This article was originally published on the blog of the Centre For Welsh Studies.
Even the most ardent free-marketeer would concede that the actions of the government in the current COVID-19 crisis are on the right track. We who most lament the excessive involvement of government in the economy in ‘normal’ times still recognise that at times of crisis – war, pestilence or famine – there are things that only governments can do.
And when, eventually, we emerge the other side of this, many people will have cause to thank Rishi Sunak, the Chancellor of the Exchequer, for his bold actions in protecting jobs and small businesses.
But here in Wales we’ve experienced, more than most countries, the effect of excessive government interference over the long term: slowing growth, killing jobs and making everyone poorer. So once this is over, what sort of normal should we want to get back to?
It’s instructive to look back in history to see what has happened after previous occasions when a government has been forced to commandeer large parts of the economy in order to respond to a crisis. Two obvious examples are the First and Second World Wars. If anything, the government made the opposite mistakes in the aftermath of those.
During the First World War, the government of the day took Britain off the Gold Standard by printing so-called ‘Bradbury Pounds’, increasing the money supply in the short term and so keeping the country solvent. Once the war was over, returning to “sound money” was seen as the highest priority, and the Bradbury pounds were withdrawn from circulation over a ten-year period.
In isolation that might have been the right policy, but it came at the same time as the glut of cheap German coal and steel that flooded the British market as part of Germany’s reparations negotiated by Lloyd George at Versailles. This contributed to the deflationary spiral of the 1920s, which in turn led to the Great Depression and such profound hardship for the South Wales Valleys and similar industrial regions elsewhere. We wouldn’t want to see a return to those days.
After the Second World War, the Attlee government continued a very high level of government involvement in the economy – if anything, increasing rather than reducing it through its programme of widespread nationalisation.
The Conservatives largely acquiesced to this – the brief re-privatisation of the Steel Company of Wales in 1951 being an honourable, and surprising, exception – and the post-war consensus continued for a further three decades.
It was during this time that the British economy in general, and the Welsh economy in particular, lagged further and further behind the rest of Europe. It was of course the great hope that joining the EEC in 1974 would enable Britain to catch up with Europe again – but many of us remember what the rest of the 1970s were actually like. It was only after Mrs. Thatcher’s decisive break with the past after 1979 that economic renewal could begin and the economy was set back on a path towards long-term growth.
The tragedy for Wales was that the stranglehold of the Labour Party and the Trade Unions at so many levels of national life prevented the same level of economic renewal from taking hold here.
A new chapter
The immediate effects of COVID-19 on the economy are likely to persist throughout the rest of this year and well into 2021. Yet in May 2021 we shall have what promises to be the most interesting and unpredictable Senedd election since the Welsh Assembly was first established in 1999.
Hardly anyone seems to think that the current Welsh Labour government, which has been as unimpressive in its handling of the COVID-19 crisis as it has in everything else, can continue its 20-year dominance of the Senedd. There is the significant likelihood that the Welsh Conservatives will see their highest level of support yet, possibly becoming the largest party.
Not only that, but there is now a brand new pro-market party in Wales, Gwlad, who having made their first electoral outing in three seats in the 2019 General Election are planning to stand across the country in 2021 on a free-market, small-government policy platform focused on delivering economic growth and closing the gap between Wales and the rest of the UK.
So what sort of policies should pro-market parties be advocating as Wales recovers from the aftermath of COVID-19 and seeks to rebuild?
Here are some suggestions:
- Clip the wings of the Third Sector. We do not need 48 separate publicly-funded organisations to tackle homelessness in Wales, especially when many of them seem to have to import clients from over the border to justify their existence.
- Stop building prestigious business parks using public funds, that as often as not end up being occupied by government departments and third-sector organisations.
- Shift the focus for investment support from overseas firms who’ll be here today and gone tomorrow, and instead concentrate resources into home-grown Welsh businesses who’ll stay and grow for the long term.
- In particular, stop throwing money at every charlatan who rocks up to Cardiff Bay with a half-baked scheme for zipwires, hotels, windfarms or leisure parks, and instead place the emphasis on encouraging long-term, well paid jobs in skilled manufacturing or white-collar industries.
- Most importantly of all, remember that often the best thing a government can do to promote growth is to get out of the way and leave it to people who know what they’re doing.
According to legend, Lucius Quinctius Cincinnatus was the 5th-century BC Roman statesman who, on two separate occasions, was appointed as Dictator (a legal title) at times of national crisis but each time resigned voluntarily to work on his farm as soon as the crisis was over. He became a byword for the vital combination of firmness in times of crisis and humility in times of peace – an example which the UK government would be well-advised to follow in the current circumstances.
But whatever happens in Westminster, here in Wales we have the opportunity to lead the way by electing a pro-market Welsh Government in 2021; one which can begin to free up the Welsh economy and start to create the prosperity that Wales has lacked for so long.
16 thoughts on “Will 2021 be the start of a new pro free-market chapter for Wales?”
I’m sorry, but this rubbish was all over the place. Have Gwlad diverted from their policy of a citizen’s income?
I had to laugh at your vacillations between the concepts of a “Free” Market, and government intervention to help us all out when it doesn’t quite pan out. The ridiculousness of this article is topped off by your snivelling acquiescence to “Mrs Thatcher”. In that turn of phrase, you have become one of “Them”.
No, we have not diverted from any policy, especially not Citizens’ Income which remains at the heart of our economic policy.
We have always been a party that inclines towards free markets and small government, but that does not mean the government should be idle. As I’ve written elsewhere, “Governments are brilliant. They can do things that no other type of organisation can or should”. We elect our governments, and expect them to step up to the plate and accept their responsibilities at times of national emergency.
But the rest of the time, we recognise that there are certain things that they don’t do so well, and it’s better for them to stand back from those. The trick, of course, is to know the difference – and also to be able to make the transition from ‘intervention mode’ to ‘non-intervention mode’. The meat of the article is the lessons that can be learned from the 20th Century’s two major wars, and to how that transition could have been managed better in each case. The example of Cincinnatus was thrown in to make the point that this isn’t a new problem by any means.
A citizen’s income surely requires some quite heavy and progressive taxation, I mean even the Nordic countries have only gone so far as to consider the idea, I gather. You know, those libertarian, lasseiz-faire utopias stalked by the spirit of Adam Smith.
The concept is ideologically fundamentally at odds to a free market because it is by definition a (pretty heavy) intervention in the labour market.
Surely what Gwlad are advocating is something along the lines of a mixed economy, Keynesianism, or as I like to call it, horses for courses. A capitalist market economy, regulated and intervened upon as and where necessary to ensure it works for the many as best as possible, with certain things seen to by the state, such as natural monopolies, public services, and a minimum guarantee of quality of life underwritten by it in terms of an education, healthcare and avoidance of destitution.
Don’t forget that government measures, such as guarantees on property and contract rights, competition legislation, and financial conduct regulations help the market economy, but surely by definition it is not truly “Free” in this case, and rightly so.
In the model which we propose (you can read about it here), the Citizens Income would be financed by a Flat Tax. For the great majority of people, the extra tax they’d pay would be cancelled out by the CI so they’d barely notice the difference. As the article explains, the idea is neither to increase ‘redistribution’ from rich-to-poor, nor to transfer money from poor-to-rich via tax breaks, but to devise a system which is fiscally neutral while being simpler and fairer.
The reason why we regard this as being a ‘free market’ reform is that by being so simple, it takes away the incentives for the government to try to manipulate people’s behaviour via the tax and benefit system, and disincentivises people from ‘gaming the system’ by having the tax tail wag the business dog. By removing the need to maximise the bottom line via creative accounting, businesses can concentrate on maximising the bottom line by maximising the top line, to everyone’s benefit.
And as my other article (linked in my other comment) made clear, of course governments have a role in creating and maintaining free markets by providing a safe legal environment where contracts can be enforced, a stable currency, open access to overseas markets and so on. The markets are still free, just not in the sense of being an unregulated free-for-all (that wouldn’t be a market, it would be chaos) but in the sense of having minimal rules which are transparently enforced and within whose minutiae the government doesn’t meddle on a daily basis.
Perhaps that’s not what you mean by a ‘free market’. But it’s what I mean, and what I believe the great majority of those who’d call themselves ‘free market advocates’ would mean.
These terms are often open to interpretation or in a lot of cases are just plain misused, but I always thought “Free” markets mean just that, no intervention whatsoever, be it regulation, standards, antitrust laws, etc. Libertarians, anarcho capitalists, Invisible Hand devotees, minarchists and the like would seem to agree.
There are no doubt people who hold such views, but I don’t hold them personally and I don’t know anyone in Gwlad who does. I see myself as standing in the tradition of Adam Smith, Friedrich Hayek, Milton Friedman, even Ayn Rand at a push, but none of them (with the possible exception of Rand when she really gets going, but then she leaves me behind) would go down the libertarian/anarcho-capitalist road. Governments exist for a reason, and it’s a good reason, but it’s still important that they know their limits.
Rand’s Objectivist ‘philosophy’ was all about doing away with any and all government intervention and letting everyone succeed or fail off their own backs unless I’m mistaken. The earth mother of those poor oppresed souls who crow about taxation being theft being theft in an unqualified manner.
The idea of a citizen’s, or universal basic income flies totally and diametrically in the face of this kind of thinking, regardless of the particular school of thought you may care to mention, and no matter how you dress it up as streamlining the tax system as some sort of arse-about-face reduction of government bloat and bureaucracy. As I’ve said, not even the Nordic countries, where individualism is a four letter word and the government has your back from cradle to the grave, have done it. How do you square the circle of a putative Welsh State where entrepreneurship is king, markets are gods and free enterprise and individualism are the law, but people are still free to sit on their arse and live off government handouts? and you know as well as I do that’s how it will be framed in the media.
As I’ve already said, Rand leaves me behind when she goes off on one of her benders; but I’m with her 100% in regarding government interference in the market as a bad thing, and seeing that a society is at its healthiest and most prosperous when all its members are encouraged to contribute to it.
But can’t you see the way that our current system distorts the market and encourages people to “sit on their arse and live off government handouts”, as you put it? When people are out of work, they get the handouts already. Under our current system. We’re not arguing that the handouts should be any bigger. But if people get off their arses (lets stick with that analogy for now…) and get a job, the government takes their handouts away and tells them they’ll have to wait five weeks to get them back if they find they need them again. The result: it’s exactly the same transaction as if the government were paying people to be unemployed. The government is interfering in the market by incentivising people to sit on their arses (OK, enough of that word already) and disincentivising them from finding work, or starting a business, or doing casual odd-jobs, or in fact anything at all that might contribute to growing the economy but lead to them losing their benefits.
The only way to get around this disincentivisation trap, and the drag on the market that it leads to, is to ensure that everyone gets the same amount from the government regardless of their status. I’m sure Rand would agree with that, but of course she’d argue that the amount should be zero. If so, I’d disagree with her. I’m convinced that the same freeing-up of the market would occur, while still providing the social safety-net that we rightly expect in our Western societies, with a basic income being provided: the point is that no-one will then be discouraged from enhancing it by doing whatever comes to their hand. To say that a Citizens’ Income is “not money for doing nothing, but money for doing anything” is already becoming a bit of a cliche, but I do actually think that it’s true.
How can you at once say that any government interference in the market is a bad thing, and in the next breath advocate this universal payment which is a dual intervention right there, that of taxation to fund it and in the issuing of the funds to all its participants. Even if the net cost to some does end up cancelling out on the basis of income received matching the tax paid, where does the money come from to administer all these transactions? If we’re not doing more ‘clever’ things with the tax system like progressive banding, green taxes, sin taxes (the merits and drawbacks of which are another debate for another day), then some might say it’s a bit of a waste of time having government departments in place to take money off people only to give it back to them.
In fairness you do make some good points, but let yourself down with these absolutist statements that contradict the sense you speak. Another example, how can you draw an equivalence between Rand advocating that everyone should get the same amount, and the concept that this amount should be zero. You’re equating presence and absence of a provision; how can everyone having one apple be some sort of equivalent of nobody having any?
While they obviously have a big role to play in a functioning economy, markets are not a panacea for all of life’s wants and needs, that I am convinced. How do you superimpose a profit and loss statement on the common good? Would you have us back in the Victorian days of robber barons, and having to seek out benefactors to get an education? This message will not win over the people of Wales any more than Plaid’s pathological leftist brand of California campus SJW nonsense.
Don’t forget, I’m not picking arguments for the sake of it, I am on your side as regards ‘The big question’, but if Gwlad does get anywhere there will be far sharper economic minds asking far tougher questions than this part time, passing interest hack.
I think we’re drawing to point where we’ll have to agree to disagree on this and draw a line under things.
There are things in this most recent comment I find hard to respond to because they seem to assume I hold views that are the opposite of those I actually do. Therefore, if I may, I’ll close by stating some ‘articles of faith’ as succinctly as I can:
– A market economy is the most efficient and effective way of achieving widespread prosperity across a society. In theory, this is because they efficiently allocate resources to the most productive parts of the economy, and give the biggest rewards to those who provide the goods and services that are most in demand. In practice, we know this works because of the huge reductions in poverty seen in countries such as India and China, that have adopted market economies after previously relying on state control.
– Market economies don’t ‘just happen’; in order to come into being and function effectively, government action is required to create a legal framework, enforce contracts, provide a stable currency in which transactions can be undertaken, and provide physical security to the market’s participants. The legitimate role of government in a modern society extends to ensuring that the workforce available to the market is adequately educated and has good quality healthcare available to it.
– Beyond that point, however, a law of diminishing returns sets in whereby if the government distorts the market, or seeks to manipulate it, then the efficiency of the market is reduced and it fails both to create and to distribute the levels of prosperity that it is capable of doing.
– The tax and benefits model current in Western societies distorts the market by encouraging people to remain economically inactive; as a result; both people as individuals and society as a whole remain poorer than they could be. Whereas all of the above is completely general across all societies, this market distortion is particularly detrimental to Wales because it affects proportionately more people here, and to a greater degree.
– The Citizens Income / Flat Tax combination proposed by Gwlad is both pro-free-market (because it reduces the distortion to the market caused by current policy and allows for more efficient allocation of resources) and socially responsible (because it doesn’t remove social protection from anyone who currently enjoys it). Any country would benefit from adopting it, but Wales more so than most because Wales suffers more than most from a highly distorted economy, the result of decades of Labour Party rule.
Those points pretty well summarise my own views. I have arrived at them by reading Hayek, Rand and Friedman, among others, and consider them as being pro free-market. I’ll persist in regarding them as such unless someone can convince me that I’ve fundamentally misunderstood market economics, and although I lack a formal economics qualification (I’m a Physics PhD with a Management MSc from Manchester Business School) I’m pretty confident of my material.
Thank you for a stimulating discussion, David. I may make some brief comments in response to any further points you make, but if a more detailed response is called for then I may have to write another article…
You’ve given me a lot to think about, but I’ll part on a question – the income disparity we see, say between your hedge fund executives and shelf stackers, is that because of the market or is it because of government interference in it. It’s a given that your highest skilled and most valuable actors in the market will get bigger pieces of the pie, but my issue is in how wide the gulf is.
Thank you David. A worthwhile question which I’ll try to address very briefly.
In any market prices are set by supply and demand. Being a good hedge fund manager is very hard, and not many people can do it. Hedge fund managers earn a lot because people want the services they offer and are prepared to pay for them – no one is forced to put their savings into such such a fund. So their pay rates are determined by the market.
Why are shelf-stackers paid so little? In a nutshell, because almost anyone can do it and the supply of people who can do it exceeds demand. That, I’m afraid to say, is the government’s fault. Mass immigration, whether legal or illegal, and from the EU or further afield, increases the supply of labour and so reduces its value. Government interference elsewhere in the economy has a double-whammy effect by reducing demand for labour and so reduces its value still further. In my view, the direction we should be going in is not to put wage caps on hedge fund managers (at the end of the day there are so few of them that it wouldn’t make much difference), but to prevent the oversupply of labour while stimulating demand for it elsewhere in the economy. That doesn’t mean ending immigration – far from it – but it means being a bit more discerning about it. And nothing stimulates demand quite like cutting taxes.
What was your PhD in? I did a year’s worth in molecular biology before dropping out and doing my MSc in bioinformatics, and I’m now a ‘generic’ computer programmer, I don’t have anything formal relating to finance or economics or anything like that myself but I have diverse curiosities I guess I can say.
I did semiconductor surface physics at Cardiff – researching how to count Gallium Arsenide layers growing one-by-one by analysing light reflected from the surface. I’ve had a varied career in both highly scientific roles and more business-oriented ones, mainly in Wales but with a ten-year stint in Silicon Valley. Nowadays my main job is running a software engineering office in Wrexham for a US semiconductor company, while on the side I’m trying to resuscitate my own startup in Swansea which Welsh Government Business Support did their best to kill.
You’re a rare breed indeed – having been able to exercise such rarified and highly technical skills within this mismanaged colony where talent seems to almost invariably get hoovered up east!
It hasn’t been easy; I put £200,000 of my own cash into my startup and so far it’s been a black hole. The company I work for now is only in Wrexham because I persuaded them to set up there rather than Manchester, after I’d got the job of setting up their second UK development office (they already had one UK office, which naturally is near Cambridge). I’m paid half what I was twenty years ago, when I worked in Silicon Valley; but I’m much happier now than I was then.