Writing at the turn of the century, the English jurist A.V. Dicey predicted that the age of individualism would give way to an ‘age of collectivism’. Collectivism, he wrote, meant ‘government for the good of the people by experts and officials who think they know what is good for the people…better than the mass of the people themselves’. Dicey was right: the twentieth century has been an ‘age of collectivism’ The most monstrous experiments in the genre were Fascism and Communism. But all over the world governments increasingly used their powers of compulsion -as well as the authority often conferred on them by voters – not just to keep the peace but to shape the activities of their societies.
What such shaping meant in practice was summed up by an English economist in 1975: ‘The government controls the flow of more than 50 per cent of the gross national product, it contributes more than 40 per cent of all new investment, employs 27 per cent of the working population, pays about one-third of all wages and salaries, and owns nearly half the national fixed assets. This, moreover, leaves out of account the manifold indirect influences on the economic decisions of the private sector, such as price controls and industrial development certificates’. This was Britain: but similar trends were manifest in developed and developing countries alike.
But in that very same decade the revolt against statism started. It was led by Margaret Thatcher in Britain and Ronald Reagan in the United States. In Latin America, Africa, and parts of Asia the retreat of statism was triggered by the world debt crisis. Then at the end of the 1980s collectivism suffered its most calamitous defeat when communism imploded. From the ruins of collectivism a new global society has started to emerge based on the principle of open markets and limited government. President Clinton himself underscored the magnitude of the shift when he announced on 14 February this year that the ‘era of big government is over’.
This could be the third great swing of the historical pendulum in modern times. The first occurred at the end of the 18th century with the dismantling of Europe’s mercantile empires and absolute monarchies. A hundred years later there was a swing back towards nationalist forms of collectivism, accelerated and deepened by the two world wars and the Great Depression. Now we may be at the start of a new age of democratic freedom as governments shrink, markets expand, and democratic norms are universalised.
What causes the pendulum to swing is far from being clearly understood. Ideas, dramatic events, leadership, technological changes, imitation all play a part. What seems true is that each system of political economy accumulates what Marxists call ‘contradictions’ which can only be overcome, it seems, by a basic change of system. The change of system releases energies suppressed by the previous system, which in turn breed their antibodies. The individualism of the 19th century collapsed in the first world war and the Great Depression of the 1930s. The age of the heroic entrepreneur and family firm was replaced by the age of the heroic government and hierarchical corporation. Both eventually drowned in a sea of debt and social and economic dysfunctions. Since the 1980s we have been engaged in ‘downsizing’ and ‘outsourcing’ all our concentrated systems of power and control, whether governmental or private, for the same reason that dinosaurs eventually disappeared – because they had got too unwieldy for their changed habitat.
The great revelation was that big government no longer worked. Once this truth was proclaimed, it spread like wildfire, because it conformed to universal experience. When people no longer trusted the state to make life better for them, governments started to run short of tax revenues -the food of the state. Since the 1970s a struggle for revenue has been going on between governments and their subjects. States have been endlessly fertile in discovering new sources of revenue to cover their spending -in Britain we now have a National Lottery to supplement orthodox taxes. But tax resistance has also grown. Once it becomes general, the game is up for big government. The state is forced by its ‘fiscal crisis’ to cut its suit to its cloth. This is the meaning of the battle of the budget which now rages in the United States and much of Continental Europe.
The point we have now reached may be illustrated by considering more carefully what the retreat from big government has involved. In my book, The Road from Serfdom, I toyed with the idea of a ‘collectivism index’ by which to measure the size and scope of government. We may think of it as made up of five elements, suitably weighted: (a)the share of national resources which the government uses, (b)the share of national income which the government spends, (c) the share of the national economy which the government owns, (d)the share of national output which the government produces, and (e) the share of economic activity which the government regulates.
The evidence shows that since the 1980s there has been a worldwide retreat from collectivism under (a),(c) and (d), roughly measured by the extent of privatisation. The record under (e) is mixed. International trade, and capital and foreign exchange markets have been partly or largely de-controlled. There has been some de-regulation of labour markets, but environmental regulation, which is often a disguised form of Protectionism, has dramatically increased.
However, there has been no overall decline since 1979 in the share of national income spent by the state; in fact rather the reverse. Between 1979 and 1995 the share of US government spending in in Gross Domestic Product rose from 30 to 33 per cent. The most that can be claimed for the USA and Britain is that the upward trend evident from the mid-1960s has been halted. This is not true, though, of countries like Canada, Japan, France, and Italy, where state spending is a great deal higher than in 1979, as it is in OECD countries generally.
The main upward pressure has come from the growth of government spending on welfare programs -cash payments to those entitled to income support irrespective of contributions. Why has the ‘welfare state’ gone on expanding while the rest of the state has shrunk? Partly, because it has shrunk. The decline in the government’s investment, employment, and ownership role has shifted public spending onto the welfare budget. As we say in Europe, before the state subsidised employment, now it pays for the unemployed.
But not just for the unemployed: since the 1970s the demand for unskilled labour has been falling faster than the supply of unskilled labour, forcing down real wages and thus driving low-waged households onto welfare.
Since the 1970s the taxpayer has also been paying the costs of the disintegrating family structure. In both Britain and the United States illegitimacy rates have soared: in Britain 30 per cent of children are now born out of wedlock. The number of families claiming one-parent benefit shot up from 290,000 in 1979 to one million in 1994. A large proportion of these children will become de facto wards of the state, supported by public funds from childhood to grave.
The problem is not just the increase in numbers of those entitled to benefit. Once an entitlement is established, the take-up rate steadily increases. Since 1979 there was a huge increase in Britain in those claiming invalidity benefits, attendance allowances, mobility allowances,legal aid, etc. It would be foolish to conclude that there has been a tenfold increase over sixteen years in those unable to walk. Rather an increasing proportion of those eligible for these benefits have been taking them up and the criteria for eligibility are being less strictly applied.
One important consequence of the continual rise in social security spending is that public spending on more traditional objects has had to be curtailed. As a top British civil servant put it: ‘Every other expenditure programme -housing, defence, law and order, education – is a residue. Each is fighting, as it were, for the scraps from the social security table’. The effect of this diversion of funds is to increase tax resistance, as ‘normal’ families see less and less connection between the taxes they pay and the benefits they receive. The declining capacity of governments to raise revenue is thus directly linked to the objects of public spending, as well as to the poor quality of key public services like education, which is partly independent of the amount of money spent on it.
Big government, then, is still very much with us. There are two main strategies for slimming it down. The first aims to retain the existing statist agenda, but to offload part of its costs onto non-state, or subordinate bodies. This is the fashionable ‘stakeholder’ philosophy favoured by the Clinton administration and Tony Blair’s Labour party in Britain. What is needed, the President said on 14 February, is not the dismantling of government but for government to work with ‘businesses, religious groups, civil organisations, schools, and state and local governments’.
For all its philosophic flabbiness, the stakeholding idea has one great, if little noticed, merit. The more social spending central government can put off-budget, the freer it will be to concentrate on its core functions. For example, many of us believe that fiscal and monetary policy has a role to play in stabilizing business activity. Keynes himself believed in balancing the budget over the business cycle: in downturns the government should incur debt, in upswings it should pay off debt. But it cannot do this if it runs a permanent budget deficit. The stakeholding concept, by allowing social spending to be uncoupled from central government finance, is a way of eliminating the chief source of structural budget deficits. Given the symbolic importance of sound government finance, interest rates should, as a consequence, be somewhat lower than they would otherwise have been.
But, operationally, stakeholding is little more than a device for reshuffling compulsory burdens. The radical alternative is a much more thorough-going return to the voluntary principle in social welfare. The object of social policy should be to make it possible for working households to provide for their own pensions and medical care out of voluntary savings, with the state limited to providing a social safety net for genuine victims of circumstance. Two consequences follow: taxes on middle-income families would be reduced; and the taxpayer would not be asked to support dysfunctional life-styles, voluntarily chosen.
It is not possible, or desirable, to get back to the minimal state of the last century. Urban societies require much more ‘governing’ than do rural ones; their casualties are more visible and make greater claims on our sympathy. But it should be possible to recapture the idea of the ‘limited state’ -the idea that the state exists not to boss people about but to ensure that virtuous citizens can can pursue their competing goals in peace, guaranteeing equal basic freedoms to all.The main extension required to the traditional functions of the state is that central government should conduct its financial policy so as to maximise employment possibilities consistent with low inflation. This would seem to be a precondition of a return to limited government.
The refusal to pay for dysfunctional life-styles from the public purse may seem too harsh a doctrine for these easy-going times. But the consequences of continuing to do so will be harsher still. There is no harder taskmaster than an indigent paymaster. As public welfare programs encounter growing tax resistance they will become increasingly punitive in intention and effect. This has already started to happen. A social policy based on the asumption of the ‘normal’ household is far more likely to produce the virtues to validate it than one based on the image of society as a hospital.The hospital turns too readily into the labour camp, the barracks, and the penitentiary.
Unpublished, but written 1998