12. The Public Sector versus the Private Sector in Britain

12 The Public Sector versus the Private Sector in Britain A. A. SHENFIELD It is now ten years since Britain was ruled by an avowedly socialist government.:I(: The d~cade of the fifties was in many ways one of liberation beyond the nation's hopes. Rationing was brought to an end, the planning of the economy by physical controls was almost wholly given up, the process of nationaliza tion was halted, and private enterprise was given sufficient free dom to display a fair measure of its natural vigor. It was a period of significant economic growth, even though the growth was dis turbingly slower than that of the other industrial countries of Western Europe and ran a halting and checkered course, owing to the need to deal with repeated balance-of-payments crises.! Ten years of Conservative government, however, have hardly lessened the relative importance of the public sector. Its dead weight remains substantially unchanged. Indeed, since 1957 the part under direct government control, as distinct from that of the boards of the nationalized industries, has been slowly grow ing. The Conservatives have removed most of the shackles fas tened on the private sector by war and Labor dirigisme. They have failed-indeed they have not seriously tried 2_to reverse the measures that made the public sector so large. When they intervene in the private sector, they do so by methods that are, "" This essay was written in October, 1961.

232 The Public Sector versus the Private Sector in Britain 233 for the most part,3 consistent with the needs of private enter prise (e.g., by the manipulation of interest rates). Thus, they have not merely restored the freedom of the private sector; they have also respected it and tried to maintain it. But equally they have judged it to be politic, or necessary, to maintain the public sector substantially as it was bequeathed to them by their opponents. Tables I, II, III and IV (see Appendix) present a selection of figures to give a statistical image of the public sector. They show that we have an economy in which government directly disposes of over one-third of the national income; in which more than one person in five of the employed population (not in cluding the armed forces) is in the service of government or the nationalized industries; and in which more than a quarter of gross fixed investment has gone into the economic activities of the state. Clearly the public sector is of formidable proportions for a country that is governed by a party of private enterprise and economic freedom, as the Conservative Party represents and believes itself to be. It is interesting to see that the proportion of public expenditure attributable to defense, which has never been conspicuously the first love of Labor, has actually fallen under government by Labor's opponents; while that attributable to the social services, which even more than the nationalized industries are Labor's pride and joy, has risen. Clearly, the forces that favor and sustain the public sector must be as deeply en trenched as they are powerful.

Yet so too are the forces on the side of the private sector. If Labor were returned to power, the relative size of the public sector would indeed grow, but not by spectacular proportions. Steel and road haulage would certainly be renationalized. Ex penditure on the national health service, education, and pen sions would grow.4 And the shadow of the state in all economic matters would lengthen and widen. But Labor's nationalization program would be unlikely to go beyond steel and road haulage,5 for its leaders have lost their faith in nationalization and retain it as a major plank in their platform only to appease their fol lowers. Their program for the expansion of the -social services 234 The New Argument in Economics would quickly run into the barrier of taxation, for not even the most "swingeing" and discriminatory taxation of the better off could yield the money that an ambitious program would require, and when it comes to taxing their own supporters, the Labor leaders become wonderfully conscious of the due limits of government. As for intervention in the private sector, this would, of course, be niggling, self-contradictory, hampering to the efficient and forward-looking, and favorable to the backward and out-of-date. But it is unlikely to be far-reaching or deep searching, though it might be made to appear as such; for the deep unpopularity of physical controls must alone prevent this.

And the Labor Party has no more thought out what it would do if it really received a mandate for socialism than th~ German Social-Democrats had in 1919 or than its own leaders had in 1945.6 No doubt the economic decay that Labor policies would promote would call forth cries for truly radical remedies .. But the kind of "remedy" that made the public sector grow like a cancer cell at the expense of the private sector would be applied by those on the extreme Left or Right who might succeed Labor after a debacle, not by Labor itself. Thus, we appear to have reached a state of rough stability in the relative dimensions of the public and the private sectors. The Conservatives are unlikely to reduce the public sector significantly. Labor would increase it significantly but not ex plosively. As the Conservatives appear to have a permanent electoral edge over Labor,7 except at times of balance-of-pay ments crisis., the outlook is probably one of no great change.

How has this come about? Can the stability be lasting? And what ought to be done about it? This is not the place to recount the story of the development of socialist thought in Britain. It is enough to say that though it was very late in taking root in Britain, as compared with the Continent, it has succeeded in so deeply impregnating the na tion's attitudes that only the rarest minds are wholly free from its influence. It constitutes the unspoken assumptions that are the real determinants of public debate; and though they are by The Public Sector versus the Private Sector in Britain 235 no means clearly or consistently socialist, they long ago ceased to be liberal. s In such a clImate a luxuriant growth of state economic ac tivity can hardly surprise one. However, there are some special reasons why the Conserva tives have found it not unpalatable to run an economy with a large public sector. As practitioners of the pure art of retain ing power, they outshine, after all, the conservatives of all other democratic countries; and their success arises from certain atti tudes that hinder them from effectively reversing the etatism of our times. These attitudes display themselves, in a variety of facets of two broad characteristics. The Conservatives are men of common sense; and they are men of national unity.

As a man of common sense, the Conservative is intensely sus picious of the theorist 9 and the doctrinaire. Since most far reaching changes are initiated by men who are moved by some theory of society, the Conservative is reluctant to attempt to reverse the trend of the times where such reversal itself requires far-reaching changes. Once it is entrenched, etatism can be dis lodged only by those who have deep convictions about the rights of man that hang together in some coherent theoretical form. Such men appear to be as doctrinaire to the Conservative as do the Socialists themselves. It is, of course, a commonplace that this attachment to common.sense is an enormQUS source of po~ litical strength, first because of its appeal to an essentially commonsensical nation, and secondly because, though it pre vents the Conservative from pursuing truth very far, it also pre vents him from doing likewise with error. lO And as most theories have more error than truth in them, a nation that is ruled by the British type of conservative is in broad terms not unblessed by Fortune. Nevertheless, if a nation has somehow got itself on to a disastrously wrong road, he is not the man to save it, except in the sense that, by slowing the pace of movement down, he gives time and opportunity for new ideas to arise and unseat the ideas for the time being in the saddle.

As a man of national unity, the Conservative must avoid deep, 236 The New Argument in Economics irreconcilable conflicts with his opponents. At the level of day to-day politics this may be merely an expression of the need to avoid offense to the middle-of-the~road, floating voter; but at a higher level it is without doubt an expression of outstanding po litical wisdom. The Conservative knows instinctively that safe and sure progress upon the road that he wishes to travel is pos sible only if he carries many more than his own supporters with him; and he knows also that his opponents are less likely to seek once-for-all, cataclysmic changes when in power if milder changes are unlikely to be quickly reversed when they are out of power. Supremely wise though this is at its best, it can easily de generate into mere caution, timidity, or allegiance to safe (i.e., mediocre) men. On the other hand, brilliant men may easily be tempted to make more of national unity than it deserves.

After all, etatism knows very well how to pitch its appeal cun ningly to deep and worthy feelings of national pride. ll Modern British Conservatism has suffered grievously from both of these faults. In a nation that is at least three-quarters working class, it is a great achievement for the party with a middle-class image to defeat at the polls the party with a working-class image, but this is perhaps as much the result of the Conservatives' faults as of their virtues. The Conservatives' attachment to what they believe to be common sense, in which they have. more often than not been joined by most of the nation, used often to be attributed to stu pidity. Their opponents do not often nowadays call them "the stupid party," as the radicals loved to do in the nineteenth cen tury. Nevertheless, an echo of the taunt still lingers in the charges made by our socialists except when, baffled by their failure at the polls, they profess to see a masterly cunning in the Conservatives' handling of the electorate. The Socialists thus tend to give the Conservatives the very attributes that some foreigners used to give Albion itself-perfidious and cunning, yet impregnably unintellectual. It need hardly be said that there is nothing in this. In the nineteenth century the Conservatives probably did generally have more, and more conspicuously, stupid men in Parliament than their opponents, but, if anything, The Public Sector versus the Private Sector in Britain 237 the boot is nowadays on the other foot. If to be unintellectual is to be stupid, one need go no further than the trade-union section of the Labor Party to find a mountain of stupidity. But if a mere capacity to repeat slogans in the language of intellectuals is not accepted as a certificate of intelligence, then a most dismal array of stupid men can be found in Labor's non-trade-union ranks.

Stick-in-the-muds, impervious to argument, are nowadays far more numerous on the Labor benches in the House of Commons than on the Conservative benches, if indeed there are any at all on the latter. 12 Since the Conservatives' attachment to national unity appears to be a permanent strand of such philosophy as they have, it is often regarded as a foundation for a conscious and fully under stood etatism. Were not the Tories the pioneers of factory legisla tion in the nineteenth century? Did they not always recoil from the "extreme" belief in freedom of enterprise of the Manchester men? Did not Mr. Macmillan himself write a book in the 1930's entitled The Middle Way} which put forward some kind of blue print, hazy though it was, for a planned economy? The belief in this is widespread, both among the Conservatives and their opponents, but on examination it proves to be elusive and insubstantial. It has never been more than a superficial reaction to the ideas of their opponents. No British Conservative thinker of the past two centuries has worked out a policy of etatism that merited the respect, or even the notice, of scholars. The opposi tion to the Manchester School in the nineteenth century was always superficial, and often cranky and perverse (which does not mean, of course, that a sounder opposition could not have been, or was not, mounted). The approach to economic planning in the 1930's, as exemplified by The Middle Way} was equally superficial, though not, of course, cranky. The belief in freedom is, in fact, a much stronger strand in the Conservative philosophy than any kind of etatism, and the Conservatives' readiness to preserve a large measure of state economic activity in our system is far more the result of political strategy and instinct than of philosophy.

In addition to all this, there have been practical difficulties 238 The New Argument in Economics in the way of reducing Labor's legacy of public economic ac tivity. First, from 1951 to 1955, the Conservatives' Parliamentary majority was too slender for large, bold measures. Secondly, since 1955 they have been beset by grave economic difficulties from time to time and preoccupied especially with the problem of the instability of the position of sterling. Thirdly, at first sight the denationalization of the major nationalized industries and the dismantling of the welfare state appear to present tasks of such Herculean proportions as to dismay all but the most resolute of politicians. In the case of the welfare state, as distinct from the nationalized industries, there is a special influence at work that supports and sustains the expansion of the public sector. It is the continual pressure for more expenditure coming from the "expert" in social services. Combined with the pressure of the vested interests that are created by social services, this becomes a force of extraordinary power. It is one that is peculiarly difficult for the Conservatives to overcome, because the "expert" who constantly preaches the need for more state provision for health or education or pensions can be effectively confuted only on his own ground of theory and analysis, and this is an arena that few Conservatives are equipped to enter.

Experience of the strength of the forces that cause social ex penditure to expand shows how ill conceived is the so-called Theory of Social Balance 13 which Professor Galbraith has an nounced to the world and which has received so much acclaim. This is not the place to examine the theory of wants on which it is founded, which is that as affluence increases, the wants of the consumer become more and more the creations of the pro ducer. Under dissection it turns out to be both empty and pre tentious. There is, of course, no way of distinguishing between wants that are the result of persuasion or example from those that have other origins; or between wants that result from the persuasion of producers and those that result from the persuasion of parents, guardians, teachers, or preachers. The motive of the persuader cannot be set up as a test of the substantiality or in substantiality of the want.

The Pub.lic Sector versus the Private Sector in Brit.ain 239 What concerns us here is not Professor Galbraith's theory of wants as such, but his contention that the structure and in stitutions of our society favor the expansion of private expendi ture and hinder that of public expenditure. The truth is the reverse. Of course, there is a large and powerful apparatus for the stimulation of private expenditure. Madison Avenue does indeed influence people. No doubt it sells goods on a very large scale. But consider the character of its appeal and the resistances that it must meet. Apart from the provision of genuine informa tion, which is the greater part of its work, its weapon of per suasion is the selected fact, the partial analysis, at worst the half lie, not the outright lie. Now the half-lie must meet two powerful resistances; first, the continual assessment of satisfaction against expenditure by the consumer who has to meet the expenditure from his own pocket and knows better than anyone else what the satisfaction means to him; 14 and secondly, the supply of expert information on advertised products by consumers' organizations.

Compare this with the strength of the appeal of the champions of the expansion of public expenditure and the character of the resistances that they must meet. Their half-lies are much more unashamed and effective than those of Madison Avenue. Not even the noblest politician conceives it his duty to present both sides of a case; it is enough that he honestly believes in his own case, which may then be better described as a half-truth rather than a half-lie. What is even more important is that he is not regarded as blameworthy if he deliberately presents his argument in a manner calculated to arouse the emotions of his audience and thus clouds their judgment. No advertiser of soap or tooth paste can hope to match this in persuasive effect. As for the average politician, exaggeration and the biased selection of evi dence are notoriously part of his stock-in-trade. At the very least he uses slogans that blunt the edge of reason and analysis. There is no more preposterous picture than that of the politician who attacks Madison Avenue for a mendacity of which he himself is far more guilty.

Thus it is that, since to be for public expenditure on, say, 240 The New Argument in Economics education appears to be for education itself, and to be against public expenditure on education appears to be against edu cation itself, the half-truths or half-lies of the politician who wishes to spend more and more public money are outstandingly persuasive. But the modern expert in social services is much more per suasive than the politician. He has the enormous advantage of appearing both impartial and scientific. He is thought to have no axe to grind, and he has the prestige of academic training or standing. In fact, he is both biased and, more often than not, unscientific. The expert in health or education is trained to seek improvement in his specialty. To push out the frontiers of prac tice and knowledge means to increase expenditure. As the gov ernment disposes of larger funds than any individual or group of individuals likely to be interested, he is in favor of public expenditure even if he gives a thought to the possibility of private expenditure. If the government is already the principal supplier in his field, he is unlikely even to think of any other possible support for the improvements that he advocates. His training gives him no inkling of the larger effects on society of increased government expenditure. It is likely only to make him contemptuous of those who appear to wish to save the taxpayer's money at the expense of the lives he thinks he can save or the minds he thinks he can improve or the new knowledge he thinks he can discover. As for his scientific approach, he is notoriously as prone to fads and fashions as is the man in the street; the difference is mainly one of sophistication.

There is another type of "expert" whose influence is much more often than not on the side of public expenditure. It is the academic teacher and research worker in the field of social administration. The social sciences have developed an academic fringe that is heavily populated by persons who deal with mat ters of economic importance but who are ill-equipped with powers of economic analysis. This is a field in which it is possible to erect an academic reputation on a foundation of snippets of descriptive work, law, statistics, and general guesswork. Thus it is, for example, that a race of so-called "labor economists" has The Public Sector versus the Private Sector in Britain 241 arisen the principal result of whose work is to promote the re ceived opinions of our time, which are, of course, heavily biased in favor of the views of organized labor, by means of tattered and threadbare economic analysis. Similarly, many who expound the subject of social administration do little more than give a sophisticated dress to popular opinion, which is heavily in favor of the virtue of public expenditure even when it may reluctantly concede that it is beyond the people's pocket. Hence, the pre ponderant weight of what is called academic opinion in this field is thrown on the side of the expansion of public expenditure, and it too is clothed with the prestige of what is believed to be impartial scholarship.

Now consider the resistances to the expansion of public ex penditure. They are mainly two: the limits of taxation, and the vested interests of private provision for the wants concerned. Of course, resistance to taxation is powerful. But under a system of progressive taxation it cannot supply a discipline as strong as the constant attention to his pocket by which the private con sumer checks his own expenditure. That millions of citizens can vote for expenditure which will not, or which they think will not, come from their own pockets must produce a built-in factor of expansion. Thus it is that, despite all the resistance to taxation, the percentage of the national income spent on the social services has steadily increased during the past decade. As for the vested interests of private provision, there is none now of any consequence in Britain. The medical profession was de feated and dragooned into the National Health Service, and is now for the most part a champion of increased public expendi ture. The public schools 15 and the private preparatory schools have retained their own special market and seek no other. The life assurance companies and societies have shied away from a fight with the state on the question of graduated pensions and have refrained from exposing the weaknesses of the new state scheme, which offends all actuarial principles.

But is it not true that we have inadequate schools, hospitals, roads, police forces, and the like? Inadequate for the demand, of course; for the supply is mainly free to the consumer. On this 242 The New Argument in Economics footing the supply will and must always be inadequate. Is it not inadequate in some more absolute sense? Perhaps. But, in the first place, we must remember that much of the supply must come in very large units. For this reason there must always be cases where supply falls short even of recognized demand, for it may not be economic to provide the large unit until there is already some unsatisfied demand. In the second place, if there is an absolute sense in which public provision may be said to be inadequate, the same is true of private provision. Does no one ever go hungry? Is everyone well clothed? Are all houses roomy and sound? It would be tedious to elaborate this.

Let us now examine the problems that the public sector has forced upon the government and the measures it has taken to deal with them. We shall then be in a position to consider the pos sibilities of finding solutions for them in the future. In the case of the welfare state, the greatest problem has been the strength of the tendency of expenditure to run ahead of expectations. When Mr. Aneurin Bevan initiated the National Health Service in 1948, he estimated the cost to the Exchequer at £250 million. Within two years it had reached £490 million. At present it is running at about £850 million, despite successive vigorous measures to reduce its cost by introducing, and then increasing, charges for drugs. Even the Labor Government was forced to do this,16 and the Conservatives have been unable to avoid taking it further. This great increase in cost has been only partly due to the fall in the value of money. It represents a substantial increase in real terms, and, of course, it would have been far greater if restrictive measures had not been applied.

The folly of the original scheme is thrown into sharp relief by the fact, which is now usually glossed over, that restrictive meas ures were not contemplated. If the original scheme had been allowed to run its course unhampered by later financial con siderations, it would have grown like Alice and thus displayed the wonderland character of the thought behind it. Once it became clear even to its champions that health, and indeed other welfare, expenditure was bound to keep rising, its defense shifted to the new proposition that what mattered was The Public Sector versus the Private Sector in Britain 243 the proportion that it took of the national income. As long as this did not increase, the argument ran, not only was there nothing to complain about, but also there was no "real" increase at all. This is what may be called the Theory of Perpetual Poverty: however afHuent a society becomes, there must always be enough poverty to call for a constant proportion of the national income to be applied by the state to its relief. It is, of course, true that there cannot be an absolute standard of poverty. Some relativity is inescapable. Hence a rIch society will reasonably take a more generous view of the definition of poverty than a poor one and will accordingly provide assistance at a higher level. This is the germ of truth that gives some persuasiveness to this theory. The relativity of poverty, however, cannot justify the expenditure of a constant proportion of the national income on its relief. As the national income rises, the increase in the ability of the people to provide essential services for themselves must be greater than the rise in what is popularly accepted as the desir able minimum level of supply. Thus, though the proportion of the national income that will need to be applied to the relief of poverty will fall less than the national income itself rises, fall it must. If the actual proportion ostensibly applied to the relief of poverty does not fall, influences have entered into policy that purport to be concerned with the relief of poverty but are, in fact, shaped for other purposes.

We shall return to this when we consider the requirements of future welfare policy, but we may note here that even the easy test of the proportion of the national income has been sadly failed in the case of the great and growing cost of pension provision. This is now firmly set on a fast-rising curve and is likely to present the welfare state with its most refractory prob lem. The chief reason is the decision taken by Labor, and ac cepted and endorsed by the Conservatives, to provide pensions at prevailing rates for those already too old to make a full, or any, contribution by way of national insurance levies. Even Beveridge was not guilty of advocating this; indeed, he warned the nation of the dangers that would arise from it in the shape of insuperable financial burdens. His warnings were ignored 244 The New Argument in Economics because pensions became a football of politics. The Conservatives have felt obliged to swim with the tide, even though at a cautious distance behind Labor. Sooner or later the system will break down, and the expectations of many of those now looking forward to the enjoyment of state pensions of a certain real, as distinct from monetary, magnitude will be disappointed. A nonactuarial scheme can be sustained only by taxation or by inflation. If the pension liability under such a scheme expands faster than the national income, it must in due course run up against the limits of tolerable taxation or inflation. By one device or another the liability will then, at least in part, be repudiated.

The problems of the nationalized industries have been more varied than those of welfare expenditure but equally, or even more, refractory. They principally concern questions of pricing, investment, and public control. The nationalization acts of Parliament enjoined the newly created boards to pay their way "taking one year with another" or "on the balance of good and bad years." This was a vague injunction from the beginning, and it has never been made precise. In practice the prices charged by the National Coal Board and the British Transport Commission have fallen far short of the level required to meet their full costs, including depreciation at replacement cost. The other boards have generally fared better, especially in the case of electric power supply, but even there it is doubtful whether costs have been consistently covered in full. Coal and transport have accumulated large losses.

In the case of transport, a part of the loss has ben written off by the creditor, i.e., the government, and it seems most unlikely tha t even the balance will ever be made good. The failure of prices to cover costs has been due partly to the mistaken belief that the national interest is served by the supply of what is called "essential services" at low prices, and partly to the reluctance of the government from time to time to face the political unpopularity of sharply raised prices. Looked at from this point of view, the nationalized industries' prices have clearly been too low; but they· may not have been too low if the true cause of the trouble has been that their cost~ The Public Sector versus the Private Sector in Britain 245 have been too high. The remote control of an overlarge scale of operation; the weakness of control over labor; the reluctance, induced by politics, to charge particular classes of customers (e.g., the user of domestic coal, the domestic consumer of electricity at peak periods, and the railroad commuter) a proper differential price-a.ll these have undoubtedly made operations inefficient, with obvious effects on their costs.

The same sorry business record is displayed by the story of investment. Table V (see Appendix) gives a comparison between the returns on investment in private industry and in the nation alized industries. If the disparity between the rate of return on capital in the nationalized industries and that of private industry were due solely to a policy of charging below-market prices, costs being held down as successfully as in private industry, the absence of an adequate business return could not be criticized. The true return on the nationalized industries' capital would take the form of the cheapness of the products purchased by the con sumers, including private industry. In any case there is no reason to expect the same rate of return in industries that differ in important economic characteristics. Nevertheless, on the evi dence of control of costs, there can be little doubt that the nation has wasted an enormous amount of scarce capital by pouring it into the nationalized industries. It is one of the principal reasons for the failure of the British economy to grow as fast as some others have done.

The investment problem that has bemused the government has been not so much the inadequacy of the return, for that is in part the result of pricing policies, but the difficulty of controlling the quantum of investment and the burden imposed on the national budget by the absence of a free-market source for the capi tal required. For some years funds were raised from the banks, but with a Treasury guarantee, except in the case of coal and the airlines, which were financed directly from the Treasury. Since 1956, all the boards have been fed directly by the Treasury in order that, as Mr. Macmillan, then Chancellor of the Exchequer, put it, he who paid the piper might call the tune. But, of course, this has in no way solved the problem 246 The New Argument in Economics of finding some rational criteria for the control of investment. The piper, in fact, does not know what tune to call. Painfully slowly the government has begun to tackle these problems of pricing and investment. More and more it has tried to make the boards simulate the practice of private enterprise.

Uneconomic coal mines and railroad lines and services are being abandoned at an accelerated rate. And, in April, 1961, it announced a new pricing policy under which the boards are to plan to "break even" over five years and to pitch their prices at a level not only to cover depreciation at replacement cost but also to produce a surplus as a contribution to further capital development. 17 Undoubtedly the changes will improve theeffi ciency of the nationalized industries. But they have not gone very far. There will still be plenty of uneconomic coal mines and railroad services in operation, and the National Coal Board, for example, will still refrain from working its most profitable units to the full, namely, its open-cast units, in defer ence to the National Union of Mineworkers, whose members do not produce open-cast coal. As for pricing, nobody knows what sort of surplus is to be aimed at or is possible; nor is there any valid reason why present customers should be forced to pay for future capital development.

The problem of public control has proved impossible to solve. Those who preached nationalization always presented it as a means of making industry accountable to the people, private industry being alleged to be accountable only to its managers, shareholders, or financiers (all, of course, being greedy and antisocial in the myths of the nationalizers). As far as account ability is concerned, nationalization has proved to be a fiasco. This was very easily predictable. Parliament is not a body equipped to control the operation of business, and not all the consumer consultation in the world (by means, for example, of the various consumer councils set up under the acts) can possibly replace or even simulate the constant and pervasive control that the consumer enjoys in a free market. What can we now do? Must the British people be forever saddled with this large, unmanageable public sector? The answer The Public Sector versus the Private Sector in Britain 247 is, in principle, clear, though its application is beset with ,difficulty.

Take first the welfare state. It is essential to begin by recog nizing that the largest element. in its foundations is humbug. In .a nation that tends to run to humbug in its less admirable moods, this is perhaps not surprising. The welfare state rests on humbug because it was ostensibly established to relieve pov erty, .while what it in fact does is something else. Beveridge's four giants~Want, Disease, Squalor, and Ignorance-were to be banished from the land, and minimum standards were to be secured for everybody. In fact, the true purpose of the welfare state is to socialize the provision of certain services, whereby it actually reduces standards below what they might be. Yet so captivating is the name "welfare state" that millions of citizens think that it gives them or their fellow citizens welfare that they would not otherwise enjoy. The method of the welfare state is to require that everyone must pay for and be free to take state-provided services in order that those who cannot provide them for themselves shall have them. Thus, it raises taxation to a level which reduces the nation's wealth by weakening the incentive to produce and save, and which holds over our heads the constant threat of inflation (even though at any given moment an increase in taxation can, for the time being, have a counterinflationary effect). It under mines both the personal responsibilities that are the warp and woof of freedom and the family responsibilities on which the wholesomeness of society rests. It teaches the electorate to vote for things that most of them do not intend to pay for. Above all, by providing services for all, it fails to provide fully effective services for those that are really in need.

In place of the welfare state, we need a state whose citizens are both free and humane. If they are free, the great majority will be able to provide for themselves-and at an ever rising level, owing to the wealth-creating power of freedom. If they are humane, they will vote the state sufficient resources to pro vide at an ample level for those (who will be an ever-dwindling proportion of the population) who cannot provide for them ..

248 The New Argument in Economics selves. Against the Theory of Perpetual Poverty that imbues the welfare state, we must set the aim of emancipation from poverty, which enables the state to act as a provider as long as it is necessary, but to wither away when it ceases to be necessary. Policy for Britain thus requires the following fundamental changes: 1. The institution and progressive application of tests of need for state social services. This should begin with the general· practitioner part of the health service, provision for old age, and the higher educational services. All are feasible, and the transfer to private provision of those above the level of need would be a powerful stimulus to experiment and improvement. 2. The development and promotion of the private supply of these services. Here the state could properly assume the function of providing information on available or pro· spective supplies, and it could stimulate the organization of group purchasing.

3. In the interim, the wide extension of the principle, already adopted minimally in the case of National Health Service drugs, of charging fees for state services. The charges should progressively be brought up to full cost level until there is competition on equal terms between state supply and private supply. Let us now turn to the nationalized industries. The comparison between their part and the welfare state's part of the public sector reveals a paradox. While the idea of the welfare state is widely popular, many people have begun to see the need for dismantling it by changes such as those suggested above. On the other hand, the nationalized industries are widely unpopular (even among Labor voters); yet very few indeed would seriously propose to denationalize them. Nevertheless, there is no com.. plete solution for their problems short of denationalization. It is true that great progress can be made by simulating as far as possible the aims and methods of private enterprise. But this The Public Sector versus the Private Sector in Britain 249 cannot go the whole way. First, the problem of pricing cannot be solved by leaving it wholly to the free-market mechanism as long as large elements of monopoly power remain with the nationalized industries. Secondly, the investment problem cannot be dealt with in the manner of private industry because only the state can hold the equity in the nationalized industries. A monopolistic supplier of risk capital is in a different position from free-market suppliers. Thirdly, as long as these industries are large and important (and not marginal state investments like, say, the British Government's holding in the British Petroleum Company), it will be impossible to prevent political interference with their managerial policies.

Yet denationalization is almost universally rejected, partly because it appears to be too doctrinaire, partly because it is too easily dismissed as merely turning the clock back. But the main reason given is that it is impossible, and this on two grounds. First,. it is said, you cannot unscramble eggs. These industries have been so fully integrated that it would not be possible to split them up without doing great harm to their efficiency, and the market would not take any of the major ones, at least, without very considerable splitting. Secondly, it is said, the market neither could nor would supply the quantity of risk capital necessary to buy up these industries. The first objection does not survive examination. There are no insuperable technical or managerial difficulties in splittiqg even the largest of these organizations. Indeed, in the case of coal, individual mines or groups of mines form natural units, the splitting off of which would present no difficulty, despite the present provision of certain essential services from the national or regional centers of the Coal Board.

The second objection is at present admittedly an insuperable one, but for one reason only, namely, that as a Labor Govern ment would renationalize any industries sold, there would be no buyers except at give-away prices. In this way, and to this extent, the Labor opposition still rules the country. If the Labor Party wins the next election, there will, in any case, be no question of denationalization for a long time. But if the Con250 The New Argument in Economics servatives win it, the victory will be their fourth one in suc cession. It is quite likely that then the Labor Party will abandon nationalization, as the German Social-Democrats have done, or cease to bean effective opposition. The question will then be whether the market will be able to supply the necessary risk capital. Now in this respect the situation has recently been transformed~ The immense growth of private and. institutional savings, the rise of the cult of the equity, and the new-found legal freedom of trustees to invest in equities have together produced so abundant a supply of risk capital that, taken gradually over a period of years, denationalization would meet no insuperable difficulty on at least this score. The test would be the prospect of profitability.

Rough stability between the relative proportions of the public and private sectors may well be our lot for the foreseeable fu ture. It will not serve· our need for economic growth and personal freedom, and if we accept it, the fault will be in ourselves, not in our stars. APPENDIX TABLE 1 PERCENTAGE OF GNP SPENT BY CENTRAL GOVERNMENT AND LOCAL AUTHORITIES YEAR. 1938 . 1946 . 1950 .. 1951 . 1952 . 1953. • . 1954. . 1955 . 1956 . 1957 . 1958 . 1959. . 1960 .. ON CURRENT ACCOUNT ONLY 25.8 55.9 34.6 34.4 35.8 35.2 33.9 33.1 32.8 32.0 32.7 33.6 34.0 ON CURRENT AND CAPITAL ACCOUNT n.a. 59.0 39.2 41.0 41.5 40.25 38.0 36.8 37.0 36.0 36.6 37.4 37.8 The Public Sector versus the Private Sector in Britain 251 TABLE 2 PERCENTAGE OF POPULATION IN CIVIL EMPLOYMENT EMPLOYED BY EMPLOYED BY CENTRAL GOVERNMENT AND NATIONALIZED YEAR LOCAL AUTHORITIES INDUSTRIES 1939 . 7.7 1946 . 11.5 1950 • 11.6 11.2 1951 • 10.5 12.0 1952 • 11.7 12.8 1953 • 11.6 12.7 1954 • 11.5 12.2 1955 . 11.3 11.5 1956 . 11.4 11.2 1957 . 11.4 11.2 1958 11.5 11.2 1959 • 11.6 10.9 TABLE 3 PERCENTAGE OF GROSS FIXED INVESTMENT AND OF GROSS DOMESTIC PRODUCT ACCOUNTED FOR BY GOVERNMENT ENTERPRISES YEAR.

1955 1956 •.. 1957 • 1958 • 1959 PERCENTAGE OF GROSS FIXED INVESTMENT 25.1 25.1 26.6 27.1 28.2 PERCENTAGE OF GROSS DOMESTIC PRODUCT 14.1 14.6 14.5 14.0 13.8 TABLE 4 ANALYSIS OF CENTRAL GOVERNMENT'S AND LOCAL AUTHORITIES' EXPENDITURE 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 PERCENTAGE ATTRIBUTABLE TO DEFENSE 18.8 25.0 28.4 28.3 28.3 26.0 25.1 23.1 21.6 20.5 SoCIAL SERVICES 42.2 39.4 39.9 41.2 42.3 43.2 43.2 44.8 46.0 46.7 HOUSING 704 6.9 7.5 8.1 7.8 6.7 6.1 5.8 5.0 4.7 EDUCATION. 9.7 9.5 9.5 9.5 10.3 10.8 11.5 12.6 12.5 12.9 HEALTH. lOA 9.5 8.8 8.6 9.0 904 9.5 10.0 10.0 10.2 NATIONAL INSURANCE • 14.7 13.5 14.1 15.0 15.2 16.8 16.1 16.4 18.5 18.9 OTHER • 39.0 35.6 31.7 30.5 2904 30.8 31.7 32.1 32.4 32.8 ~ r-'t ~ ~ ~ ~ <~ E:: ~ ~ ~ ~ ~ ~ C'"to ;;. ~ ("") C ~ C ~ 5' The Public Sector versus the Private Sector in Britain 253 TABLE !) NET RETURNS ON CAPITAL (PER CENT) 1955 1956 1957 1958 1959 MANUFACTURING AND DISTRIBUTION 17.4 16.3 15.5 14.3 14.9 IRON AND STEEL 19.0 16.8 16.4 14.1 13.3 NATIONAL COAL BOARD • 0.4 6.8 3.6 2.8 1.6 ELECTRICITY COUNCIL AND BOARDS 5.1 4.7 5.0 5.7 5.6 GAS COUNCIL AND BOARDS 4.0 4.4 4.5 3.4 3.3 BRITISH TRANSPORT COMMISSION 1.9 0.2 -0.6 -2.1 -1.3 BRITISH OVERSEAS AIRWAYS 4.2 3.4 -0.2 -0.7 3.9 BRITISH EUROPEAN AIRWAYS 7.0 4.1 7.8 4.7 8.6 POST OFFICE • 4.4 ' 6.9 7.5 8.0 8.6 NOTES 1. We have had an almost complete biennial series of crises since the War; viz., in 1947, 1949, 1951, 1955, 1957 and 1961.

2. They denationalized most of the steel industry and a goodly part of the road haulage (i.e., trucking) industry. Steel and road haulage were nationalized by the Labor Government shortly before it lost power, and their new nationalized organizations had hardly got under way when the Conservatives rode in again. One large steel company remains in public hands, and the government intends to dispose of it when the private capital market appears ready to take it on reasonable terms. There appears to be no serious intention now to get rid of the remain ing public part of road haulage (i.e., "British Road Services"). As the government has missed the opportunities when the private market was ready to take up the steel company on terms that in retro spect can now be seen to have been reasonable, a not excessively jaundiced observer may conclude that the Conservatives are unlikely to dispose of it at all.

3. But not wholly. Directives to the banks to limit loans, for example, are of a different character from raising the rate of interest and are akin to physical controls. Subsidies to private enterprise (e.g., to agriculture and some industrial companies) are, of course, in the last analysis poison to the free-enterprise system.

254 The New Argument in Economics 4. Partly by design, but largely also as a simple result of greater laxity in control. 5. And probably also water supply; but there is not much party contro versy in this because water supply is already largely in public hands, and where it is not, the suppliers are closely controlled by statute. 6. Consider, for example, the almost fantastically naive confession of Mr. Emmanuel Shinwell, who, after nationalizing the great coal and electric power industries, stated that on assuming office he expected to find that his party would have ready a blueprint for nationalization, for after all it had preached it for two generations. He was astonished to find nothing in the locker. That he himself had spent a long life preaching nationalization without knowing, and obviously without caring to know, whether there was a blueprint or not, appeared in no way to abash him.

Consider also the current password amongst the designers of Labor's program: control over "the commanding heights of the economy." This is brilliantly fashioned for Labor's needs; for it gives the impression of strategic mastery without necessarily meaning anything at all (other than the sense in which central banks already exercise control). The use of a military metaphor is unconsciously revealing of the mind of the economic planner. Of course, to draw attention to the absence of a blueprint for nationalization is in no way to suggest that Labor's policy would have been better with a blueprint than without one. It might have been worse. 7. There is little doubt that this is correct, even though at the time of writing (October, 1961) the Conservatives' popularity appears to be crumbling. 8. In the European, not the American, sense, of course. I am referring here to debate on economic and social matters only, and among the general public, not among professional economists. There are still some fields in which Britain is splendidly liberal.

I know, of course, that some American libertarians speak in similarly gloomy terms of their country, but illiberal notions have won a far deeper and more pervasive influence over the unconscious attitudes of men in Britain than in America. The mean animus against the eco nomically successful (masquerading under notions of fairness and moral ity); the tenderness to those who resist economic change; the almost automatic tendency to think that if anything appears to be wrong, the state must put it right; the widespread assumption that the incomes of rich taxpayers (and only of rich taxpayers) belong to the state, in the sense that a reduction in their taxation is a "handout" of the people's money-these are the distinguishing marks of the attitudes of millions of Bri tons of all classes. 9. That is to say, the openly declared theorist. Men of common sense also act on theory, of course, but are not conscious of it.

10. The great exception to this is the tariff reform campaign of the early years of the century, culminating in the protectionism of the thirties. When the Conservatives, in a regrettable aberration, allowed themselves The Public Sector versus the Private Sector in Britain 255 to be captured by the Radical, Joseph Chamberlain, they adopted and tried to expound German theories that were, in fact, through and through etatist. But it was poorly done. Mostly their protectionism was on a man-in-the-street level even in the Cabinet chamber. Their phi losopher-satesman and leader, Balfour, could hardly conceal his disdain for the level at which some of his colleagues pitched their appeal. II. There are some things in Britain that the people love to tell themselves are the best of their kind in the world. British justice is an exaIllple; but the very fact that the popular belief in the superiority of British justice is mainly well founded is an unfortunate cause of our failure to notice that there may be a few features of the organization of justice in which we have something to learn from other countries. Now this tendency to pat ourselves on the back (we even pat· ourselves on the back for not blowing our own trumpet!) can have a powerful political influence. Thus the Left has propagated the preposterous myth that we have a National Health Service that is the envy of the world.

Described in this way, the National Health Service comes to excite pride even in the Conservative's heart, despite his awareness of its many defects. 12. Similarly the hard-faced men who had done well for themselves out of the First World War and who were once alleged to throng the Conserva tive benches have disappeared without trace and without successors. On the other hand, the Labor Party has always had, and still has, a contingent, corroded with self..,righteousness and envy, even more un pleasant than any hard-faced men. 13. John Kenneth Galbraith, The Affluent Society (Cambridge, Boston: 1958), chap. 18. 14. Except in the eyes of the self-styled champions of the common man. Their contempt for his common sense and intelligence is as baseless as their flattery of his probity and integrity. 15. I.e., AngliceJ private schools. 16. In protest against which Mr. Bevan, who regarded a completely free health service as his own pet child, resigned.

17. See Command Paper 1337, Her Majesty's Stationery Office, April, 1961.