Free markets, strong state

Authority complements commerce

The greatness of a state, and the happiness of its subjects, how independent soever they may be supposed in some respects, are commonly allowed to be inseparable with regard to commerce; and as private men receive greater security, in the possession of their trade and riches, from the power of the public, so the public becomes powerful in proportion to the opulence and extensive commerce of private men.

-David Hume, Of Commerce (1755)

Markets don’t get the credit they deserve. That somehow a limitless number of individual consumers and producers can, by pursuing their own interests without central direction, ensure that people are fed, clothed, housed, entertained, and secured is little less than miraculous. Markets’ power rests in their reorientation of human activity toward abundance: rewarding those who create and produce, rather than competing over the distribution of scarcity.

Markets are natural, but their success is not inevitable. Humans are capable of cooperation through commerce, but the conditions for it to take place are far from given: a little familiarity with the experience of poor countries shows how hard commercial society is to realise. Deep reserves of human capital and social capital are necessary to allow markets to emerge, to evolve, and to sustain.

A strong state is needed to defend and deepen those reserves of human and social capital, which are hard to accumulate but easy to run down. Markets themselves can erode them, if they are not governed properly. Commercial society depends not only on producers and consumers being free to do business, but also on the certainty that rules will be enforced, and the worst externalities tackled. The greater the authority of the state, the easier this task becomes: authority allows a state to act rarely (allowing commerce to proceed otherwise), but decisively when it does.

These questions are or should be central to modern politics — not only the development of markets, but the authority of the state which ensures that they develop in the right way. But in Britain, we see complacency all around, and not only from the left. We have so-called neoliberals who love markets and the prosperity they bring but run a mile from defending social order, and postliberals who love social order but distrust markets and suspect prosperity is simply decadence. Few now are willing to stand for markets and prosperity and the social order on which they ultimately depend.

The managed economy

The narrative from all sides is that markets are secure in Britain. Everybody knows that markets work best: Jeremy Corbyn was the exception, not the rule, and here comes Rachel Reeves to assure business (at Davos!) that Labour are on their side. So complete is the seeming triumph of the market economy, that the free market think-tanks, which did important work decades ago, have become enfeebled and irrelevant.

It is true that there is no threat of a centrally planned economy, and the energy of markets is agreed to be A Good Thing by all. Instead, the challenge to commerce has shifted: no longer wishing to set tractor production targets, but rather to manage commerce so that it is bound to pursue other outcomes while doing the day job of producing and selling goods and services. Over the past several decades, and accelerating under the Tories, bureaucratic managerialism has insinuated itself into different markets. There is no single central planning agency, and bureaucrats often situate themselves as clients within businesses, as a growing caste of compliance experts, whose job it is to make sure commerce is managed within the required parameters. The prosperity that free markets can bring becomes ever more distant, as business continues to be done, but more and more to deliver on managerial imperatives rather than success for producers and consumers.

Some examples can tell a story here. More and more sectors of the economy are subject to the continuous reviews and strategies of barely known state regulatory bodies. These bodies are often small in themselves, but they work through compliance — they set outcomes to be achieved and then demand that their client, regulated businesses, produce plans to show how they will be realised. The model started in finance and the utilities, and now expands far beyond, with even the Premier League about to be treated to its own specialist regulator. These regulators do not succeed by encouraging innovation, productivity and commerce; their interests are in declaring problems requiring their management, and creating a climate of ‘risk’ where failure to comply, and to demonstrate compliance, represents a danger to the business.

Increasingly large parts of the economy are managed more directly, through systems of bureaucracy granting rights to operate which can then be used to generate profits as long as businesses remain aligned with managerial imperatives. In our energy system, producing energy efficiently is no longer the goal sought. Instead, the state can provide price guarantees if your production technology is deemed ‘renewable’. In housebuilding, construction is allowed only where local political machinations eventually deem it acceptable and often only if social homes are also being constructed as part of the deal (to then be allocated by other bureaucrats, to politically favoured constituencies). Even if you’re in such a straightforward business as providing goods to government, so-called ‘social value procurement’ requirements mean that the goods alone aren’t enough — your business must also help achieve a range of other government goals.

In the workplace, the creeping reach of equality laws mean that managers increasingly aren’t able to manage for fear of tripping over risks which haven’t been debated by parliament, but rather elaborated on by bureaucrats and the legal establishment. The Equality and Human Rights Commission has just announced new ‘advice’ (ignore at your own risk) on supporting workers experiencing menopause. The courts have asserted their right to review historic pay decisions between disparate groups of workers, as if they somehow have more market knowledge than the employers concerned. The sweeping, sometimes arbitrary nature of equality law creates a demand for compliance expertise in every business — and not only within it, but also in commissioning a range of external experts, often staffing NGOs you’ve never heard of, to ‘advise’ and ‘train’ to demonstrate that the business isn’t risking transgression of these vital (but subjective, and unnecessary until recently) laws.

Weak state

You might take from this that state authority is not our problem, that the British state must be strong to constrain commerce in so many ways. Taxes are at historically high levels, too. All this is to confuse the state with the bureaucracy, and authority with power: they sound the same, but they very much aren’t.

State authority is measured in its ability to act with strength and despatch, and if you’ve been paying attention to the travails of Britain over the past twenty-five years, these are very much declining qualities. The British state has a twenty-one mile wide moat and still can’t enforce its border. An Afghan man committed an acid attack in London and, left with half his face missing, could only be found by the police when he died. Basic crimes are no longer policed, and a high volume of crime is committed by a known group of offenders the state leaves free to prey. Organised ethnic rape gangs continue to operate with seeming impunity and even the few perpetrators who are caught enjoy the protection of the law more than its punishment.

The state’s much vaunted health service has far more money and staff than ever, and yet manages to be treating fewer patients than it did before. More and more the state allows people to draw their income from its tax base because they claim to be unwell, often because of hard-to-test claims of mental illness. And in case you wondering, the state really doesn’t do well on making the trains run on time, especially given the regular strike days when half of trains don’t run at all.

While it’s true that tax levels have risen higher than ever, the British state lurches from one fiscal crisis to another. Now spending over a trillion pounds per year, it claims to be unable to accommodate criminals in prisons and rather than pay low-skilled care workers the market rate, it has resorted to shipping in tens of thousands from Third World countries, barely regulated and their families in tow (many seem to disappear, some sadly do stay in the industry). Britain’s political class love using the annual budget to talk about the tiny ‘fiscal space’ the OBR says a government has, and whether this will be disbursed through a few symbolic tax cuts or on ‘investments’ in peripheral spending programmes.

No: for all its lumbering size, Britain’s state is not strong, but weak, flabby, and decrepit. Rather than an authoritative agent able to act within society and economy, the British state now sits within and sees its power drained away into a much wider Blob, spreading across many scattered bodies across public, charitable, and corporate sectors (those compliance experts have their part to play). The Blob indeed draws power from the state, but then quickly diffuses it through mechanisms like Hubs, designed to manage problems but never really to solve them, with ministers’ ability to decide on policy subordinated to the collective wisdom of ever-multiplying, self-appointed stakeholders.

Yes, the British state has lots of money and lots of power, but it is distributed across so many intermediaries and subsidiaries, each with their own legal and/or political leverage, such that the centre is often left looking to serve The Stakeholders rather than decide and enact its own will.

Do not confuse the ability of a quango official to throw grants at their favoured NGOs or a despotic official to demand costly compliance with some rule that you’ve never heard of (and parliament hasn’t explicitly legislated) with an authoritative state — it is not at all the same.

A case study: the Port Talbot steelworks

The recent Port Talbot steelworks episode helps understand the dynamics of the weak, Blob regime-state haplessly reacting to the consequences of managed markets causing a slide to economic stagnation.

While Britain led the development of steel production, its steel industry has been at the forefront of our move into being a post-developed economy. Steel production in Britain is now nearing extinction: a 50 percent reduction in output across thirty years, squeezed especially by fast-rising industrial energy prices. This is the intended result of Britain’s energy policy, which has forced energy users to subsidise investment of ‘renewable’ energy to contract carbon emissions from UK energy production. The managerial priority has been carbon reduction; industrial capability has been an afterthought.

In this setting, the remaining steel sector — in foreign ownership — has demanded government support to continue operations. In 2023, the British government placated Tata Steel, the Indian owner of the Port Talbot blast furnaces (one of Britain’s few remaining large steel production facilities), by providing financial backing of £500m to support their development of new, more carbon-efficient electric arc furnaces. Despite this support, at the start of 2024, Tata Steel announced their plans to close the blast furnaces, with the expected loss of thousands of jobs.

Cue outrage from all quarters, but most of all from politicians, like local MP Stephen Kinnock, accusing Tata Steel of betraying Port Talbot and declaring their commitment to steel production as vital for Britain’s economic future. Unions lobby government furiously to commit billions more in financial support in the hope of buying a change in Tata Steel’s decision.

This is idiotic. Stephen Kinnock supports the energy policy that has made Britain a hostile environment for steel production; he and his party supports even more aggressive action on this front. Markets were managed to reduce carbon emission production in Britain, and steel production has thus gone overseas. The outcome for steel production was predictable, and in fact predicted. Policy has been successful in its aims: stupid games have been played, stupid prizes are now on offer.

The paralysis of government around this situation shows how weakened the state is. As the inevitable outcome of the policy came closer and closer, foreign companies like Tata Steel were able to extract financial concessions and the British state’s inability to pursue a coherent policy were exposed, with the £500m of funding support offered with no conditions on Tata Steel’s future operations in Port Talbot (£500m was a consolation prize; Tata had asked for much more). When Tata Steel then made the inevitable economic decision this year, the only political discussion to be had has been how much more the government could offer to reverse the situation.

Authority and commerce together

This is not how things should be. If Britain is to succeed once more, then this pattern of a managed economy and a weak state needs to be broken. And this is not a choice between one and the other: we need a free economy and a strong state, as they are mutually beneficial.

Commercial modernisation is the surest route to social and economic progress. Competitive markets modernise through a continuous process of creative destruction, clearing away the old to make way for the new. Meritocratic to its core, commerce favours those who produce more and better, not those who win favour from politicised stakeholders. The same forces of competition driving economic progress also serve to discipline society, rewarding those who create and contribute, cultivating the virtues of work, thrift, enterprise, and independence.

That same discipline allows for a society to be capable of organising itself, allowing for the state to focus on what only it can do and to do it well. As we have seen, the expansion of the state into ever more fields of activity has weakened it. Restoring state authority depends on government becoming smaller and more sparing, no longer trying to solve all problems and lending its money and power in so many directions that none find traction. Instead, government should focus on its roles as the enforcer of order, including serving as an occasional, but necessary, corrective to commerce. Withdrawing its support from the complex web of stakeholders, shutting down the various ‘hubs’, simplifying government to focus on setting rules rather than managing a constant stream of special cases — all of this is what a programme to restore state authority looks like.

If the state is to have the power to decide over the exception then it must return to doing so exceptionally. The rule of law is not only good for personal liberty; setting and then consistently enforcing general rules reinforces state authority. Managerial activity encourages rent-seeking because there is always the potential to gain benefits by being an exception from thee rules. At the same time, it allows the state an easy option to set mistaken rules and intervene to avoid their consequences.

The Port Talbot case is instructive here. Careless, unserious policymaking led to the state adopting an energy policy that made steel production in Britain chronically uncompetitive, but with no attention to what that would mean for steel production. As the consequence unfolded, policymakers looked for sticking plasters to avoid it, leaving them easy prey to foreign steel plant owners looking for favours. A laissez-faire default, with an expectation that no sticking plaster subsidies could be used, would have created incentives for better policymaking and less rent-seeking behaviour.

Authority for commerce

How can strengthening the state enable commerce? Aside from stepping aside, removing regulators and regulation, what can government do to enable markets and prosperity?

First: do the basics, do them well. As the British state fails to enforce its laws across society as well as economy, it makes commercial life harder. Criminals should be deterred by forceful policing, and punished robustly. Day-to-day crimes like shoplifting should not be tolerated. ‘Broken windows’ effects feed a general sense of lawlessness which undermines state authority and the order it brings.

Second: dismember the managerial state properly — don’t just tinker at the edges. Regulatory bodies should be disbanded; there should be a presumption against having a bureaucracy to ‘manage’ a sector. The development of ‘franchise’ sectors — such as homebuilding and renewable energy — should be stopped and market disciplines returned. Government procurement should have ‘social value’ requirements scrapped, and instead should focus purely on questions of cost and quality. Sweeping, ambiguous regulations should be repealed and replaced with clear rules fully understood by legislators at the time of their enactment.

While functionally libertarian, the position here is not ideologically so. A free economy does not mean eschewing a role for the state in shaping the economy. It’s just that the state should favour making policy by general rules with predictable enforcement, not by constant managerial tinkering by supposedly expert bureaucrats.

Policymaking should also not be confined to questions of competition and the removal of obvious externalities, important though they certainly are. Markets are powerful, but businessmen often make stupid, lazy, short-termist decisions which work for their businesses, but not for Britain. Left to their own devices, businesses will happily sell out key industrial capabilities or hire cheap labour (and lobby for more immigration) rather than invest in automation.

Individual business decisions in this way can lead to worse outcomes for the national interest, and the state does not need to enable or support them. Hiring cheap labour means encouraging mass immigration with all its social consequences; the state can and should decide who gets to be in the country. A free economy doesn’t mean a licence to act recklessly.

Ensuring that we retain and grow industrial capabilities and deliver capital-intensive infrastructure without relying on (often flawed) businesses deserves a whole other article, but again the point is that a strong, authoritative state is not confined to a choice of pure hope or bureaucratic management — institutions can be designed to focus authority and not to degenerate into Blob nodes. For infrastructure, there are different models available to our current failed framework, and for industrial capabilities, the manifest failures of selective intervention do not mean that the state cannot ensure the creation of incentives at market level.

Commerce for authority

Just as we have seen that the strong state can support a return to a flourishing free economy, there is plenty for the state to learn from markets about how better to operate.

This is not a brief for ‘contracting out’, the strange phenomenon starting in the last years of the Thatcher era and proliferating under Major and Blair, where faceless private bureaucracies like Serco and Capita run public services to drive down cost with no regard to quality. Many of these services would benefit from full privatisation, and some of them by returning to public operation if they have to continue.

On that point, the other side of dismembering the managerial state is that any policy or programme which depends on mass decision-making bureaucracy should be scrutinised with a view to its termination. Simplifying what government does, and how it does it, should allow for a substantial reduction in the number of agencies and bodies.

In the same way, ‘marketised’ public services should be subject to special scrutiny. Providers in these markets have the autonomy of businesses, but little accountability: they invest taxpayers’ money in assets, they operate under implicit state guarantee, and are governed by boards of stakeholders.

A good example here are Registered Social Landlords, often referred to as housing associations. Despite claims that they are private NGOs, they have been declared by the courts to function as public bodies. They sit across millions of homes which they rent at below market rates, on politicised criteria, with notable distortions on who benefits. These bodies are large, profitable organisations pursuing a political agenda (in some cases, explicitly – Metropolitan Thames Valley Housing supports a pro-immigration lobby group) at taxpayer expense. The obvious solution is to liquidate their portfolios and return the assets to private investor ownership.

Perhaps most of all, the restoration of a laissez-faire norm should mean government refraining from granting funds to any charitable or corporate organisation. That isn’t to say government funds should not be used to achieve social and economic policy outcomes — but this should be by supporting entire markets (perhaps through a mechanism like social policy bonds), not any one organisation within them.

In restoring state authority, there are more lessons to be learned from taking a more economic mindset to policymaking and implementation.

One aspect of this is making sure those imposing external costs on society pay for them in full. We already respect this principle in certain settings (such as pollution), but it can be applied more widely.

One opportunity is that we should make protestors pay for the costs that they impose on our public spaces. Seemingly every week a group of protestors can be found in a major city disrupting movement and often causing damage and requiring policing. These costs are recoverable from those organising protests, especially if they are NGOs. Policing costs are already recovered from football clubs, and protests should be no different.

Similarly, if we are to allow immigration at any level we should ensure that those benefiting from it pay the costs imposed on society. Limiting the number of migrant residents allowed in Britain at any one time and auctioning the visas can be an effective way of ensuring the public capture the rents expected from migrants being allowed into the country.

Costs can also be offset in terms of potential risk, taking advantage of market incentives to make difficult judgements and ensure accountability for them. Probation insurance is one area where we could do this: rather than have unaccountable Parole Board members decide who should be released, we can let the market decide by requiring prisoners eligible for release obtain fully-backed insurance which covers the cost for any crimes they commit as well as for their return to prison. Insurers could set specific conditions to mitigate the risk in a way a state agency would find hard to do, case by case.

Free economy, strong state

Britain’s decline — economically and socially, it’s all connected — is a choice.

Britain chooses to subject its economy more and more to managerial imperatives; we choose to let our state be subsumed into the Blob regime we have. Reversing this pattern is possible, if we get to work freeing the economy from the managerial state, and reconceiving government to be more sparing, more exacting.

As we have noted, the agenda is functionally libertarian, but not ideologically so. An authoritative state can and should act where it can improve things, but it should be conscious of not setting precedents, and not creating bureaucratic problems which need managerial solutions. Smaller, simpler government does not mean weakness: the agenda set out here calls for new capabilities within the state, so that what interventions are made are actually successful.

As time goes on, breaking out of the trap of managerialism will become harder. After decades of bureaucratic creep across the public, charitable and corporate sectors, Britain has become used to it, and removing it will not be without trauma. But on the other hand, such is the scale of resources absorbed the Blob, there are rapid gains to be made and shared by those willing to embrace a different future, that of a free economy and a strong state. It is long past time we got started.