individual responsibility in Christianity. He almost follows the American libertarians in envis- aging a severe reduction in taxes to make central government minimalist. But his proposals are given a different complexion when he embraces Frank Field's idea that all individuals should be required to con- tribute a share of their income to fund pen- sions and other benefits.

Vardy's most innovative suggestion is that altruists who talk about welfare should be able to put their money where their mouth is by opting to pay voluntary addi- tional taxes ranging from one to five per cent of their income to causes of their choice. Contributors would be awarded badges of merit — the best of them, no doubt, containing an image of Blair him- self.

This is a serious contribution to the free-rider problem, but it needs further thought. If voluntary contributions are not publicised the incentive effect is much reduced, but if they are, everyone of above median income is open to moral bullying, which is surely not what Dr Vardy intends.

The conclusion emerging from a critical perusal of both books is that we should embrace the liberating as well as wealth- creating potential of markets, but also accept the human case for redistributing some of the chips to those who have been unlucky in the market game. Such a philosophy would be resolutely pro-choice and anti-paternalistic but would not pass by the needy or the unlucky on the other side of the road. It has been called in a recent speech by the CBI director general, Adair Turner, 'Redistributive Market Liberalism' or RML. Until somebody comes up with a catchier title, I shall adopt this label with gratitude.

Meanwhile, if anyone wants a primer of RML he or she can do no better than turn to Professor Alan Peacock's recent book of essays. The professor is not a cheerleader by temperament and there is no rousing call to arms. Instead, the virtues of markets are brought out in a series of applied essays ranging from the economics of devaluation to those of broadcasting. Some of the best concern the somewhat equivocal status of economic theory itself. If anyone is in doubt about the need for a safety net as well as a ladder let him look at Peacock's reflections on his return from a mission to Russia, where he found himself engaged in trying to outline, at breakneck speed, just such a net for the victims of economic upheaval.

If some philanthropist wants to earn one of Dr Vardy's medals at a moderate cost they could do a good deal worse than arranging for a cheap paperback copy of Alan Peacock's book.

`Why shouldn't I be obsessive-compulsive? My mother is obsessive and my father is compulsive.'