Building shield

Last week, I wrote about small state interventionism – which has emerged as the closest thing that the Government has to an economic doctrine.

In a piece originally published in the Financial Times and now available on his blog, John Kay argues that George Osborne’s approach owes more than a little to Ed Miliband’s big idea of ‘predistribution’ – which he defines as follows:

“Instead of fixing the results of the market, you try to fix the market itself.”

A classic example of such a policy is the minimum wage:

“Britain’s statutory minimum wage was introduced in 1999 at £3.60. A range of studies showed that this sensibly cautious introduction did not have the widely predicted negative effects on low-skilled employment, and that has allowed substantial increases in the statutory minimum — to £6.50 — to be implemented since then.”

Of course, in this regard, the big difference between Miliband and Osborne is that the latter is also committed to a smaller state, intervening in the marketplace to reduce government spending (and therefore taxation and/or borrowing).

By definition, small state interventionism (SSI) supplants the previous economic doctrine:

“From 1997 to 2010, when Gordon Brown was chancellor and then prime minister, the dominant influence on UK economic policy was a doctrine I call redistributive market liberalism. The thrust of RML is a separation of production and distribution, of efficiency and fairness. Broadly speaking, the market should be allowed to get on with the job of providing goods and services, and the state should intervene only to remedy adverse distributional results.”

Intervention in the case of RML meant redistribution – and consequently a big increase in government expenditure:

“The most important practical manifestation of the doctrine was the tax credit scheme Mr Brown introduced in 1999 and then extended to the point at which its cost today represents about one-third of total expenditure on welfare in the UK.”

In theory, this was intended as a redistribution of wealth from the rich to the working poor. But given the expansion of public and private sector debt in this period, it was also a redistribution of resources from the future to the present, and from businesses that invest in a well-paid, well-trained workforce to those that don’t.

Kay makes no mention of what could be counted as a second pillar of RML: the expansion of the public sector workforce. This, too, required an increase in debt-funded government expenditure and thus can also be seen as a form of redistribution – which, without wholesale nationalisation, still achieved a major shift in the balance between the private and public sectors.

In shrinking the public sector payroll (while rapidly expanding private sector employment) and cutting back on tax credits (while seeking to push up wage rates), the Government is bringing about a massive change in the way in which the country makes a living. The switch from RML to SSI is therefore a very big deal indeed.

Not everyone is happy. Small state interventionism is opposed by the big state left, but also from those on the right who can’t see beyond the word ‘intervention’. John Kay makes a very interesting point in identifying a third source of opposition:

“RML has for some time had a following among economists. They are by training predisposed to applaud the virtues of the market but many, especially in universities, have leftist political inclinations. This doctrine plays a big part in the thinking of those involved in policymaking in finance ministries and global organisations. Its technocratic character means, however, that it has never had much wider political appeal.”

Being technocratic in character, this school of thought has focused on the theoretical benefits of redistributive market liberalism, while overlooking the harmful side-effects.

Small state interventionism has a very different nature, being political not technocratic, and concerned with outcome not theory.

4 comments for: Further notes on small state interventionism

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