Big Daddy government is out of date

Michael Prowse was a product of the welfare state. Then he moved to America and discovered the joys of libertarianism
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A decade ago I believed you could not be a compassionate, caring person unless you believed in big government. For me, as for many others, government and compassion were synonymous. I accepted that market forces had some uses in promoting economic efficiency. But I thought the government had to intervene in countless ways to prevent "market failure". And I believed it had a duty to redistribute resources on a massive scale to ensure social justice. I subscribed, in short, to policies now known as "new Labour".

Such views now strike me as entirely natural for somebody brought up in a welfare state. Like many in my generation I enjoyed free education (at university as well as at school) and free health care. I expected state support should I become unemployed or should I simply lose the taste for work. And I looked forward to an income-linked state pension.

I began to question this kind of state paternalism for two reasons: because the world began to change in the late Eighties and because I fell under new intellectual influences. To a British audience it may seem puzzling to argue that changes in the political climate encouraged a move away from paternalism. After all, the free-market movement reached its apogee of influence in about 1987. Today, the conventional wisdom is that Thatcherism put too much emphasis on individualism and not enough on community.

Yet, taking a wider view, the free-market case has been greatly strengthened since the late Eighties. The demise of Communism in eastern Europe and the former Soviet Union, and the burgeoning of the capitalist spirit in China and much of the Third World, are among the most significant political events of the century. This change, which I did not expect, profoundly influenced my thinking.

Equally important, a move from London to Washington in 1990 gave me a strikingly different perspective on events. Bill Clinton won the 1992 election only by packaging himself as a quasi-conservative committed to "ending welfare as we know it". He then shifted sharply to the left. But the reaction in last November's congressional elections was remarkable. The Republican vote in the House of Representatives rose by about a third compared with the last mid-term election in 1990 - the biggest swing since the late Twenties, when the Democrats enjoyed a comparable surge in support.

I see this as evidence that the conservative revolution that began with Ronald Reagan is gaining, not losing, momentum. Newt Gingrich has sparked a more profound debate about the role of government than anything seen in the Eighties.

It is certainly more profound than the limited debate in Europe about the future of the welfare state which is driven, it seems, purely by financial considerations. And there seems no doubt that the US is now moving in a conservative/libertarian direction. The question is not whether there will be less government and a devolution of powers from Washington to the states and localities, but how quickly this will occur.

Yet in an important sense the US is merely returning to its pre-Great Depression traditions. The revolution that created America was an impassioned and principled rejection of government - British government. For 200 years, ordinary Americans have had a much greater distrust of government - any government - than Britons. Seeing this at first hand, I have felt my own convictions about the role of the state begin to shift.

Intellectually, I have been influenced by the "classical liberal" writers of the 17th and 18th centuries and by two modern schools of thought: "Austrian" economics, which has increased my confidence in markets; and US "public choice" theory, which diminished my faith in government.

Austrian theory starts from far more plausible assumptions than traditional neoclassical theory. Markets are not assumed to "fail" merely because they do not meet the efficiency conditions dreamt up by mathematical economists. They are seen rather as a discovery process - a way of utilising knowledge that is distributed among millions of individual participants and that is not, even in principle, available to any central department.

Markets are superior to governments for at least three fundamental reasons: they disseminate and process information more rapidly; they rely on more decision takers; and they provide, through the profit motive, an in-built incentive for agents to use this knowledge efficiently to promote ends valued by fellow citizens.

Public choice theory, for its part, explains precisely why government failure is more likely than market failure. It reminds us that individuals do not cease to be self-interested when they enter public service. I do not deny that bureaucrats (like private business people) can sometimes be altruistic. But they have a powerful, countervailing incentive to do whatever will further their careers; their actions will often be determined by factors internal to their organisations.

Usually they will have an incentive to increase the power and prestige of their arm of government, which is one reason why the public sector has a natural tendency to expand. In any case, the self-interest of public officials will be less effectively channelled into virtuous paths than will that of private agents subject to the discipline of market competition.

So what role do I now think government should play?

The first point I would emphasise is how far the world has strayed in this century from classical liberal principles. I was struck by a line in a review by Martin Taylor, of Barclays Bank, of The State We're In by Will Hutton. Mr Taylor was not impressed by Mr Hutton's general argument but he did concede that "too much individualism is bad for too many individuals", or words to that effect.

That somebody as sensible as Mr Taylor can believe that Britain suffers from an excess of individualism strikes me as profoundly alarming. In retrospect, the Thatcher years saw, at best, a tiny move in this direction: the growth of public spending was not checked; the state did not withdraw from any of its traditional functions. How can anyone talk seriously of an excess of individualism when government spending (including transfers) accounts for more than 43 per cent of GDP against less than 41 per cent in 1979, the last year of Labour government?

Do we really need a state this large? If we do, what does this tell us about the assumed capacity of individuals to look after themselves? A small proportion of individuals at the bottom of the ability/income spectrum perhaps need assistance. But it is surely ridiculous to assume, as we usually do, that most people cannot manage without the state as a crutch.

I am not saying that most people should assume greater responsibility primarily to save the state money. The cost is important: the tax burden imposed by the welfare state clearly undermines incentives and retards growth. But the real argument cuts deeper. Individuals should assume responsibility for these basic duties because doing so will make them stronger, better and, in the long run, happier human beings. The strongest argument against dependency on government is that it cripples individuals' capacity for self-development.

This raises what is perhaps the fundamental question: how large a state should classical liberals support? I will assume, for the sake of argument, that there is a case for a minimal state that protects individuals against internal and external threats to person and property and upholds rights of contract. The question then is how to justify a larger than minimal state. The traditional answer is in two ways: the state is necessary to provide certain "public goods" and in order to redistribute resources from rich to poor.

The public goods defence of government is much weaker than is usually assumed. The classic definition of a public good is that it is non-excludable and jointly supplied. Non-excludable means that those who do not pay cannot be prevented from enjoying the good. Jointly supplied means that my consumption of the good does not limit what is available for you. An example of a true public good is the deterrence effect of national defence.

Most so-called public spending is not on services meeting this technical definition of a public good: education does not meet the criteria, nor do pensions or health care. I believe we greatly underestimate the ability of individuals to provide collective goods through voluntary co-operation; lack of faith in voluntary action is one of the bitter legacies of big government.

That leaves redistribution as the real justification for today's outsized states. Why is this argument so potent? One reason, sadly, is that many people are motivated by envy. If you doubt this, just consider the furore over executive pay in the UK. In the US there is no such fuss because there is less of a tradition of resentment at the good fortune of others, even though pay and wealth inequalities are larger than in Britain.

Envy is fuelled by the popularity of the distributive or "cake" theory of justice. According to this, income or wealth is supposed to be just there, to be magically generated out of nothing. But a dynamic "entitlement" theory of justice is surely far more realistic. As Robert Nozick pointed out, goods and entitlements-to-goods are created simultaneously; without the entitlements there would be no goods. The size of the cake is not predetermined. No one plans the distribution effected by market forces. There is no guiding intelligence. So, as Friedrich von Hayek argued, it is strictly meaningless to think of a distribution as fair or unfair. It just is.

So how would I sum up the libertarian or individualistic credo to which I now subscribe?

The fundamental belief is that we as individuals, in almost all circumstances, are the best judges of what makes us happy. We should thus be as free as possible to make choices for ourselves. Restraints are necessary, as John Stuart Mill argued, only to prevent us harming or violating the rights of others.

Allowing individuals to make as many choices as possible for themselves is not an argument for greed or materialism. For all I care, everyone can spend their days meditating or tending their gardens. I do not care if the GDP shrinks. What matters is that the pattern of activity reflects people's free choices.

To be a libertarian is not to lack virtue or compassion. It is to recognise that benevolence is a quality of individuals, not of governments. The loudness with which people demand higher taxes on others is not a measure of their benevolence. The only plausible gauge of personal benevolence is our willingness voluntarily to give money to others. I believe a libertarian society would stimulate individual moral growth and, with it, true compassion for the less fortunate.

Individualism, as I understand it, is not opposed to community. I am in favour of clubs, associations and co-operative ventures of every conceivable kind. There should be as many and as varied a set of associations as people want. The one essential condition is that they should be voluntary.

Here we encounter what is perhaps the fundamental difference between the libertarian and the paternalist. The libertarian believes passionately in voluntary co-operation (and especially that brought about by market transactions). The paternalist believes in coercion, in the forcible raising of taxes and the collective management of resources by a supposedly enlightened elite. The libertarian wants the many to take decisions for themselves; the paternalist wants the few to take decisions for the many.

There is no longer any question in my mind that the former philosophy is superior: voluntary action is preferable to coercion. Libertarianism would bolster the economy, strengthen personal morality and create more individual freedom. I thus find it hard to understand why anybody wishes to defend the paternalist status quo.

The writer is the Washington columnist of the 'Financial Times'. This article is extracted from a lecture to the Institute of Economic Affairs.