4 July 2024

More government action can’t fix Britain


This is an edited version of remarks delivered by the author as part of Civic Future’s ‘The New Wild West’ summit.

Should the state play a larger role in the UK economy? My answer is “no” – many problems that Britain faces are down to too much government action and too much of the wrong type of government action.

A free-market economy is not and can never be a regulation-free zone – markets must always operate within a rule of law. However, that does not mean there are no meaningful distinctions between different types of rules within which markets are embedded, and whether those rules create the space for people to act as entrepreneurial agents.

If we want economic growth, what should those rules do?

First, they should allow a complex ecology of individuals, firms, and organisations the freedom to experiment in responding to their own circumstances, as they see them, and for the results of those experiments to be communicated to others. Free market capitalism is a system of what Deirdre McCloskey calls ‘trade-tested betterment’. It is a system of voluntary experiments where contradictory ideas about what works are put to a competitive test, the results of which are then communicated by profit and loss signals. Strong protection of private property allows for permissionless adaptation to constantly changing local conditions, while holding people to account for their decisions.

Second, rules should reduce the transaction costs of decision-making. That means, where possible, confining decision rights to those immediately affected. Keeping them between a buyer and a seller, for example, or an employee and employer. The rules should not grant veto power to multiple external actors who aren’t directly impacted by the decision in question.

Third, rules should be focused on addressing genuine externalities that impinge on peoples’ property rights and freedom. It is not an externality when an incumbent loses market share to a new entrant, or when the value of houses falls because the supply of homes on the market has increased. It is an externality if someone pollutes the air we breathe without our consent, and it may be an externality when someone’s view is threatened by a new construction project. Even when dealing with externalities, it is important to remember that, at root, they involve conflicts of interest and trade-offs between different values. Effective rules must encourage bargaining across those lines of conflict.

All these principles are violated by the biggest obstacle to economic growth in the UK: the Town and Country planning system. Introduced as part of the Atlee government’s post-war socialist transformation, it has remained virtually untouched since 1947. The right to develop land in the UK is nationalised: there is no permissionless adaptation and no permissionless innovation. Excepting some agricultural land uses, nothing can proceed without the approval of a planning bureaucrat or a committee of stakeholders.

In its early years, the system operated as a model of what some now call ‘missionary government’. It used the authority seized by the state from allegedly short-sighted property owners to pursue two core objectives: the direction of industry and population towards the areas the planners thought most appropriate; and a deliberate policy of urban containment.

The first of these objectives was an abject failure. This is epitomised by the New Towns programme. With one or two exceptions such as Milton Keynes, none of these towns attracted the people and industry they were supposed to. Even today, many of them lag well behind on multiple socio-economic indicators.

The planning system’s second goal of urban containment has been achieved, but at considerable cost. As the direction of industry and population was abandoned, the planning system came to focus almost exclusively on controlling private sector developments.

Elements of the system could be used to resolve externalities associated with new building, but in practice incumbent homeowners have no incentive to bargain. They can veto new development whatever the benefit and would-be housebuilders cannot offer them compensation for allowing development to take place. There is no market in development rights and no trade-tested betterment between incumbent residents and developers. Moreover, allowing multiple parties who are not directly affected by a decision to have their say in what gets built, where and how, raises transaction costs with years of delays.

The results are familiar to us all: rampant Nimbyism. The supply of new development land doesn’t keep pace with demand – and it hasn’t done so for close on 70 years. Between 1900 and 1930, with rising population and living standards, prices for development land actually fell. Since 1947, there has been a constantly expanding wedge between the price of land in agricultural use and that with planning permission for non-agricultural uses – especially housing.

Apart from the obvious impact on house prices there are multiple other knock-on effects:

  • The scarcity rents generated by the system mean that people invest disproportionately in the speculative property sector rather than in industry.

  • The quality of housing design is poor. In a sellers’ market, at the margin developers are more likely to make money by speculating on their ability to sell land with planning permission than to compete on quality of design for anything they build. In such a market, whatever gets planning permission is almost certain to sell.

  • Competition is reduced – the complexity of the system favours larger developers who can afford the legal and regulatory costs. This is why the self-build sector in the UK is virtually non-existent in comparison to countries with more liberal planning regimes. We have a system not dissimilar to the so-called ‘Permit Raj’ that prevailed in India post-1947.

  • It reduces adaptation to local circumstances. High housing prices block people from moving to the areas where the jobs are. They also block the creation of new jobs in places that need them. The proportion of designated Green Belt in the North – for example around Liverpool and Manchester, and Leeds and Bradford – is greater than that found in the South-East.

Why focus on planning? Because even in periods when the UK has been moving closer to the principles I set out earlier, as it was between 1979 and 2007, it has been held back by the most comprehensive system of land use regulation in any developed nation.

In today’s political environment, there is once again widespread support for ‘missionary government’ and ‘stakeholderism’. We should worry that the patterns that we see played out daily in our planning system will be replicated across multiple other sectors.

The signs of this are already evident in energy policy, with the forced transition of net zero. Instead of a simple carbon tax, we have a regime where governments think they know what the energy mix should be, and multiple agencies and stakeholders all have their say. In the mid-1990s it really did look like ‘things can only get better’. Looking forward today, we have a political economy that looks very likely to make things much, much worse.

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Mark Pennington is Professor of Political Economy and Public Policy at King's College London.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.