Arthur Seldon, "Intellectual Reinforcement for Capitalism" (1990)
Part II of The
Virtues of Capitalism, vol. 1 of The Collected Works of Arthur Seldon,
7 vols., ed. and with Introductions by Colin Robinson (Indianapolis: Liberty
Fund, 2004-5). <http://oll.libertyfund.org/title/1825>.
Vol. 1 <http://oll.libertyfund.org/title/1449>.
See also the "Liberty Matters" discussion of the work of Arthur Seldon held
in November 2013 <http://oll.libertyfund.org/index.php?option=com_content&task=view&id=1690&Itemid=366>.
Table of Contents
Chapter 7. Intellectual Reinforcement for Capitalism
Human affairs could not be made ultimately predictable by any centralised coercion, but the proliferant germination of ideas in millions of brains could be killed by it.
[G. L. S. Shackle, in Alexander Shand, The Capitalist Alternative]
Strict standards are enforced on the contents of a business prospectus; it is a pity the same standards of veracity cannot be enforced on some politicians . . .
[John Jewkes, A Return to Free Market Economics?]
I consider both the complex theory of welfare economics—the economic analysis of market failures—and
the blend of hope and cynicism which passes for political wisdom to have
been infertile and obfuscatory.
[George Stigler, The Citizen and the State]
There is now more understanding about the market by scholars and politicians, although continuing obfuscation from the literati. Yet the academic critics of capitalism have rarely absorbed the developments in economic analysis in recent years that reinforce the empirical evidence of its superiority.
The new developments in economic thinking and interpretation of the real world, collectively described as the “new economics,” have formed the essence of the writings mobilized by the IEA. They originated mostly in the United States, which is not surprising since American economists outnumber those of any other country or continent. British economists have also been innovative in the new economics, and there have been some outstanding British contributors in several of the developments: in monetary economics by Professor Patrick Minford, in the economics of politics by Professor Sir Alan Peacock, Professor Charles Rowley, Professor Jack Wiseman and Professor Norman Barry, and by promising younger economists like Professor Martin Ricketts, in the economics of standards in safety by Professor Michael Jones-Lee and by others.
France has provided active acolytes in les nouveaux économistes; their most systematic chronicler, the clear-thinking former journalist turned economist Henri Lepage, who saw the light in the late 1970s, has produced interpretations of the new economics that have won well-earned acclaim.1 There have also been original contributors in Switzerland, notably Professor Peter Bernholz and Professor Bruno Frey, Austria (Professor Friedrich Schneider and Professor Erich Streissler), the Federal Republic of Germany, Scandinavia and other countries.
Not all the exponents of what I see as the ten main developments in the new economics would agree with my conclusion that its general effect is to strengthen the case for capitalism. Although they are more inclined to see the strength of the market and the defects of the political process, some still cling to the hope that government will work better if run by the right people, which in practice means socialists rather than liberals or conservatives.
The new economics is mainly a rediscovery, refinement and restatement, in modern language and application to the contemporary world, of British, or Anglo-Scottish, classical economic thinking and policy. All knowledge is derived from previous knowledge; if the advance is substantial in insight or application it is permissible to describe the new knowledge as different from the old, and therefore new.
The main elements can be arranged in ten groups:
- the new interpretation of capitalist history;
- the new analysis of property rights;
- the new emphasis on the market as a process;
- the economics of politics (public choice);
- the critical examination of government regulation;
- the sceptical view of public goods;
- the nature and effect of externalities;
- the monetary control of fluctuations;
- the economics of self-investment in human
- the limited and the minimal state.
The New Interpretation of Capitalist History
There have been two intellectual developments in the study of history that reinforce the case for capitalism. One is the counter-revolution in the economic analysis of history which rejects the materialist interpretation of Marx. The other is the new emphasis placed on the role of private property rights.
The first has restored and reinforced the classical interpretation of capitalism as the source of increased productivity and rising living standards. For long decades, British economists and economic historians, notably G. R. Porter, T. B. Macaulay, famed for his Whig interpretation of history, John Stuart Mill (with some lapses), J. E. Cairnes, Alfred Marshall and Herbert Butterfield, found that the Industrial Revolution, the dawn of capitalism, had led to improvements in the condition of the mass of the British people from their almost unchanging or only very gradually changing standard of life for centuries until the late 1700s. Early Marxist or other forms of socialist writing—by Engels and Marx from the 1840s reinforced from about the 1880s by Arnold Toynbee, the three essentially socialist man-and-wife teams of historians, the Hammonds, the Webbs and the Coles, and more recently the Marxists Professor Eric Hobsbawm and E. P. Thompson—have taught the opposite: that living conditions deteriorated, in some periods more than others, that capitalism had produced immiseration. Socialism, it was strongly argued or firmly implied, offered the only hope of improvement.
The classical view was self-evident common sense. The capitalist Industrial Revolution drew people in from the primitive dwellings of the countryside to the more substantial homes of the towns. It replaced coarse apparel by woven clothes. It replaced the endless hours of cottage working by legislation on factory hours. It also brought the task of providing drainage and public order for large congregated numbers and other new conditions of urban living. But to attribute these new evils to capitalism is as plausible as blaming every human advance for its incidental disadvantages, unforeseen but temporary until new measures can be organized to remove them.
The Marxist critique is presented as scientific and sophisticated. Its jargon camouflages its essential naïveté. Were the technical discoveries in steam power and traction, the manufacture of textiles, printing and other industries to be foresworn because they brought new problems to solve? Would the guild system—or trade unions—have embraced them for their advantages or resisted them for their disturbance to established interests? Would government and bureaucracy have correctly assessed the balance of advantage of beneficial innovation and costly new tasks? Would a socialist society have introduced technological invention at a rate to suit the unexpressed interests of the uninfluential people at large in as rapid a change as possible? Or, would it rather have timed them more slowly to suit the vocal interests of the established producers, planners and bureaucrats?
The Marxist critique has suffered from historicism—the historical method of assessing economic systems and judging them as causes followed by consequences, the familiar fallacy of post hoc, ergo propter hoc. It argued that capitalism was accompanied by drawbacks; therefore it caused them. The Marxist critique then went on to the other common fallacy of the non sequitur: because capitalism caused problems (not proven) it should therefore be replaced by socialism in various forms from the dictatorship of the proletariat to gas and water municipalization. But the socialists were guessing: they had no reason to suppose that socialism would be an advance.
They have continued to condemn capitalism and have urged socialism for 200 years or more, and many are still condemning capitalism and urging socialism without putting the two pertinent questions asked and answered by the liberal economists and historians. First, would the eventual rise in living standards have taken place without capitalism? The answer is that it would not have done under the medieval guilds or under state socialism. Second, would the tasks of organizing urban living have been foreseen, avoided or accomplished better under socialism? The answer is that its record, wherever in the world it has been introduced, indicates no reasons to suppose that it would have been more prescient, prompt or proficient.
It could not have been long before the unbelievable Marxist/socialist interpretation of history was in turn repulsed by the restoration of the classical interpretation of capitalism. The original counter-revolutionaries of the 1920s, the historians John Clapham, Dorothy George, Dorothy Marshall and later Ivy Pinchbeck, were followed by W. H. Hutt on the factory system and trade unionism, T. S. Ashton on aspects of industrialism and more systematically by the Australian economist and historian R. M. Hartwell, who challenged the essence of the Marxist interpretation. Hayek and Hutt were joined in the 1950s by the French political scientist Bertrand de Jouvenel and the American L. M. Hacker (previously Marxist-minded) in reasserting the classical Clapham approach. The Marxist immiseration doctrine was rejected: the Marxist proletariat were not early or mid-nineteenth-century working people pauperized by early capitalism; many were the new population that would not have been born at all, or would not have survived, but for the new capitalism that created unimagined livelihoods by the new machinery of its technical revolution. Falling death rates following improved sanitation kept some alive who would have died earlier, but the Industrial Revolution produced the new tools that created the new occupations that gradually raised the living standards that sustained life for more people for more years.
The Marxists have made much of the fall in general incomes in some periods. It was hardly likely that the new conditions of industry and work would proceed uninterruptedly. (The notion that socialism proceeds smoothly upwards without fluctuations is a myth, bolstered by the suppression of statistics.) But the Marxists were disposed to see (almost) every downturn as terminal; they would understandably not want to see the upturn beyond the next crisis of capitalism at whatever stage they happened to be, from the first crisis observed by Engels in 1844 to the last crisis of October 1987 (or the autumn of 1989, and no doubt more, real or imagined, to come in the 1990s). There is a lot of theorizing about social relations, conflicts and hegemony, but in the real world of the everyday life of the people socialism is a vaguely desirable system to which many still aspire though few understand, but a system that is being replaced by capitalism everywhere, from Europe to the Far East.
The repute of capitalism has nevertheless suffered from the continuing influence of Marxist history. It is still taught widely in the Western world. It is still fallacious. It still fails to ask what the world would have been like without capitalism. And it cannot now explain why the world aspires to capitalism, especially where it has experienced socialism.
The New Interpretation of Property Rights
The second development in the reinterpretation of history is the emphasis on the evolution of private property rights. Hayek has restored the term “several” property (separate, as distinct from joint or common).2
A crucial difference between capitalism and socialism is in the role of property. Capitalism in principle maximizes the scope for private property; socialism maximizes the scope for public or nominally common property. In capitalism ownership is direct by the individual or group; in socialism it is indirect through the state or other representative body. In capitalism property rights—to hold, sell, hire, lend, bequeath or give—tend to be maximized; in socialism they tend to be attenuated—the citizen may have some rights of use but ownership resides with the state, a kind of superior landlord. In capitalism the owners of property are typically named, identifiable and responsible; in socialism the nominal owners, the people, are typically anonymous and unidentifiable and the effective owners, the planners, are in practice not responsible to the nominal owners and therefore irresponsible.
Since capitalist systems contain some socialism, and socialist systems some capitalism, these differences may be of degree rather than absolute principle: in capitalism some private property is owned jointly in groups— commercial companies, cooperatives or voluntary associations; in socialism some property is personal and private. But the differences of degree are wide enough to be analysed as differences of principle. And capitalism is passing through a period in which the large commercial groups that dominated the ownership of property (the Fordism of the Marxist critics) are yielding to smaller units in which more ownership will be personal and identifiable.
The central advantage of capitalism over socialism in the husbandry of property is that the real owners in capitalism take care of their property; the nominal owners in socialism cannot because they do not know what they own. What belongs nominally to everyone on paper belongs in effect to no-one in practice. Coalfields, railways, schools and hospitals that are owned “by the people” are in real life owned by phantoms. No nominal owner can sell, hire, lend, bequeath or give them to family, friends or good causes. Public ownership is a myth and a mirage. It is the false promise and the Achilles’ heel of socialism. The effort required to “care” for the 50-millionth individual share of a hospital or school owned by 50 million people, even if identifiable, would far outweigh the benefit; so it is not made, even if it could be. The task is deputed to public servants answerable to politicians who in turn are in socialist mythology answerable to the people. In this long line of communication the citizen is often in effect disenfranchised. The wonder is that the myth of public ownership continues to be propagated by men and women who aspire to political leadership. In commercial advertising it would be denounced by socialists as a fraud on the people.
The task of husbandry and conservation recurs in the joint ownership of private property in private companies or associations (housing and others), but the difference is decisive. An individual owner can sell individual property rights: he exercises control by the power to exit because there is a market; in the political process he has to settle for the ineffectual exercise of voice in the control of mass ownership of common or joint property.
It is evidence of the power of repeated political propaganda that many ordinary people continue to believe in the reality of public ownership, and it is a reflection on non-socialist politicians that they have not destroyed the myth. The uncharitable but realistic explanation must be that, at least until 1979, politicians in all parties had aspired to the control of government-owned nationalized or municipalized property that they knew was in no effective sense public.
This well-established truth of classical liberalism is a decisive component in the historical counter-reaction to the Marxist critique of capitalism. Two American historians, Professor Douglass North and Robert Thomas, have explained the transition from the stagnant feudal and guild systems to progressive economic growth in Europe, first in Holland and then in England, by the transition from common property, then typically in land, to personal property.3 The method was essentially the enclosure of common land into plots for the exclusive use of individual owners.
This is the precise opposite of the continuing socialist teaching, even in the latest revisions of Labour Party policies, that progress lies in passing from private to public ownership. Now that glasnost has induced the Russians to release even unfavourable information, we are not surprised to learn that the productivity of private plots in the USSR is 10 to 20 times that of socialized land. Tolstoy the landowner and Lenin the land-coveter, like their opposite numbers in eighteenth-century France and twentieth-century South America, wanted land taken from the rich and given to “the people.” If it had been parcelled out into personal plots it would have been worked more efficiently. But by “the people” the socialists meant that the land should be owned in common, not in the reality of everyday life by the people as individuals. The effective owners who control its use form an amorphous mass of unidentifiable politicians and bureaucrats who cannot easily be brought to book for their stewardship. And, supreme irony, even if they are identified they defend themselves with financial and other resources belonging to their victims.
Individual ownership has been anathematized by socialist teaching. Socialists did not, and still do not, understand that it is private ownership that produces results. So it could be also in the private ownership of the deserts, the sea beds and air space when means are devised to enclose and appropriate “plots” to individual owners who will find it profitable to invest in making them productive.4 Until then their use will be decided by governments driven by political aims, which may be put before the best use with maximum efficiency for the benefit of the common man.
It was the development and refinement of the law of private property rights that explains the replacement of medieval stagnation by modern progress. North and Thomas5 presented a reinterpretation of British and European history that makes most history textbooks out of date.
Serfdom, unpaid labour on land of the lord of the manor, was the payment for his (public good) services of defence and security, justice and courts. The custom in serfdom of exchanging labour services for public goods was cheaper than contract because it lowered the information costs and transaction costs that would have been entailed in periodic revision of the labour payment for the lord’s services. Payment by taxes was impracticable because cash was not used widely. Payment in kind was inconvenient because markets were not yet developed to ease the measurement of the value of labour. But in time markets developed: the growth in population brought new land into cultivation; specialization and therefore exchange increased; money and credit came into growing use; more and more serfs became land-owning peasant farmers as they were encouraged to bid for private plots on which to grow products of which the surplus available after family subsistence could be sold at a profit in markets.
The role of the law on property was probably more important in stimulating economic growth than the technical advances of the Industrial Revolution. Population increased and techniques (in agriculture) advanced in the eleventh century but they brought little economic growth because land was still owned communally, with little incentive for individuals to invest and expand production. But in the eighteenth century the further increases in population and technical advance were accompanied by economic growth because there was by then enough private ownership of land to make private investment profitable. The peasant owner had developing property rights: since exclusive personal ownership told him the costs and benefits of investment, he found that his decisions would benefit (or harm) him and his family. The individual farmer could advance on his own without waiting in a political process for agreement by a committee, or a majority, and without incurring the transaction costs of organizing agreement (and what might be called the associated discussion, persuasion, negotiation and consensus costs in time, energy and money). When one farmer forged ahead, the information costs of learning about the effects of new methods were lowered for all the others. Productivity and living standards improved all round. Private property made for growing public prosperity in the real sense that it was shared by the people, not controlled by politicians and bureaucrats.
That was the capitalist secret: markets and their prices told farmers the vital information on earnings, costs and profits required to make decisions on what to grow, how much to grow, at what prices to sell and how much to reinvest. In contrast, the now century-old socialist claims for the rewards of public ownership and the venality—the selfishness, greed, exploitation, alienation—of private ownership have been a confection of wishful thinking, an escape from the real world, as tragically confirmed by experience in every country that has tried socialism from the USSR through China to Africa.
Two more conclusions, both disagreeable for socialism but hopeful for the common people, must also be drawn. The history of Europe demonstrates that inequality is necessary to reveal progress by different people and reward those who take the risks of the unknown by exerting effort and initiative to discover new ways of solving known tasks or new tasks to solve, but it is also essential to stimulate emulation, from which all eventually gain. If equality is enforced by socialist law, or encouraged by conservative custom, it slows down or suppresses progress. The peoples of Europe would have remained poorer longer.
Moreover, since the power to persuade and organize others in collective organizations is itself unequal, the ability of people to advance as individuals in the market without waiting for others is in the end more egalitarian than the socialist method of waiting in the political process for agreement, universal or by majorities, in debating chambers. The evolutionary spontaneous freedom under capitalism for individuals to act without collective restraint is necessary for some to forge ahead and show the others the way. In the end, as the others follow, more can share in the advance. Inequality in action is the way to equality in result.
The market, in short, is a surer way to an egalitarian ambience, in which all can feel they have achieved as much as others by their own efforts, than is the enforcement of equality by the state. The equality of socialism is deceptive: in the real world (but rarely in socialist textbooks) deep-seated inequality is grounded in wide differences in personal political and cultural power, generally wider and deeper-seated than the differences in income or wealth in capitalism. The eventual equality-creating mechanism of the market under capitalism is based on liberty to compete and emulate, and is more enduring than the equality enforced by the political process under socialism. Equality is the indirect outcome—unintended but more secure—of the liberating market process; if equality is the direct goal of policy, it creates impulses and pressures for it to be pursued at the expense of other purposes, and among them intangible liberty is the politically more likely sacrifice. The equality of socialism ends by being forced on the people by coercion; the irony is that the political people are more equal than the common people. That is reality; the rest is self-deception or wishful thinking.
The evidence is around us. The capitalist United States has achieved more equality, indirectly and less systematically but more surely, than the USSR. In Britain the market takes longer to achieve equality because it is impeded by hierarchical resistances to, and cultural distaste for, competition, so that able young people from the working classes still take longer to penetrate the higher-paid professions than in the United States. British workers from the north are not always readily welcomed in the middle-class suburbs of the south; professional parents resist the competition in “their” state schools of working-class children who could be enabled by vouchers to escape (“exit”) from sink state schools in working-class areas.
How far it is the legal refinement of property rights rather than technological advance that explains economic growth and progress remains debatable. The conclusion of North and Thomas6 that the crucial condition of progress was law rather than technology seems persuasive. The new avenues for economic activity created by invention and innovation, both in the original Industrial Revolution of the late eighteenth century and in the even more rapid contemporary Information Revolution of the late twentieth century, provided then and provide now the scope for new forms of property rights in manufacturing in industry and personal services.
Yet the economic advance made possible and stimulated by open markets has been impeded by laws, on copyright and patents and other political creations, that prevent the market from performing its wealth-creating function. This was the conclusion of Professor Sir Arnold Plant, whose lectures developed the teaching of David Hume (that private property was necessitated by scarcity) and strengthened the view that private ownership was essential for its conservation and optimum use, not only directly for the owner but also indirectly for the community, for whom the private owner acted as unofficial trustee much more effectively than the political trustee in the public ownership of socialism. The private owner in the competitive market is penalized if he uses his property inefficiently; the public owner in the political process conceals his inefficiency and sails on to the next episode of inefficiency. The collectivized farmers of socialist countries, who will have to be given private plots in order to increase the production of staple foods, will both increase their private incomes and enlarge the supply of food for the population as a whole. But the idolatry of public ownership is the economic obstacle to production in socialist countries and to the avoidance of starvation in the African socialist states. No less, it is the persistent political obstacle to further de-socialization of property in Britain and other capitalist countries in Europe and other continents. That is the dilemma, that public property creates private destitution: the contradiction that socialists persist in ignoring, even in the Britain of the 1990s.
Capitalism forged ahead in the eighteenth century under the impetus of the technological revolution, but it was retarded by the slow refinement in the nineteenth century of the property rights required to give it maximum scope. The early inventions of the 1760s and later created enterprises that were financed partly or largely by private loans from family, friends and neighbours. The company laws that created joint-stock firms with limited liability to encourage strangers to lend and invest came 90 years later in the 1850s.
The enclosures of fifteenth-century England were the forerunners of the return in the twentieth century from common ownership socialism to private ownership capitalism in the denationalization or privatization of the 1980s. The belated transfer from the nominal ownership of public property in nationalized airways, gas, water and other corporations to the real ownership of private property in the shares of airways or gas companies has fastened academic attention on—and public interest in—the nature of property rights. The transfer from unreal to real ownership of the coal mines and the railways is impeded by party political calculation of electoral timing, but can hardly be far behind. The even more belated release from state and political control of schools and hospitals may require new forms of property ownership.
These are the new tasks for economists, historians and lawyers. But the fundamental obstacle is political. In capitalism as it has been allowed to degenerate, desirable reforms have to be piloted through the political process. The reforms required to enable capitalism to yield the best results of which it is capable will not be enacted unless they suit the politicians and their bureaucratic entourage. We must discard once and for all the superstition that, although we have to look to the self-interest of Adam Smith’s baker to supply us with edible bread, we can depend on the selflessness of the politician to provide good policies. Politicians are bakers in politics. The significant difference is that we are not tied to bakers for four or five years as we are to politicians. We can desert unacceptable bakers every day. It is less easy to escape from the large semi-monopoly suppliers of heavy Fordist industry with projects that last for years or more, not least in the nationalized undertakings. They are being undermined by technical invention and replaced by smaller units providing escapes to competitors. Again, the political process provides no better protection for the consumer in “regulation” that is captured by the regulated or in watchdog bureaucracies that are pawns of the political process.
As we are tied to politicians for years on end, we must create new safeguards against their waywardness. Politicians will produce good policies if their interests are also served, or at least if they are not seriously disserved. There need be no conflict, but the aim must be to go further and ensure harmony between the politician’s interest and the public interest. That requires an arsenal of incentives and inducements, disciplines and penalties to ensure that in serving themselves politicians serve the people. Politicians have disserved capitalism by overtaxing, overinflating, oversubsidizing, over-centralizing . . . and many other acts of commission and omission. They have had a long run of preventing open markets from abolishing want.
The package of incentives and disciplines is not yet in place. A transfer from all unnecessarily public property to private property where possible is a first essential. The underlying obstacles to the required measures are that it is taking a very long time for anti-capitalist scholars to understand why private is superior to public in property rights and that politicians and bureaucrats will resist the lessons of post-war experience. That is the province of the economics of politics, government, democracy and bureaucracy, or public choice, as it is described by its Scottish-American founders (below).
The Market as a Process
The third reinforcement for capitalism is the refinement in economic thinking on the idea of a market. For decades the notion that human beings should be subjected to the market was anathematized, especially by politicians who, even if unconsciously, were presenting themselves as the more desirable alternative. Market forces are still regarded, even in the serious press and by the literati, as an elemental power beyond human sympathy or control. The politicians, especially the socialist inclined in all parties who thought that government existed to promote worthy causes, presented themselves and were regarded as more human, more compassionate, more accessible and more civilized.
The sobering truth is almost the opposite. Markets comprise men and women who meet to exchange objects or services they want for others they offer in return. That in practice markets are imperfect has obscured the more fundamental truth that they are the best-known way of enabling individuals to meet for mutual benefit. The socialist criticism has been obsessed with the imperfections of the market to the exclusion of its unique properties. In return socialism offers aspirations without performance. World practice and experience in all the continents show no better, less imperfect, mechanism than capitalism as it has been, still less as it could be with free markets unimpeded by the political process.
The incalculable loss—the opportunity cost—of half a century of Keynesian macro-economics has been the neglected refinements in the micro-economic study of the market that would otherwise have been made. New ways would have been devised to deal with its imperfections—the public goods it has been thought it cannot supply, and the monopoly, externalities and unnecessary differences in incomes that it has not so far avoided.
It is intriguing to envisage the world without Keynes. The economists who were, or still are, inspired by his teaching—Professor James Tobin and Professor Paul Samuelson in the United States, Professor Hahn in Cambridge and many others—seem to imply the worst of unemployment and perhaps general social breakdown. Yet the countries that ignored Keynes, not least Germany and Japan and for many years the United States, have prospered with negligible unemployment. So should Britain have prospered as the slump of 1929–31 receded in the later 1930s if she had developed a liberal market system instead of the post-war Conservative-Labour corporatist state.
Now, after 50 years, micro-economics is again being applied intensively in the newly systematic study of the market process in the United States and Britain. The German economists who inspired the economic miracle— Walter Eucken, Ludwig Erhard, Alfred Müller-Armack and others— rejected (or ignored) Keynesian macro-economics. The macro-economists whose advice on incomes policies, growth targets and reflation (often a euphemism for inflation) was heeded in Britain and the United States by governments of all parties in the 1960s and 1970s have not only left a legacy of stagnation or inflation, or the ironic combination of both in stagflation. They have also weakened political democracy by weakening free markets and strengthening state controls—which meant weakening capitalism and strengthening socialism. It was not until their influence as economic advisers was replaced from the 1970s by that of economists who may have deployed macro-economic models but who instinctively understood their dangers unless applied in the light of their micro-economic foundations, that state controls were replaced by markets and stagnation by expansion.
Fundamentally, the error of macro-economic models still used in government planning is that they reflect totals or averages of production or consumption, saving or investment, but that individual decisions are mainly influenced by small marginal changes in these quantities. Macro-models that ignore their micro-foundations say nothing of significance about individual reactions to marginal changes in price. Macro-economic totals of car production conceal differences between firms; totals of bread or beer consumption conceal differences between age groups. The return from state controls to free markets could push macro-economic studies and applications back to the minimal activities of government and expand the micro-economic study of individuals.
The revival of the refinements of micro-economics would reduce the influence, and discipline the over-use, of macro-economics. Hayek emphasized the essential function of the market as not merely the rational allocation of existing resources but the discovery process of generating new ways to improve and develop them. The British political scientist Professor Norman Barry has contrasted the older end-state objectives of centralized government—if benevolent in high employment or low inflation, if authoritarian in space research or military strength—with the newer studies of human behaviour as a process of decentralized interaction between individuals as buyers and sellers which produces a better harmonization of human activity.7 He concluded, as a political scientist judging economic mechanisms:
Too many economists have been guilty of gleefully demonstrating how existing market structures depart from a hypothetical optimum. Political scientists too often imagine that the only way to avoid dictatorship is to let politics operate more or less unrestrained irrespective of the damage it can do to the efficiency properties of the market....
... the economic world becomes the plaything initially of . . . the headily unrealistic abstract theorist and then the defenceless target of unconstrained political authority.8
The unreality of supposing that government and its essentially macroeconomic instruments can produce the best results from human and natural resources, and the necessity of making the micro-economic view of the world prevail, were put graphically by Professor G. L. S. Shackle in depicting the micro-economic jigsaw puzzle of supply and demand, decisions and expectations, as able to change “as swiftly, as completely, and on as slight a provocation as the loose, ephemeral mosaic of the kaleidoscope. A twist of the hand, a piece of ‘news,’ can shatter one picture and replace it with a different one.”9
It is unrealistic to suppose that the political processes and public property rights of socialism can make as much use as capitalism of the micro-market. The revival of micro-economics is a further intellectual reinforcement of capitalism in the world ahead.
The Economics of Politics (Public Choice)
The economics of the market has been studied for at least 200 years. Little wonder that its imperfections fill the textbooks and are reflected in the journalism of writers who grew up in the post-war heyday of Keynesianism. No less predictable is the disposition of politicians, occupationally anxious to enlarge their empire, to find reasons for throwing out the baby of the market with its bath water of imperfections. “Market failure” is the irresponsible device on the banner of academic socialism, which is not examined in the same meticulous detail to discover government failure. Yet the record and history of government failure would fill a thousand Domesday Books. The pervasive repeated destructive inability of government to represent the people, keep its promises, correct its defects, discipline its bureaucracy, cut out waste, respect individual differences among citizens, avoid monopoly, provide choice and purge corruption, especially in local government and in much else, receives less attention in conventional political science or the press.
The failure of government is the main conclusion from the barely 30 years of study of the micro-economic analysis of the motivations and reactions of individuals in politics—in government, democracy, taxation, bureaucracy, electoral systems and other components of the political process. Although the subject of the analysis is politics, the treatment is economic. The American political scientist Professor William Mitchell has said his confrères in political science have not been very quick to see its importance because the method of thinking about individuals in politics is unfamiliar and the conclusions unpalatable. Students of government do not characteristically weigh the costs and benefits of alternative policies. Since “no-one in politics knows the value of anything,” the political allocation of scarce resources is likely to be less efficient than in the market where everyone has to know prices in order to make intelligent because informed decisions.10
The essence of the new study was put succinctly by the Swedish economist Professor Ingemar Stahl when he presented Professor Buchanan to the King and Queen of Sweden as the Nobel Laureate in Economic Sciences in 1986.11
Individuals in households and firms exchange property rights by a pricing system in markets, which thus coordinate billions of transactions spontaneously. Individuals may act with the motive of self-interest but the consequence is usually to serve the general interest because transactions will not normally be made unless they benefit both, or all parties. Neither does self-interest connote selfishness: people act from self-interest because it is the only interest they know and are equipped to judge. They do not profess to know the interest of others better than others do themselves. This is the profession of politicians. The assumption that they invariably do know the interests of others has rendered conventional political science not only irrelevant but also misleading in the study of present-day politics. The study of public choice (Stahl described it as “the new political economy”) had expanded the scope of economics in three ways.
First, it had applied micro-economics to the political process and its associated government administration and interest organizations. Individuals who act from the motive of self-interest as members of households or firms are also members of the political system. “It is hard to believe,” as Stahl put it, “that [they] drop the self-interest and turn into economic eunuchs devoting themselves completely to social engineering in the service of the general interest.” Public choice was making it possible to deduce the macroeconomic behaviour of political and administrative organizations from the micro-economic interests of their individual members.
Second, public choice indicated that voters in the middle of the range of interests (the median voters) will strengthen their influence as parties of the Left and the Right try to win their support to form a majority. Attempts to correct market failure by government can thus produce “government failure.” Budget deficits are politically tempting because the economic benefits of government expenditure go to the contemporary citizens, who have votes, and therefore to the politicians of the time, but the cost is borne by voters of the future who cannot vote against the deficits of today. Politicians who are profligate and live on loans today may not be in public life to receive the wrath of voters tomorrow. Little wonder governments often bequeath large debts to their successors. Producer groups with clear gains although fewer votes will also be favoured at the expense of consumer groups with more votes but less incentive to organize because their individual gains are minuscule.
Third, following the Swedish economist Knut Wicksell (1851–1926), Buchanan’s public choice had developed the “contractarian” view of the state to explain its decisions on government expenditure and taxation. In a private contract between two individuals agreement was unanimous: both gained and neither lost. The idea of a unanimous social contract in which all gained led to the economic theory (explanation) of the state in which the optimum rule for government expenditure and taxation was determined by the costs of unanimous decisions in which all gained weighed against the losses suffered by individuals. The outcome would depend on the constitution and the rules establishing the right balance between the government coercion required for protection against danger and the risk that the coercive powers of the state would be exploited by the interest groups.
The writings on public choice have grown faster in the last 30 years than perhaps those on other developments in economic thinking. Much of it has grown from the seminal work of Buchanan and Tullock,12 in which Buchanan analysed politics as a process of exchange (above) and Tullock analysed “public choosers” (voters, politicians, bureaucrats) as primarily self-interested individuals.13
These developments and later refinements in public choice have superseded much of conventional political science and its unrealistic approach to the potential beneficence of government. It will never be the same again after its invasion by economics, and the replacement of undefined generalized “needs” and “priorities” by the calculated or estimated (or guessed) costs and benefits of specific policies as the criteria of political decisions and the judgement of politicians.
Scholars of all the social sciences will assess public choice by its revolutionary insights. Politicians will be sobered by its demonstration that they are not a race apart but are like other men and women. With historic exceptions, especially when they rise to a national emergency, they are no worse but nor are they better—more able, kinder, more moral, less corruptible— than other men and women. Students of political science, philosophy and sociology will want to add public choice texts to the reading lists of outdated middle-aged and older teachers.14
The most important twin insights of public choice, its most fundamental contributions to the formation of policy, are first the focus on the power of dominantly producer interest groups to frustrate the potential ability of free economic institutions to serve the general interest, which in effect is the interest of producers themselves as consumers, and second the inherent tendency of myopic government to yield to the organized at the expense of the unorganized, and thus to put the short-run present before the long-run future.
The first, the extraction from politicians in government of the rewards denied by discriminating consumers in competitive markets, is described as rent-seeking in the literature.15 There seems no official public choice term for the second, the debilitating myopia created by political self-interest, but a main element is described as “log-rolling,” the mutual aid between politicians who support one another’s self-interested projects without regard for the eventual damaging effects on the citizenry of all their projects as a whole. Other elements have been described, significantly, if sometimes cynically, as “pensioneering,” the “vote motive” (the title of Tullock’s IEA Paper,16 and the political analogue of the market profit motive), collusion, jobbery and worse. “Politicians,” said Professor Mitchell, “live by stratagem and tactics.
Although their world is a monopoly, it hardly brings a quiet life . . . they must ‘wheel and deal,’ conceal, dissemble, lie, exaggerate and bluster.... They conduct the weighty affairs of state . . . without a supportive ethical setting for efficient trading.”17
Ironically the danger could be less under socialism than under capitalism. A government of socialists that dispensed with the votes of political democracy, as some in Europe, Asia, Africa and South America do, could ignore the importunities of the interest groups and put the long-run interest of the people, as they saw it, first. But they would require to be benevolent, informed and long-sighted: rare qualities in combination. And the interest of the people as seen by the socialist controllers would not necessarily be the interest of the people as they saw it themselves.
Capitalism has been developed and is seen to be superior precisely because, except in national emergency when a Lloyd George or a Churchill puts national survival before party expediency, or in the absence of emergency when a Mr. Gladstone or a Mrs. Thatcher can impose conviction, principle or a vision of society on pragmatic (meaning calculating or cynical) ministers, men and women in government remain as human, fallible, imperfectly informed, near-sighted and self-regarding as men and women elsewhere. A century of increasing overgovernment under socialism has created the illusion of political supermen, served by bureaucrats who disguise themselves as “your obedient servants.” William Shakespeare used Cassius to tell the Romans not to bend the knee to the tyrant Caesar. He might now tell the people: “Men at some time are masters of their fates: The fault . . . is not in our stars, But in ourselves, that we are underlings.” Socialism risks generating Caesars. Much more than capitalism it requires planners, controllers and administrators with fearsome powers. Under capitalism the ordinary common people who do the work of the world do not depend on extraordinary people to “lead” them; capitalism runs best when a handful of reasonably able people do the relatively little that government has to do and discreetly withdraw to live their own lives. Switzerland remains the exemplar.
The transition required for capitalism to emerge from a long term of socialism may necessitate an active, even assertive, government and its forbidding risks. The charge of assertiveness against the three Thatcher Governments may reflect in part the effort required to re-establish the spirit as well as the institutions of market liberalism. Yet the ultimate culprits are the governments of all parties that instituted socialist control where it was not necessary. The policy of centralization to re-create decentralization has obvious dangers; ambitious politicians with no convictions will be tempted to prolong it. Conservatives have been hardly less guilty than socialists. The obvious solution now is to limit the power of all politicians to the essential minimum. Public choice indicates constitutional disciplines on politicians to inhibit their natural proclivities. Further solutions outside the political process, considered in the final chapters, may be required.
The teachings of public choice are an intellectual reinforcement of the case for capitalism because the market minimizes the power of men and women in the political process.
The Seductions of Government Regulation
Where socialists have had to accept that private industry in the market could be superior to public enterprise controlled by government, they have insisted that government must nevertheless regulate it to safeguard the public interest. The review of socialist thinking in 1989 as reflected in the review of its principles and proposals by the Labour Party, said to be the echo, 30 years late, of the German Social Democratic acceptance of the social market economy in 1959, indicated over a hundred new regulatory authorities with political powers.
Like some of its academics, Britain’s socialist politicians have belatedly heard of the market but not yet of the economics of politics. The market process was difficult to accept after decades of condemning its defects; the Labour-Socialist solution is to take it under political (democratic) control. Yet the defects of the political process will be impossible to absorb because it is the essence of socialism. Politics can civilize the market. Politics can hardly civilize politics. Political democracy as we have known it so far has not made itself representative of all the people.
The dilemma is insoluble. Yet it cannot be concealed for long. Socialist politicians concerned for electoral power can disguise it for a time. Socialist academics faithful to their science in the pursuit of elusive truth will not conceal it at all.
The new economics of Professor George Stigler, the 1982 Nobel Laureate, Professor Gary Becker, Professor Sam Peltzman and others, mainly in the United States, strongly suggests that, because of the working of the political processes, regulation invariably ends by favouring the regulated industries.
The regulated capture the regulators. The latest hope of the socialist mind, in all parties, that government and politics would find the solution has failed.
Road charges in the United States were found to be half as much again as in countries without road transport regulation like Belgium. Short-distance urban transport passengers were subsidizing long-distance passengers—as discovered more recently in Britain. The unregulated market in the newer capitalist countries produced “jitneys” (large taxis), which gave passengers more flexibility in arranging routes, but, because they were suppressed in regulated transport systems, travellers resorted to private cars and intensified road congestion. Regulation in medicines has slowed down the production of new medicines because the political regulatory authority, not least in the United States, is understandably too cautious: it will be blamed for the publicized tragedies caused by the unforeseen side-effects but not for the unknown lives that could have been saved by the suppressed medicines. Political overcaution in standards that are too high, so that political popularity is bought at the cost of the citizen, is one more defect largely ignored in political science. The use of compulsory car seat-belts has unknowingly shifted casualties from passengers to pedestrians. Government is praised for saving passengers but not condemned for killing pedestrians. Continued protection for “public utilities”—telephones, electricity, broadcasting, the post— repeated the dismal occupational disease of the political process by subsidizing producers at the expense of consumers and aggravated the offence by repressing innovation. For how many more years would British households have had to accept the stale joke about the complete choice of telephone colours provided that they chose black? The simple answer is as long as government prevented competition with the socialized telephone system.
The notion of conventional politics that the function of government was essentially to rescue the citizen from market failure is a long time a’dying. The history of government regulation vividly demonstrates the inability of the political process to cure a failure of the market process. The charge that standards in the market are too low is sometimes justified, but the reason is mostly that the market is prevented from being as competitive as it could be in generating more information from more suppliers, so that consumers have the wider choices that will enable them to avoid the lower standards by escaping to the higher standards. It is usually government that suppresses the competition by erecting vast monopolies. Obvious examples are fuel and transport, education and medicine.
The new economics of regulation has produced evidence of the undiscovered damage of even well-intentioned government. Ironically, the better the intention, the more the damage, because of the temptation to set standards too high and the anxiety to avoid the criticism that they are too low. Market standards that are too low do not last long and are corrected when consumers can escape from offending suppliers. But the political process generates strong incentives of overcaution to garner votes at the expense of eventual choice, comfort, access and lives. Of these, restricted access is the least detectable: standards that are too high raise costs, and prices that are made unnecessarily high exclude the poor more than the relatively rich. The cause of these consequences of government regulation is unavoidable: the costs and burdens of standards that are too high are more difficult to detect than in the self-correcting mechanism of the competitive market. The externalities of socialism can do more damage than the externalities of capitalism.
The central conclusion is that the much-emphasized argument for regulation by politicians makes the decisive error of socialism that it will be conducted by a new race of men and women. Some exceptional individuals have appeared in British history—perhaps Pitt the Younger, Gladstone and Churchill. There is now much argument whether Mrs. Thatcher is such a one. If history judges her as exceptional, she is aided by only a handful of others, but surrounded by mostly unexceptional conventional politicians for whom politics is their chosen profession and power their essential goal, who too often sound like barristers with briefs in which they had no heart. Yet even if the exceptional appear more frequently and more dependably on the political scene, the argument remains for capitalism to confine the powers of everyone in politics to the tasks that only government can perform.
The first five of the ten developments in economic thinking that strengthen the case for capitalism have been reviewed in this chapter. The second five are examined in chapter 8.
Chapter 8. More Intellectual Reinforcement for Capitalism
Capitalism is based on self-interest and self-esteem; it holds integrity and trustworthiness as cardinal virtues and makes them pay in the marketplace, thus demanding that men survive by . . . virtues, not . . . vices.
[Alan Greenspan, in Ayn Rand, Capitalism: The Unknown Ideal ]
We are radicals for capitalism . . . we advocate capitalism because it is the only system geared to the life of a rational being.
[Ayn Rand, Capitalism: The Unknown Ideal]
... the impressive economic and the still more impressive cultural achievements of the capitalist order . . . could lift poverty from the shoulders of mankind.
[Joseph Schumpeter, Capitalism, Socialism and Democracy]
This chapter covers the second five of the developments in economics that strengthen the argument for capitalism.
Shrinking Public Goods (Unavoidably Collective Functions)
An apparently safe argument for the socialist is that socialism is indispensable for the public goods that cannot be produced in the market. Joint financing by taxation and production by (or for) government is therefore apparently indispensable.
“Public goods” is a defective description. It suggests, perhaps unintentionally, that they are produced by government necessarily for the “good” of the “public.” To analyse them dispassionately, an ethically more neutral description is preferable. Until a better term is discovered, I shall occasionally use “unavoidably collective functions” to emphasize that they are necessarily collective, but not necessarily “good” as distinct from public “bads,” produced by government.
That some goods and services are unavoidably functions of collectives like government is not an intellectual argument for the superiority of socialism as a principle. Collective production is necessary for a small part of economic activity—perhaps 15 per cent in Britain (see below)—but it remains as defective in principle as it is objectionable in application. Collective provision is not chosen (for public goods) because it is preferred to the market. Heart surgery is not preferred to a healthy heart but to a non-functioning heart. Government has to supply public goods not because it is better than the market but because the market cannot supply them at all. But in supplying public goods government still subjects the citizen to all the “bads” of the political process.
Socialism in modern defence and other public goods proper is unfortunately unavoidable, although the debate on the nature and extent of public goods is long and continuous. The public sector as distended by most governments in Europe and generally in the capitalist West does not stop at public goods. Socialism in fuel and transport, education and medicine, housing and pensions, most local government and other (mostly) private but “socialized” goods is not a technical necessity; it is mostly a political convenience based on fallacious socialist reasoning. It is mostly unnecessary, undesirable and avoidable. But imperialist politics has invaded and captured them and will not easily release them without explicit demonstration of public displeasure, even though government production—“nationalization” in its varied disguises—is demonstrably superfluous and increasingly inferior to the market.
Socialized public goods not only suffer from all the defects of socialized activity, but they suffer more. Escape and exit are possible from socialized non-public goods like education and medicine; escape and exit are not possible from public goods proper like defence or law and order, except by the extreme resort to emigration. The thwarting of citizen preferences in public goods proper—the forced payment in taxes for services not preferred by large minorities, the unaccountability, the political horse-trading, the social friction (as between unilateral and multilateral disarmers) and other discords, the differential influence of the organized political people and the unorganized domestic people, the bureaucratic, professional and trade union obstructions to experimentation in better methods of supply by competitive private suppliers—all these and the other defects of socialism are intensified and maximized in unavoidably public goods.
Public goods proper are distinguished from public goods “improper”— the so-called public sector services that have no business in the political process—by two characteristics: they cannot be financed by market pricing (charges of varying kinds) because individuals who do not want them cannot be excluded, and individuals who use them without paying do not reduce the supply available for others who do. The technical jargon is “non-excludable” and “non-rival.” The archetypal public good, external defence, unavoidably protects all citizens, including those who evade taxes, and is therefore non-excludable. Broadcast services which can be received by all without reducing the supply to any are non-rival but can be made excludable by meters and scrambling devices so that free-riders do not exploit payers; and the broadcasts do not require tax financing because they can be based on private payment.
A distinction which affects policy is between exclusion that is physically impracticable, as in external defence, and exclusion that is practicable but financially uneconomic because the cost of collecting “entrance” fees exceeds the revenue, as for national parks; although charging is technically feasible, it is uneconomic, and it is therefore sense to make entrance “free” to all. This is another source of confusion caused by the political convenience of describing as “free” the services paid for indirectly by taxpayers—but not by tax-evaders.
The distinction between public goods proper and public sector services is clear. Public sector services are public goods improper where they are excludable and rival. Most British public services are not public goods proper and do not have to be supplied by government.
Some years ago, in an effort to gauge the extent of unavoidably governmental activity, I reached the rough estimate that only a third of the empire of government in 1976 comprised public goods proper.18 Since the public sector has continued to expand, though less since 1979, the proportion is now probably nearer a quarter. The remaining two-thirds or three-quarters are public goods improper. The new prospects of world nuclear and nonnuclear disarmament, made likely by the belated Soviet recognition in 1989 that socialist production will lag behind capitalist production and requires not only markets but a massive shift of resources from armaments to consumer goods, could substantially reduce these proportions. It may also occur to the communist countries under their new “liberal” leaders in the 1990s that the output of consumer goods could be vastly expanded if transferred from socialized to market production. The danger is that the Soviet military might see an expansion of the market economy as a way to reduction in the armed forces.
Whatever the essential nature of public goods proper, about which economists and political scientists will continue to differ (the seminal thinker Anthony de Jasay has recently questioned the conventional approach [below]), a technically pragmatic device or rule of thumb for distinguishing them from public goods improper would be to apply charging. If they could be financed by charging, they are not public goods proper, because they would then be shown to have separable benefits for which users could be charged or from which free-riders could be excluded. If they cannot be financed by charging, or if the revenue would be exceeded by the costs of collection, they are public goods proper.
Whether charging would, in political practice, be used in this clinical fashion is questionable: government would be tempted to use charging to suit its short-term aims, perhaps to raise revenue from a virtual monopoly, as has been argued with nationalized gas and electricity. But the distinction remains in principle: if politicians were saints, or could be disciplined by a senatorial House of Lords or by constitutionally entrenched clauses to act righteously, charging could be a powerful instrument to settle the question in some cases. It might also perhaps dispense with the unfruitful or self-indulgent theorizing on what were and what were not public goods by academics spoiled by tax financing.
By this charging test, there is a long list of British public services that are not public goods—from railways and air transport through coal, electricity and gas to most schools and hospitals, and from public libraries to job centres. Many, like education, have been defended as the way to deal with poverty, but even when poverty gradually receded from the British scene they were continued—and enlarged—in the public sector by the momentum of party politics and by the rent-seeking vested interests that found they could extract more from political negotiation with ministers or civil servants than from the consumer in the market (chapter 11). The larger part of the public sector is a political artefact, not an economic necessity or a public preference. Its persistence can be explained only by the economic analysis of politics.
In deference to the public choice academics, I should have said that the fraud of public service is explained only by the study of public choice, but I have argued that the term was unfortunate. Public choice is the study of the behaviour of “public choosers” in the political process (its clumsy original name was “non-market decision-making”), but its essential findings are that the political process is a vast engine for the frustration rather than the satisfaction of the choices of the public. The term “economics of politics” avoids the implied approval of the political process as it has developed.
The euphemism “public” is itself a political misnomer for politicized services run by bureaucracy. It conceals the large element of public goods improper in the unnecessary socialism that distorts the British and other capitalist economies. The term “service” is another political euphemism for a range of goods and supplies which vary from the acceptable, such as the police in some but not all services like advice on burglary protection and convoying valuable loads by road, to the unacceptable, like “sink” schools, shabby hospitals and slum housing. Particularly in league with the misleading “public,” the question-begging “service” suggests a benevolence that is belied by the common everyday experience of rail travellers, householders, parents, patients, council house tenants, pensioners and many more who cannot escape easily, or at all if they are poor.
Nor are public goods proper fixed for all time. Technical advance can transform some into private goods that can be financed by pricing in the market, with all or most of the advantages of consumer sovereignty. Lighthouses were once considered public goods because all ships benefited, whether they paid or not, by reducing the risk of collision. But there was also a private benefit of avoiding the risk of being sunk by rocks or other natural obstructions; to this extent ships should pay part of the cost of the service. A device such as “scrambling,” which confined the use of lighthouses to ships that paid and excluded those that stole a free ride at the expense of others, might make for better use of resources and efficiency in general, since free-riders, by not paying for the equipment, labour and other resources required to provide the service of safety for them, are making journeys at less than the full costs.19
Nor is broadcasting necessarily a public good. In the economic shorthand, it is non-rival but not non-excludable. Sir Sydney Caine, the liberal economist who had been Vice-Chairman of the Independent Television Authority (ITA), argued many years ago that meters could enable listeners or viewers to pay for the programmes they preferred,20 and charging for programmes was in principle commended by the Peacock Committee on Broadcasting in 1987.
Two developments put the extent and importance of public goods into question: first, technical innovation at a rate unknown since the Industrial Revolution; second, the very supersession round the world of socialism by capitalism. Public goods have loomed large in the budgets of both capitalist and socialist governments for more than half a century because the largest item has been expenditure on what politicians call “defence” but is in practice preparation for possible war or for aggression. The belated realization by the communist world in the 1980s that it will not catch up with the capitalist world, by internal productivity or imperialist adventure, is now likely, for the first time since 1917, except during the Second World War, to lessen tensions between the two worlds and enable both to beat their massive arsenals of nuclear and conventional swords into civilian ploughshares, schools and hospitals, boots and shoes, homes, motor cars, television receivers and toys. The announcement by Gorbachev to the newly “elected” (but mainly selected) Congress of People’s Deputies in May 1989 that Soviet expenditure on armaments had been no less than four times the amount long announced to the world (which could still be a political understatement) was also a confession of political duplicity unequalled in the capitalist world. The vast resources of labour and equipment would have brought much comfort to Russia’s ill-housed millions. But now the Russian anxiety to increase the production of consumer goods might lead to disarmament that could bring a very large transfer from public goods to private goods. Government spending on armaments by the leading countries could fall sharply; total “public” expenditure in the capitalist West could fall from 40–50 per cent of national income in Europe to 20–35 per cent or less as it is confined to public goods proper. The load of socialism could be lifted from the lives of the common people everywhere.
The advance in technology, the inability of government to raise enough taxes for services to dispense with long waiting (from medical care and the law to the processing of driving licences and passports) or congestion (from large classes in schools to hospital wards shared reluctantly by older and poorer men and women patients), the recognition by the employees of the public sector that, as Anthony Crosland said of local government, “the party is over,”21 the new taste of formerly propertyless workers for a real “share” in industry, the very acceptance by parties of the Left that capitalism has come to stay . . . all these and other developments unforeseen ten years ago look likely to reduce further the weight of public goods in many or most countries of the world. The very revulsion against the excesses of the state—its gluttony, its immobilisme and its pretence of sainthood—will stimulate inventors, innovators and entrepreneurs to discover new ways to reduce its writ.
Services that once seemed indisputably public goods are, moreover, being performed increasingly by private suppliers, more in North America than in Europe, with Britain a latecomer. (The evidence for the Third World has been compiled by Gabriel Roth.)22 The law concerned with the settlement of disputes can partly or largely be replaced by private arbitration. The police may have to go on ensuring public order but will probably lose some or much of their protection of persons and property to private agencies. Security at Heathrow and other airports is largely provided by capitalist companies. Prisons can be run by private firms. Taxes may have to be levied by government but could be collected by private companies. Fire services are not necessarily public: in Denmark and some towns in the United States they are sometimes supplied by private firms.
Academics and other observers are examining public goods more closely. Two Belgian academics, the economist Professor Boudewijn Bouckaert and the lawyer Frank van Dun,23 have analysed their nature and extent with unaccustomed scepticism; they doubt whether public goods are as unequivocal or as unavoidable as is still commonly supposed. The Hungarian writer Anthony de Jasay, who lives in France, author of the penetrating dissection of The State,24 has followed with another sceptical analysis of the public goods problem.25 He argues strongly that the very effort of government to provide public goods without charge to all and sundry breeds the parasitic freeriding that it intends to suppress—one more example of the clumsy perversity of the state. He takes further the argument that many public goods are still supplied by government when they could be produced by “spontaneous group cooperation.” The conclusion that, since free-riding would be difficult to exclude, there would be a drift from voluntary to compulsory solutions, seems to indicate a tendency that would meet the powerful opposite forces tending to reduce the ambit of public goods in a world that renounced nuclear armaments.
So much for public goods proper (wholly, largely or partly). The days of public goods improper are more certainly numbered. The two large bastions of the public sector, the public services of education and medicine, which provide increasingly personal separable benefits, will be eroded by rising incomes or tax evasion if government continues to prevent escape and exit by enforcing taxes for sink schools or inhospitable hospitals regarded as unacceptable. All or most fuel supply can be provided by private firms. There is no good reason for transport to be owned by the state and run by government officials. The personal services of job centres for employees of all kinds and agencies for office staff, nurses and domestic assistances can be— and are being—performed more sensitively by private agencies. Universities and other suppliers of higher learning will derive more income from their customers—students, industry or overseas institutions. More cost-covering charging for libraries, museums, art galleries, opera, ballet and beach facilities, and new charging for refuse collection and other local government services would remove them from the misnomer of public goods and move them from local government to local firms. Water supply for private homes and sewage disposal can be better provided by private companies, not least because they are more likely to introduce the metering that induces economy.
Not least, the efficient supply of public goods proper has been damaged by the inefficient supply of public goods improper long after they were made superfluous by technical and social advance. It would not be surprising if government were slow to ensure the supply of possibly new public goods, like protection against air or water pollution, coastal preservation and the conservation of ancient buildings or animal species. If it had pruned back the public goods improper over the decades, it would have better anticipated its new tasks. The political inability to change the composition of the public goods sector with changing conditions is yet one more form of government failure uncomprehended by the socialist mind.
The Political Exploitation of Externalities
The social cost imposed on innocent third parties by private exchange in the market is an allied, and apparently easy, argument for advocates of government action to correct market failure. Public goods are intended to provide joint benefits to all whether they pay or not; other goods exert unintentional external effects—benefit or damage—on third parties.
In principle the argument seems incontrovertible. Factories belch smoke. Motorways create noise. Road traffic burning diesel oil or leaded petrol exudes noxious smells or poisonous fumes. The discharge of industrial waste destroys fish. The list seems endless. “The world,” says the usually sober Sunday Times, “is dying.”26 Let government, runs the familiar response, protect the environment by prohibiting such “externalities” or, at least, ensure compensation for harm.
The argument is not self-evident. There are at least eight difficulties. First, almost every human activity has unintended external effects; if they were all prohibited, or examined and approved by bureaucrats, the cost would exceed the benefit. Like the identification of public goods, the policing of all externalities is an economic, not a technical, task. Some externalities have to be tolerated, in socialist as well as capitalist economies. Their prevention is no more an absolute than any other human activity.
Second, some probable or possible externalities are known ahead of time and allowed for in human calculation. People do not move to houses near the likely sites of sewage farms; the market puts their prices lower to compensate them for the risk or inconvenience. Political paternalism, here as elsewhere, is superfluous; it would destroy the price signals of the market.
Third, externalities can be beneficial as well as harmful: if people who lose are to be compensated, others who gain should be surcharged; if the state taxes a factory owner for his smoke, it should compensate the local housewives for the cost of laundering their sheets. But if all the gains and losses, compensations and surcharges were assembled, the cost of compensating and/or penalizing everyone could again exceed the good done on balance to all. Pursuing externalities to their ultimate conclusion would create an impoverished bedlam, a Valhalla for bureaucrats, a cornucopia for accountants, but not much for the rest of us.
Fourth, the theoretical solutions for harmful or beneficial externalities create an “open sesame” to the political process and all its works; we can imagine what it would make of the task of assessing millions of externality taxes and subsidies.
Fifth, an ounce of the environment is worth sacrificing for a ton of new medicine that will cure cancer. The environment cannot be saved at all costs. No-one behaves as though it should be. We despoil a village green to make a cricket pitch; humans live on non-humans (chicken, cows, sheep, fish), and non-humans live on lesser creatures. Yet the environment is safer with private property rights in the market than subject to politicized decisions by government.
Sixth, some degradation can be discouraged by the use of the market itself. A lower tax on unleaded petrol would discourage the use of leaded petrol. Professor Wilfred Beckerman, who has not invariably favoured the market, argued strongly in the 1970s, supported by the scientist Lord Zuckerman, for charges or taxes rather than government prohibitions.27 Beckerman’s analysis and proposals were amplified in an IEA Paper in 1975 and echoed in a report commissioned by the Department of the Environment in 1989.28
Seventh, the fundamental condition that predisposes the environment or other property to spoliation is that it is owned in common, and not appropriated by a private owner who would protect and conserve it. Before the politicians of the world draw electoral capital from preparing international cooperation on protection of the environment, which would be vulnerable to questionable political influences, let them extend private property rights wherever possible to create effective inducements to the conservation of the environment. Until they have done that, the politicians may be thought intent on empire-building.
Finally, government is itself the source of the most far-reaching externalities and the most incorrigible, because the politician or bureaucrat at fault is more difficult to discover and less likely to be penalized (or rewarded) than its citizens. Its policies would not necessarily be dictated by faithful thought for the public interest but be influenced by political, industrial and vested interests, precisely those anxious about the natural environment who would pay too high a price in other people’s taxes.
Two examples illustrate the error. The universities yield incalculable externalities in stimulating respect for spiritual values, enjoyment of cultural life and so on. Therefore, it is argued by the culturally inclined, they should be subsidized by government. Many scholars, vice-chancellors and socialists of all sorts have charged the 1980s governments with philistine barbarism for making the universities dependent on private financing. The argument seems indisputable in principle but founders in practice. How extensive are the cultural externalities? How large are the state subsidies required? Who pays (their opportunity costs)? Who decides? Are the relatively poor yet again to subsidize the potentially rich? It is not very helpful to make large claims for government funds without a more or less precise notion of how much is required. It is a high-minded task difficult to fulfil at the expense of others who have to pay but have no say. It is one more irresponsible indulgence encouraged by the political process.
All these are political decisions if they are not decided in the market. The suppliers of academic culture are well equipped to justify endless subsidies. Together with the innumerable other suppliers of undeniable externalities, they could justify subsidies absorbing more than the national income. The market certainly generates externalities, but that does not make the political process the better judge of their extent. The subsidization of the universities and their separation from the market and its (imperfect) cost indicators have produced grotesque expansion in subjects far removed from everyday requirements. The Thatcher Governments have been right to shift the balance of financing away from public to private.
The political process can do harm through the best-intentioned of scholars. The Committee on Higher Education under Professor (later Lord) Rob-bins recommended in 1964 that no less than 10 per cent of university costs should be financed from student fees. Soon after when he came to the IEA I asked whether all members of his committee had suggested 10 per cent, whether some had preferred lower and others higher figures, and whether it would not have been more enlightening if the report had indicated the range. He replied that it had been desirable to arrive at an agreed figure; it was true some had preferred lower figures, but the higher figures had been as high as 40 per cent. This was an exercise in political tactics. The publication of the range would have inspired a much more valuable public discussion of the pros and cons of politicized university financing than the bland agreed average. The market reveals the vital differences in individual judgement; politics aims at agreement on the meaningless impersonal compromise consensus.
The second example of the excesses of the political process in framing policy on externalities is the series of accidents on British Railways in early 1989. The natural human response of the Secretary of State for Transport was to assure Parliament that “everything possible” would be done to discover the causes and prevent their recurrence. This is good politics but profligate economics. In a world of scarcity no “desirable” object—safety or life it-self—can be pursued “at all costs.” All objects must stop short at the stage when additional resources add equal utility in all uses, so that the community cannot benefit by switching resources from some uses to others (the economists’ law of equi-marginal utility). The market enables us to measure the utility that we think will be added by labour, equipment and land in alternative uses. But in politics the decisions are likely to be short-sighted, self-interested guesswork, especially near by-elections.
Cost–benefit studies, as Professor Michael Jones-Lee emphasizes, can shed some light, although Professor George Peters showed long ago in a frequently reprinted paper that they are often precarious and pretentious.29 The main objection is that they hand politicians yet another “scientific” instrument to wield to their advantage. Unlike the market, politics is the arena where self-interest does not generally tend to public advantage.
The most extensive, but least discussed, externalities of government are the indirect or incidental but widespread political, fiscal, bureaucratic, labour market, trade union and professional, familial, financial and international repercussions of the welfare state. It consumes much higher taxation than would otherwise be required. The taxes impose costs on the national exchequer and generate tax avoidance and evasion, and since taxes, although legal, are no longer regarded as necessarily moral, they have stimulated the new twilight of law-breaking in what I have called “tax avoision,” the mixture of avoidance and evasion when the resentment of taxes levied for unapproved purposes, such as subsidies for non-poor council tenants, pass imperceptibly into tax evasion “justified” as rejection of the impositions of irresponsible politicians.30
The welfare state also distorts the machinery of government. It inflates the cost of the bureaucracy, and expands its power to run monopolies that decide the choices and obscure the quality of government services. It increases the strike threat of public sector professionals and trade unionists. In replacing the individual decisions of the market by the majority/minority decisions of the political process it foments social conflict between the political people and the domestic people (chapter 13).
The welfare state is rarely debited with its opportunity costs—not least, the expansion that would have developed in the voluntary insurance and other spontaneous forms of self-help among the common people as incomes rose (chapter 11).
Although it seems ironic to emphasize the evil that emerges from services created to do good, the welfare state has created large scope for work evasion, responsibility evasion, concealment of culpability for error and waste, redistribution of income from the poor to the affluent, favouritism, jobbery, corruption and theft. It is little wonder that the middle classes, as politicians who run the services, professionals who fill secure posts and well-connected consumers who receive the most responsive attention, benefit more than the working classes.
The wonder remains that, after 40 years, socialist academics continue to see the vision of the welfare state as it was conceived in the 1940s, rather than the reality of the externalities that emerged in the everyday world of the 1980s. Still less do they envisage the welfare services that could develop in the 1990s and 2000s under the stimulus of the market forces that produced the unprecedented wealth, range and quality of personal and household consumer goods that the common people have received from capitalism as it has been, and even more as it could have been.
The Importance of Money
Capitalism has been derided for its apparently incurable instability in the roughly ten-year trade cycles that for half a century from the 1880s to the 1930s alternated between boom and slump, bringing unemployment, hardship and poverty to the common people. Capitalism went through its darkest days in the 1930s, both materially from the Great Depression of 1929– 33 and intellectually from the academic/political savaging by the wide range of critics from democratic Fabian to assertive Marxists who taught the dictatorship of the proletariat, an outlook epitomized by Stephen Spender in 1932.31 For liberals in the 1930s who had a cautious good word to say for the free society, derision was their common lot. “Market” and “capitalism” were rarely uttered with approbation, even in academia.
The new economics of money, inflation and unemployment has restored the repute of capitalism and its continuing efforts to find ways of reducing the fluctuations. There is still dispute; there is doubt about some formulations of the monetary explanation of instability, there are aspirations to forge syntheses between classical and Keynesian economics, and there is still a lingering longing for a new mixture of fiscal and monetary devices that will enable government of able upright long-sighted politicians to rid economic life of disturbing fluctuations.
But the old confidence of the critics has evaporated. The non-socialists who hoped that Keynesian control of government expenditure would discipline booms and slumps, avoid inflation and unemployment and save liberal capitalism have had to entertain doubts. The more socialistically inclined who saw Keynes as validating a democratic socialist system run by government that would combine market production with socialist distribution have had to make doctrinal concessions. Four developments in economic thinking, two familiar, two less so, have had to be absorbed.
The Friedman analysis of the essentially monetary causation of fluctuations has provided rules for government in the control of the supply of money. Economists debate the time lag and the arithmetic link between the supply of money and the subsequent rise in prices. The ample evidence lies in the socialist countries that know there is no more essential way to stop the inflation than by ending the flood of money. The Minford emphasis on “rational expectations” in the light of the efficient use of available information, developed from the American John Muth, indicated that anticipated changes in the supply of money had smaller effects on output and larger effects on prices than unanticipated changes. Government could therefore become impotent in economic management to master inflation or create high employment. Ordinary people in the market prevailed over ministers, experts and bureaucrats in the political process: market information was the key to anticipating and reducing the fluctuations. The hopes that government would be the vehicle of effective stabilization policy were dimmed.
The two less well-known developments are from the school of public choice and from the Austrian school of market process. The economics of politics was applied to monetary policy by Professor J. M. Buchanan and Professor Richard Wagner, who maintained that the Keynesian analysis of the use of budgetary policy to flatten the fluctuations was not only economically flawed but also politically unrealistic. Government might deploy budget deficits to inflate the economy and increase employment which would attract electoral popularity, but it was not likely to impose budget surpluses to deflate the economy and reduce overfull employment which would earn electoral unpopularity. The Lawson budget surpluses of the late 1980s are too short-lived to judge their effects on electoral sentiment. The impression created by the conventional price-less opinion polls, that the surpluses are making the public ready to continue paying high taxes in favour of higher public expenditure, has been the source of continuing confusion in political policy. The opinion polls are literally price-less and misleading because respondents are not told how much more in taxes they will pay for how much more in benefits (chapter 10). After six or seven years of budget surpluses the public will realize that it is paying far more in taxes than is required for state services and will expect tax reductions. It will not thank governments of Left or Right that deny them. The net long-term effect of alternating budget deficits and surpluses would be a gradually rising trend of inflation unrelieved by countervailing disinflation.
The fourth development was the most revolutionary. Since Adam Smith it had been supposed that the provision of money was a primary public good to be supplied by government. Hayek developed, or unknowingly rediscovered, a long-standing doubt whether, in the absence of a restraint like the gold standard which deprived national governments of the power to inflate unilaterally, politicians could be left to resist the temptation to debase the coinage (and paperage) and inflate themselves out of increasing unemployment. Arguing essentially from the micro-economic law that an increase in the supply of a commodity reduces its price, he proposed in the mid-1970s that money should be taken out of the monopoly of the state and be put into the competitive market of suppliers who would have an incentive to prevent inflation that the state lacked: they would resist the temptation to inflate the supply of their money because its value would fall and their customers would use the private money of their competitors; they would have courted and suffered bankruptcy.
In 1975 Hayek sent the IEA the draft of what was published as “The Denationalization of Money” in 1976.32 Competition in currency had been suggested earlier (without Hayek’s knowledge) by an American economist and there was a long-standing advocacy of private money in “free banking.” But the idea of what would now be called privatizing money was not likely to be absorbed quickly by practical central bankers, state or private, who would lose business, or by politicians, who would lose their electoral trump card. When I put the idea to a former Governor of the Bank of England, he responded indulgently “That would be for the day after tomorrow.” But we have long learned that what practical men preoccupied with the tasks of today and tomorrow judge as “politically impossible” can rapidly become politically urgent when their long-serving stratagems are seen by the electorate to have failed. Lord Callaghan was an exceptional man of courage in 1976 to have told his trade union allies in public that the old (Keynesian) superstition—that government could inflate its way out of depression—was an illusion. He may have resorted to candour to relieve pressure from the aggressive trade unions, but he took the risk of general public unpopularity and may have suffered loss of support at the 1979 General Election. More recently, in 1989, the then Chancellor of the Exchequer, Nigel Lawson, proposed competition between national currencies in place of a uniform single currency for the European Economic Community, and argued it persuasively in a Treasury document.33 This reform for competition between state currencies would reduce the risk of national inflations, though it would be vulnerable to agreement between national politicians on international inflation. Only private money would prevent inflation.
Whether by annually balanced budgets or other constitutional means or by external disciplines like a twentieth-century version of the gold standard the proclivity of hard-pressed politicians to inflate—hoping for early expansion in output while they remain in office and delayed rise in prices after the election if they return to opposition—will otherwise not be suppressed. The search for stability in economic activity no longer looks to all-wise politicians in government as the saviour but to profit-seeking and loss-avoiding bankers in the market. It is one more reinforcement of the case for capitalism against socialism.
New Activities for the Economic Microscope
A powerful contribution to the counter-revolution against the political process is the imperialist “invasion” by market analysis of human behaviour long thought to be the province of political science, sociology and other studies that had invariably concluded with proposals for solutions through the state: the family, the household, marriage, fertility, diplomacy, war, conscription, altruism and philanthropy, tax evasion, crime and many others.
The general conclusion from this re-examination of human activity, from wholesome to venal, sacred to profane, is that it is better understood when analysed as personal reactions to the individual incentives and penalties analysed by micro-economics, than as broad and vague sociological or psychological trends or movements. This development in economics is mainly American, originated largely by Professor Gary Becker of Chicago and brought to Britain by one of his students, Dr. Ivy Papps of Durham University.34
The family is best understood as a firm, a unit of production of income and children, within which there is no monetary market but which avoids the transaction costs of repeated renegotiation of exchanges of services: a long-term contract of marriage is costly in money and time to break by divorce, but it insures against the sudden loss by divorce of the specialized contribution of the partners. The family, like other units of economic activity, cannot be analysed wholly in financial terms, since as the dominant Cambridge economist Alfred Marshall taught, exchanges are based on the net balance between monetary and non-monetary advantages; but government economic policy can do grievous harm if it ignores individual reactions in the family and the household.
Other activities that have revealed new truths when examined as markets are discussed by Professor Tullock and by Professor McKenzie35 in a book translated into German, Japanese and Spanish.
The Social Welfare Fiction
The tenth development in economic thinking that reinforces capitalism for its market mechanism rather than socialism for its political process is the defeat of the socialist “maximum” state by two streams in liberal thinking in favour of the “limited” state or the “minimal” state.
The maximum or unlimited state is in full retreat. The notion that public services were inherently better than private services, public expenditure than private expenditure, and public enterprise than private enterprise lingers among politicians but is rapidly being abandoned by almost everyone else, including the public that once believed it.
The notion that individuals could make rational decisions collectively, and that there was a device for discovering what they had decided collectively, once had an august intellectual origin. Professor Kenneth Arrow, the Nobel Laureate, devised a “social welfare function” to assimilate all individual choices, perhaps with the assistance of Lange’s phantom speed-of-light computer, and thus indicate the “representative” choice of all. Perhaps a system of voting might assemble a collective “message” to the legislature. A “social choice” would convey the highest common factor of preferences.
Yet the ultimate outcome of this attempt to put all preferences into one was ironically the Arrow Impossibility Theorem, which acknowledged that there was “no social choice mechanism” that can perform the task.
Several economists have attempted to rescue the effort, but it remains a dangerous cul-de-sac that tempts economists into thinking of ways to make the function come to life by force. A distinguished American economist said that, after all, individual preferences were not so important compared with the communal decision. Professor Amartya Sen of Oxford, reviewing “the vast literature” on social choice, comprising many articles and books by numerous economists and political scientists over more than 20 years, claimed: “As a methodological discipline, social choice theory has contributed a great deal to clarifying problems that had been obscure earlier . . . [it] has undoubtedly been a creative tradition . . . that can be used to analyse economic, social and political problems involving group aggregation.” But he ended disarmingly: “Perhaps the successes have been rather mixed....”36
This is a facile claim and a damaging admission by a senior economist who teaches and influences young students. Economists are taught to think of weighing the benefits of scarce resources against their costs. How much is “a great deal” (of clarification)? Who has benefited? By how much?
There is a danger that academics will choose subjects—such as the very scope of “group aggregation”—that have more interest for themselves than potential good for the community. Oxford University and its colleges are fortunate to live partly on (private) endowments, but increasingly the salaries and other costs of its academics are paid for by taxpayers, many not rich and some poor. What sort of a return—how large compared with what it might have been elsewhere—has the taxpayer had for his “investment” in the “vast” researches into “social choice”? At least the market would have compared yields with other investments. The (private) University of Buckingham has to pay more attention to the benefits and opportunity costs of its carefully husbanded revenues. Would the academics who must have spent many thousands of man-hours on “social choice” have done so if they had been financed by people who asked more questions about how the money was used?
The notion of “social choice,” which meant what it said—the attempt to devise a method for unifying all individual choices into one choice—yields little or nothing of value contrasted with the analysis of the economics of politics in public choice, which sheds new light on the working of government in the real world. Not least, unlike the fanciful visions of political science, the economics of politics demonstrates that politicians cannot and do not precisely execute public choices—that even if it were possible to assimilate all choices into one by the social welfare function, it would not necessarily be enacted in the public interest.
The liberal reaction has been to question the efficacy of government and to limit it in the limited state or to minimize it in the minimal state. In essence the difference between the two liberal approaches lies in a varied view on the extent of public goods. The case for limited government has been put persuasively by the Oxford philosopher John Gray.37 The trend to centralization must be reversed, government must “relinquish a paternal role” and power must be returned to “civil society.” He quoted Professor Michael Oakeshott for the view that government must not “galvanize” its subjects but act as “the umpire . . . to administer the rules of the game....” Yet, though government should be limited, Gray argued that it should go beyond Oakeshott; it had “an important positive agenda,” which included first the classical public goods, second, and more unexpectedly, the protection of “all who wish to acquire a decent modicum of wealth and responsibility in their health, education and provision for old age,” and third, and an intriguing new item, the responsibility “to facilitate the transmission of valuable cultural traditions across the generations.”
The other liberal approach to the case for minimal government emerges from the work of several followers of Mises and other Austrian economists, mainly Professor Murray Rothbard, and from the “anarcho-capitalist” writings of Professor David Friedman. Both in effect mount a root-and-branch assault on the notion of maximalist or unlimited government based on variants of social choice.
The difficulty with limited government that liberals have yet to resolve is that its functions must be exercised through the imperfect political process that distorts and manipulates individual preferences. Who makes the rules that politicians are to enforce in the public interest if not the politicians themselves? Quis custodiet ipsos custodes? Limited government implicitly supposes that government will perform faithfully the main functions allotted to it even though it is judged incompetent in performing other functions. The notion of limited government lacks the indispensable instinctive scepticism of government taught by the classical liberal economists that led them to want government confined to its unavoidable minimal functions of public goods rather than to the indeterminate limited functions that could be decided by government itself. If government cannot be expected to perform acceptably the services it can leave to the market, it cannot be expected to devise neutrally the rules that decide the services it must perform itself.
Means have not yet been devised to discipline the politicians. The new constitutional economics has grown in the very attempt to clarify the requirements and discern the essentials of the solution. The liberal advocates of minimal government reflect the anxiety that government should be confined to the indispensable functions that cannot be performed in any other way. To give political man more powers and functions is to leave the potential for abuse that no democratic government anywhere in the world has scrupulously rejected or resisted.
The new trend of thinking in limiting or minimizing the power of government is the tenth development in economics that reinforces the case for capitalism against socialism.
1 Henri Lepage, Demain le Capitalisme, Open Court, 1981, and others.
2 F. A. Hayek, The Fatal Conceit, Routledge, 1988.
3 Douglass North and Robert Thomas, The Rise of the Western World, Cambridge University Press, 1973.
4 D. R. Denman and Jack Wiseman, Markets under the Sea?, Institute of Economic Affairs, 1984.
5 North and Thomas, The Rise of the Western World.
7 Norman Barry, The Invisible Hand in Economics and Politics, Institute of Economic Affairs, 1988, p. 83.
9 G. L. S. Shackle, in Alexander Shand, The Capitalist Alternative, 1984.
10 William Mitchell, Government As It Is, Institute of Economic Affairs, 1988, pp. 16–17.
11 Ingemar Stahl, Nobel Priset, Prize citation: “for his development of the contractual and constitutional bases for the theory of economic and political decision-making”; quoted from pp. 35–6.
12 J. M. Buchanan and Gordon Tullock, The Calculus of Consent, Logical Foundations of a Constitutional Democracy, University of Michigan Press, 1962
13 C. K. Rowley (ed.), Democracy and Public Choice, Blackwell, 1987.
14 A good start would be the essays by Richard Musgrave, Mark Blang, Hilder and William Baumol, Herbert Giersch and others in honour of a leading British public choice economist Professor Sir Alan Peacock (David Greenaway and G. K. Shaw [eds.], Public Choice, Public Finance and Public Policy, Blackwell, 1985) and the writings of Professor Jack Wiseman and Professor Martin Ricketts.
15 J. M. Buchanan, R. D. Tollison and Gordon Tullock (eds.), Towards a Theory of the Rent-Seeking Society, Texas A&M University Press, 1980.
16 Gordon Tullock, The Vote Motive, Institute of Economic Affairs, 1976.
17 Mitchell, Government As It Is, pp. 17–18.
18 Arthur Seldon, Charge, Temple Smith, 1977; reprinted 1978.
19 R. H. Coase, “The lighthouse in economics,” Journal of Law and Economics, October 1974; A. T. Peacock, “The limitations of public goods theory,” in Economic Analysis of Government, Martin Robertson, 1979.
20 Sydney Caine, Paying for TV?, Institute of Economic Affairs, 1968.
21 Anthony Crosland’s legacy is reviewed in David Lipsey and Dick Leonard (eds.), The Socialist Agenda, Cape, 1981.
22 Gabriel Roth, The Private Provision of Public Services, Oxford University Press, 1987.
23 Boudewijn Bouckaert, General Meeting of the Mont Pelerin Society, St. Vincent, Italy, 8 September 1986; Frank van Dun, Economic Affairs, July–September 1984.
24 Anthony de Jasay, The State, Oxford University Press, 1985.
25 Anthony de Jasay, “A study of the public goods problem,” in Social Contract, Free Ride, Clarendon, 1989.
26 Sunday Times, February 1989.
27 Wilfred Beckerman and Lord Zuckerman, Minority
Report, Royal Commission on Environmental Pollution, HMSO, London, 1972; Beckerman’s argument was amplified by economic analysis in Paying for Pollution, Institute of Economic Affairs, 1975, and further refined in the second edition, 1990.
28 D. Pearce, A. Markandya and E. Barbier, Sustainable Development, London Environmental Economics Centre, 1989.
29 George Peters, Cost–Benefit
Analysis and Public Expenditure, Institute of Economic Affairs, 1966.
30 Arthur Seldon, in Tax Avoision: The
Economic, Legal and Moral Interrelationships between Legal Tax Avoidance
and Illegal Evasion, Institute of Economic Affairs, 1979.
31 Stephen Spender, Forward from Liberalism, Gollancz, 1932.
32 F. A. Hayek, The
Denationalisation of Money, Institute of Economic Affairs, 1976.
33 An Evolutionary Approach to Economic and Monetary Union, HM Treasury, November 1989.
34 Ivy Papps, For love or money, IEA Hobart Paper, Institute of Economic Affairs, 1980.
35 Gordon Tullock and Richard McKenzie, The New World of Economics: Explorations into the Human Experience, Irwin, 1975.
36 Amartya Sen, in John Eatwell, Murray Milgate and Peter Newman (eds.), New Palgrave Dictionary of Economics, Macmillan, 1987, vol. 4, p. 389.
37 John Gray, Limited Government: A Positive Agenda, Institute of Economic Affairs, 1989.