Why cuts are not the answer to everything
Here’s a quick history lesson about the state and the market for the free-marketeers in the Lib-Con coalition.
It is no surprise that the new UK Lib-Con coalition government should blame the previous administration for Britain’s financial mess. Nor should it be a shock that prime minister David Cameron is painting the future as black. He has the dual advantage that if things really do turn out to be awful, he can say he told us so - and if they do not, he can claim the credit for turning the economy round.
More interestingly, beneath the rhetoric there does seem to be a genuine belief in the corridors of power that the state in Britain should be smaller and have a lesser role to play in all aspects of life. In this respect, Cameron has been aided by the addition to his ranks of a section of the Liberal Democrats that believes in the free market. In 2004, the Lib Dems Nick Clegg, Vince Cable, Chris Huhne and the (now departed) David Laws, all appointed as ministers in the new Cabinet, contributed to the ‘Orange Book’, which espoused the free market as a solution to the problems of the economy and which provoked controversy within the ranks of the Lib Dems.
Having come late to the free-market philosophy, and at a time when most other politicians and economists were moving away from it, these Lib Dems have some of the fervour of the convert. Cable in particular, whose formative experiences were in the 1970s when the UK government failed abysmally to prop up flagging businesses such as motor manufacturer British Leyland, is possessed of a fierce belief that the state has only a limited role to play in the economy. He has promised to overturn former Labour business secretary Peter Mandelson’s nascent attempts at reviving an industrial policy for the UK.
So now the government has both pragmatic and quasi-ideological reasons for cutting public spending and reducing the size of the state. Pragmatic in order to avoid a collapse of the confidence in those lending money to the UK, and quasi-ideological through the concept of the ‘Big Society’ rather than the ‘big state’.
The problem with this approach is that it flies in the face of the history of capitalism over the past 100 years. In every developed and developing country in the world, the state has come to play a bigger and bigger role. Outside of the aftermath of wartime, no state of any consequence has succeeded in cutting public spending absolutely. Certainly no state has managed to do so after a recession. Even under former Conservative prime minister Margaret Thatcher, in the supposedly brutal cuts period of the 1980s, public spending overall continued to rise.
Why is this? Essentially because the free market has proved incapable of fulfilling many different and essential functions of society. No modern state, for example, has ever had an education system which is run as a private business. No modern state has had an entirely private health system. Even in the US, which is most committed to the free market, state funding of Medicaid is an essential part of health provision. In addition, individual national insurance schemes have never been able to pay entirely for payments to the unemployed.
Private businesses depend on the state to provide cheap education, healthcare and unemployment benefits for their workers. To some extent the role of the class struggle in earlier periods was important in establishing the levels of provision of benefits from the state, but the elite as a whole understood that the state needed to subsidise welfare in order for the economy to function effectively. It was not the postwar Labour government, for example, which designed the welfare state in the UK - it was the National Government under the Conservative Winston Churchill which did so through the production of the Beveridge Report in 1942.
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The state has also had a key role in the building and maintenance of transport and other key infrastructural projects, which are too big for any individual private company to develop but which all businesses benefit from. Roads are one good example of this, but virtually all communication systems and infrastructure projects require massive state involvement and investment in their production or maintenance.
It is also the case that the state is now so large and so intertwined with private business that many companies depend on government contracts. The IT business in the UK, for example, has benefited over the past 20 years from many large projects in the National Health Service and in other government departments.
There are those who argue that it is the growing role of the state that has stifled private enterprise, but the reality is that without ever-increasing state involvement modern economies could not survive. Capitalism is too feeble and unproductive in most modern economies to operate on its own two feet without massive state assistance.
So what does this mean for the present UK government’s plans to cut spending? Firstly, they will struggle to make any impact on the overall scale of public spending without doing huge damage to the way our society works. Secondly, whatever their pretensions to the opposite, the axe will fall hardest on those least able to defend themselves.
Rob Killick is CEO of cScape. Read his blog, UK After the Recession.