It has been a rough couple of weeks for the classical liberal tradition of Smith, Locke, von Mises and Hayek. I am sure that many of these giants of economic thought will be turning in their graves at how the economic systems they advocated have been characterised.
But this whole debate in the UK about the Prime Minister and her erstwhile Chancellor’s economic planning has raised a significant question. MPs like Robert Halfon raise important points when they talk about social justice and the plight of the poorest among us.
The critical question is how do you best improve the lives of the many?
What the PM and her team have conspicuously failed to explain is that there are two parts of this equation, but they do not operate independently of each other. One part relates to lowering the cost of living for people. That is of marginal benefit to the rich, but it is incredibly important to people who aren’t rich. For them, it is the difference between having to choose between heating and food or having both.
How do we lower the very high cost of living that applies in the UK? First we need to understand what our problem is. Benchmarked against other countries, especially the US, the UK is a costly country to live in. This is particularly true in what might be called the lifeblood areas of the economy, such as food, housing, transportation, energy and access to capital. This fact is brought home to the millions of Brits who holiday in America and marvel at its cheap food and clothing, for example.
Once you understand you have a problem, you can then use the single most powerful force we have to lower costs, lower price and increase choice which is competition. Applying competition to these sectors and weeding out regulations that damage competition (which emphatically does not mean deregulation) and are distortive is a difficult job which involves a lot of work in the weeds of regulation and regulators. It is not the stuff of Daily Mail or even Financial Times newspaper headlines. But it is nevertheless hugely important. Being open to trade and not restricting trade flows (and thus increasing import competition) is also a way of driving costs down. All of this will also help us combat the inflationary pressure that has been caused by locking down the global economy for a long period – and this lockdown is not over as Xi recently doubled down on China’s no-Covid strategy.
The other element is lowering the tax burden so that economic activity can be incentivised leading to more and better jobs in the UK. It is these jobs that will put more money into the pockets of consumers that can then be spent on the necessities of life you have made cheaper by attending to the first part of the equation. Simultaneously by maintaining an open trade policy and lowering barriers to UK firms in other markets we improve their performance, profitability and this leads to job creation. Both parts of the equation taking together then create positive feedback loops which improve the overall productivity of the country, and bring continued benefits to its consumers.
Both of these elements need to operate in tandem for greatest economic effect. The core of this policy is to focus on consumers and do everything to improve their lot. This does not just mean consumers at the end of the buying chain, but recognises that every producer is a consumer of something. By lowering the cost of inputs, this approach will also help production in the UK to become more efficient, again contributing to lower prices and lower costs.
Robert Halfon’s urging of the Conservative Party to return to social justice and the relief of poverty is an important challenge. Indeed this is where the battle lines for the political realignment that is going on across the world will be drawn. It will be between those who believe that people’s lives are improved by competition, lower costs, more choice and more and better jobs created by a dynamic and growing economy, versus those who believe that this same thing can be achieved by government interventions, bail-outs, handouts, and price caps (which is simply another form of government intervention). The latter tend to diminish competition, contributing to higher costs and prices (which then have to be capped leading to shortfalls in supply). This high cost economy can only be sustained by large amounts of money printing, a very high tax burden and artificially low borrowing rates. Ultimately that leads to inflationary pressure which will devastate everyone’s livelihoods.
There are those who favour redistribution and government intervention across the entire political spectrum in the UK. Perhaps that is why Hayek dedicated his 1944 book, The Road to Serfdom, a response to the Beveridge Report “to the socialists of all parties”. Ultimately it comes down to whether you think wealth can be created or destroyed or whether interactions are zero sum. If you believe the latter then inequality and redistribution are all that matter. If you believe the former, then the primary job of the government is to create the conditions where the creation of wealth is maximised, and the force of competition used to drive costs down. But history and the economic record have shown that the billions of human interactions that occur in the world are in fact non-zero sum in nature. That wealth can indeed be created or destroyed, and that it is much easier to destroy than it is to create. Increasing economic activity, and increasing competition matters most to the poorest – it is of incidental interest to the rich who usually have the power to game the system and benefit from the status quo. It is a fight that pits the poor and workers who aspire for better lives for themselves and their children against the overwhelming power of the beneficiaries of the status quo. We have seen a taste of that, and Britain and the world’s poor deserve better.
Shanker A. Singham is CEO of Competere, a trade law and economic policy consultancy.
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