There are some lessons in economics that must be covered again and again, to counter the allure of misleading promises from politicians apparently bearing gifts. Take the promise of a free lunch. No such thing exists, but voters keep falling for it.
The Government’s decision to impose VAT on private school fees has been justified in part by the promise that it will fund ‘free breakfast clubs’ for state school children. Such misleading language has real economic costs.
When the state promises ‘free’ food, the right question is: who’s paying for it? Adam Smith understood where our meals really come from:
It is not from the benevolence of the Butcher, the Brewer or the Baker that we expect our dinner, but from their regard to their own interest.
The butcher, the baker and the candlestick maker all incur costs when they provide us with goods. In the normal course of exchange, we expect to make it worth their while. Alternatively, they could serve us for nothing if they think we deserve charity. Or, if we’re the taxman, we obtain part of the value of their produce via extraction.
In all cases, those offering goods and services must invest in premises and equipment, buy materials, pay their apprentices and compensate themselves for their toil. Under market conditions, we pay them ourselves. But under charity or extraction conditions, the product we obtain is still not ‘free’ but rather has been paid for by others.
Pedantic or important?
Does it matter if the supermarket offers ‘Buy One Get One Free’? Not much. Here, ‘free’ is an inducement to visit the store, try a product and fill your shopping basket. Putting aside that provision of the ‘free’ item is conditional, the consequences of the inaccuracy are with the supplier that makes the offer and absorbs the cost.
Does it matter if we tell each other that ‘the best things in life are free’? Not much. Lasting friendships, conversation, a family meal free of devices; these things flourish, because people willingly commit effort and time to sustain them. Those are resources too, freely and mutually given. Anyone who is unpleasantly surprised to find that these are not in fact free, is free to leave and dedicate their time to daytime TV instead.
Does it matter if the government promises us a ‘free breakfast’ for some children? You bet.
The first effect of the extraction of value via taxation is obvious. We contribute money that we could otherwise have spent or invested. We, and society, are worse off by the amount of the tax.
The Government will, however, say this is a price that the taxpayer must endure, because public expenditure is for the greater good and the impact of state spending adds up to a net benefit. In which case, we should expect an honest account of the costs and benefits.
After all, the Government is not giving us free benefits, let alone being generous, but providing something to Paul that Peter paid for. Peter is taxed £100, allowing for expenditure on Paul of £95 (assuming the tax collector is paid £5). To make a fair assessment, we must see the benefit of the £95, plus the benefit to the tax collector, and must then subtract the lost benefit that the £100 would have provided in the private sector.
A second, hidden, cost of the tax is the lost economic value of the activity that doesn’t take place. If the baker sells ten loaves instead of twelve because of the tax, that’s two customers a little hungrier than they might have been, and a further erosion of the baker’s profits. Worse, if the baker is forced to close, leaving just one baker in town, then customers have lost the benefits of choice and competition. If there’s no other baker, the customers must start baking, go without, or start travelling to the next village, and that might spell terminal decline for the local economy.
So when a government announces free breakfasts (or lunches), it is concealing very real costs that are being paid elsewhere in the economy. Perhaps, though, we still doubt that it matters much, as long as the benevolent government is indeed acting in the greater good. Economics gives us two even stronger reasons to care.
The first reason is that economics is the balance of costs and benefits. A society that cannot see the costs, blinded by the ‘free’ benefits, will make bad decisions. Recipients of public services will demand too much from the government – technically, marginal benefit will appear to exceed marginal cost ad infinitum if the latter is believed to be zero. It becomes impossible to account for the greater good.
The second, more insidious, concern is the effect on our political and economic culture. Children that grow up thinking public services are free are likely to take for granted those resources and the people who pay for them. If education, and healthcare, are free; if your retirement is free; your children’s breakfast is free; and you have free childcare, it’s not unreasonable to question what motivates people to turn up for work, let alone go the extra mile with energy and initiative.
When a government promises everything for free and tells us that taking what is ‘free’ is a form of noble support for society, then we learn to put our energies into further extraction. We demand: ‘This free thing isn’t good enough; make it better for me.’ Not: ‘How can I make this better myself?’ State school parents are aspirational, we’re told by our current Government. But not so aspirational that they (or those able to do so) have yet fallen over themselves to contribute more to their own needs, as I suggested in a previous article.
In contrast, when we hear that opting out of a ‘free’ state education is ‘unfair’ and the parents who have done so face not only being asked to contribute ‘a bit more’, but are targeted multiple times over and even stigmatised, then we are being shown the road to serfdom. The more cynical will conclude that this is the whole point, which is certainly a view consistent with removing degrees of independence from maintained schools and with the timing issues surrounding Labour’s education tax.
This is not even a ‘right-wing’ perspective. The more philosophical progressives and socialists have a history of encouraging producers to put their shoulders to the collective wheel, rather than championing those who rely on handouts. President John F Kennedy urged Americans to ‘ask not what your country can do for you, but what you can do for your country’. William Beveridge’s 1942 report identified ‘idleness’ as the fourth ‘giant evil’. Karl Marx insisted on ‘from each according to his ability’ before promising us ‘to each according to his needs’. They all knew there were no free lunches, or breakfasts.
Rather than calling us to pull our weight, individually or collectively, privately or socially, a society that talks of ‘free’ stuff is simply training us all to be free riders.
However, the closest thing to a free lunch is a positive externality. If private decisions have some wider benefits to me or society, lucky old us. The person incurring the cost is in control of the decision, and the social benefits, although not strictly free, have no marginal cost beyond what is incurred privately.
Independent education generates positive externalities because it saves money for the state sector (or allows greater expenditure per head for a fixed budget), supports the pro-social accumulation of social capital and sustains a wide range of charitable and cultural contributions.
When a government falsely promises a ‘free’ breakfast paid for by taxing a positive externality it causes four economic harms. ‘Free’ discourages society from balancing the benefit of the breakfast against: (1) first-order economic harm caused by the extraction of value from Peter to pay for Paul’s breakfast; (2) second-order harm when behaviour changes and schools close, noting a ‘deep and narrow’ tax like this one is highly prone to such consequences; (3) harm from the loss of beneficial externalities generated by private education; and (4) unseen harm to culture, expectations and behaviours in our political economy, encouraging extraction and extinguishing initiative, as Beveridge would have recognised.
Some will call me a pedant, but I’ll continue to challenge the misuse of the word ‘free’ to describe Government spending. When the state promises ‘free’ meals, who’s paying for it? In the end, all of us.
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