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Brown's market imperfections Samuel Brittan: Financial Times 14/02/03 Anyone who regards Gordon Brown, UK chancellor of the exchequer, as an Old Labour wolf in New Labour sheep's clothing should read the full text of his landmark speech to the Social Market Foundation on February 3. It is many years since we have had from a serving minister such a good exposition of the role and limits of markets and how their deficiencies can often be remedied by more competition rather than state ownership and control. Indeed, I was reminded of some of the utterances of Ludwig Erhard, the father of the former German "economic miracle", and of Karl Schiller, the Social Democratic reforming leader who came out with a slogan remarkably similar to Mr Brown's: "The market where possible, regulation where necessary." A decently printed copy of the speech should be disseminated for adult education. Some of the shine has inevitably worn off the halo of the chancellor's macroeconomic policy because of the world economic setback. The reasoning is wrong-headed. It is absurd to blame the British government for stock market slumps that have been worldwide. Some of the same people who rightly criticise the excessive rigidity of the European stability and growth pact are quick to attack the chancellor for prospective budget deficits emanating from slightly more discretionary fiscal rules. And anyone on the right who feels sympathy for President George W. Bush's tax-cutting proclivities should be very quiet on prospective British deficits. Throughout history, wars and recessions have been accompanied by increased government borrowing. If I wanted to quibble with the speech, it would be that, although markets are mentioned favourably dozens of times, the price mechanism, which is essential to their functioning, is first mentioned only at the bottom of page 11 of a 20-page speech and hardly at all after that. It is of course the labour markets that are at the root of this inhibition. Talk about inflexibility in, for instance, continental European payment systems is jargon for workers being priced out of jobs. But market-based systems are not just an excuse for lower wages. Many in public service, especially in south-east England, are clearly paid much less than their market rate. The chancellor does not go even a fraction of the way towards breaking up centralised nationwide bargaining in the public services. Nor did any of his Conservative predecessors. Whenever there is a conflict inside the Treasury between its desire to promote market forces and its commitment to holding down a crudely defined cash total of spending, it is always public spending control that prevails. Mr Brown did, however, go astray when defending the role of public sector health provision. His pinpointing of the deficiencies of a purely insurance-based market system was spot on. But his analysis was confined to two models: the National Health Service and US medicine. He said nothing, for instance, about continental models that combine elements of markets and prices within a state-backed system. It is not, however, these fine points about the public services that have led to business disenchantment with the chancellor. The flaw can be quite precisely stated. His interventions are nearly always defended by the need either to make markets more competitive or to make them work better where they create external costs and benefits that are not fully priced in the market. Nearly all his measures have been crawled over by economists and economically literate professionals with this aim in mind. Their mistake is a simple, logical one, arising from their being too close to individual details to see the big picture. The problem is that regulations, taxes and other interventions, each of which can be separately justified, add together to a climate of control freakery that undermines the original good intentions. If it makes economists feel better, I can call this the aggregation problem. When all the hundreds of incentives, penalties and tax breaks are added together it is more than a full-time job to keep up with them. No wonder the smaller and medium-sized firms, which do not have top personnel to spare for these purposes, are more up in arms than the bigger enterprises. I once said that Mr Brown would find it difficult to make a speech in favour of motherhood and apple pie without establishing a national award for the former and a tax incentive for the latter. Real entrepreneurs mostly want to be left alone, not showered with incentives. Of course, they also want to have their cake and eat it, and retain or expand a few government schemes of special benefit to themselves. But we need to give most weight to their general sense of being over-regulated.
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