Everywhere markets are in retreat. Conservative politicians respond to the Left blaming markets for the state of modern Britain by pledging to fix broken markets and promising more interventions and more regulation.
Their pitch to voters is “we’re better regulators and spenders than Labour”. Planning policy “in the right hands” can be a powerful tool to “shape, regulate and drive the construction of new homes,” the Prime Minister declared last week in her housing policy speech. It is a classic example of what Friedrich Hayek called the “fatal conceit” of believing in the efficacy “rational coordination” of society’s undertakings. How on earth can planners know how the type, quality, quantity and location of demand for new housing?
Hostility to market solutions has become deeply embedded in Tory thinking. “We do not believe in untrammelled free markets,” last year’s Conservative manifesto stated. Trammelled or otherwise, pro-market, deregulatory policies have been off the menu for quite a while. Indeed, it is quite hard to think back to when the last unambiguous market liberalising policies actually took place.
Candidates would include the 1998 Competition Act and the 2002 Enterprise Act, which toughened and systematised competition law. There’s the 3G spectrum auction in 2000, which drew its inspiration from a 1959 paper by the Nobel economist Ronald Coase, who advocated creating property rights in radio spectrum. Then there is Tony Blair’s attempt to reform public services based on the principles of choice and competition. That sputtered out by the end of New Labour’s second term after Gordon Brown defeated Alan Milburn’s ambitious plans to effectively replace the NHS from within.
That battle within New Labour reflected a split between Blairites and Brownites, the latter holding that information asymmetries and public service ethos rendered competition inappropriate for the provision of public services. Nonetheless, both sides believed in improving economic performance by helping markets work better. In his last budget as Chancellor, Brown managed to cut the basic rate of income tax to 20 per cent, having begun his time at the Treasury by introducing a taper on capital gains tax, subsequently replaced by an 18 per cent flat rate by Alistair Darling, which was then raised to 28 per cent by George Osborne.
The early years of the Coalition government witnessed the last gasp of serious public service reform, championed most vocally by a couple of Tory Blairites. Cameron adviser Steve Hilton was preparing the ground for an ambitious attempt to liberalise public services, but was a casualty of Liberal Democrat opposition. Andrew Lansley’s attempted reforms of the NHS collapsed around the same time, but over at education, Michael Gove scored a big policy success with his free school programme, a success that stands as the last liberalising policy to date, but one that quite possibly cost Gove his job as education secretary.
Since then, public service reform has stalled or gone backwards. In energy, the Coalition backed the central buyer model previously rejected by the Brown government as too statist. In fact, energy policy exemplifies what’s gone wrong. Politicians enact policies that push up costs. They then clamour for price caps on energy bills and compete with each other to heap blame on the Big Six energy companies. Ministers are then given a stern warning by a respected economist, Dieter Helm, whom they asked to conduct a cost of energy review.
Not to change course, Helm warned in his October 2017 report, would “continue the unnecessary high costs of the British energy system, and as a result perpetuate fuel poverty, weaken industrial competitiveness, and undermine public support for decarbonisation.”
If that wasn’t enough, Helm concluded his report with words that should have shocked ministers out of their complacency: “The status quo is not going to be a good place to be in the medium and longer term. It is not sustainable, and therefore it will not be sustained.”
If shock was his aim, Helm seems to have failed. Ministers just sat on their hands, presumably hoping that the eventual policy crack-up wouldn’t be on their watch.
Gordon Brown holds the clue to the missing piece in all this. For all his failings as Chancellor, he saw economic policy as being central to improving economic performance and the role of the Treasury as pushing pro-growth policies across Whitehall. In this, he took a leaf out of Nigel Lawson’s book in redefining the role of economic policy. In his 1984 Mais lecture, Lawson reversed the post-war consensus on the respective roles of macro- and micro-economic policy, whereby fiscal and monetary policy were seen as tools to manage demand and micro-policy used in a failed attempt to suppress inflation:
It is the conquest of inflation, and not the pursuit of growth and employment, which is or should be the objective of macroeconomic policy. And it is the creation of conditions conducive to growth and employment, and not the suppression of price rises, which is or should be the objective of microeconomic policy.
Set against Lawson’s standard, there’s been a reversion to post-war belief in demand management, nowadays with monetary policy being conducted by the Bank of England. Thankfully, the aim of fiscal policy is to balance the books rather than feed demand, but balancing the books is not enough. In 1976, Sir Keith Joseph gave a lecture “Monetarism is not enough” that anticipated the thrust of many of Lawson’s tax reforms:
Our socialist anti-enterprise climate: indifference, ignorance and distaste on the part of politicians, civil servants and communicators for the processes of wealth-creation and entrepreneurship; high taxation; very high marginal rates of taxation; perhaps most important of all – increasing capital taxation on the makers of wealth – whether self-employed, small, medium or large.
On micro-economic policy, Philip Hammond’s Treasury draws a blank. Beyond balancing the budget, the government doesn’t have an economic policy. There is no agenda of tax reform. Stamp duty of up to 10 per cent — costing the purchaser of an average London flat around £17,000 – constitutes a disincentive to labour market mobility. Energy-intensive businesses are burdened with the highest electricity costs in Europe. Ask Conservative MPs to name a single new policy designed to improve economic competitiveness and they are hard pressed to give an answer.
The realisation that the government doesn’t have an economic policy explains much that is going wrong. A strong economic policy would help define what the government wants from Brexit. Unremitting focus on fostering the conditions for prosperity and raising living standards would mean the government having policies most likely to make voters materially better off by the next election. Markets work – and, given time, they help governments that let them work win elections.