Getting tired of being told the public sector/government does not create wealth, that can only be done by the private sector.  This is demonstrably untrue.  The Soviet Union ran for seventy years – maybe not very efficiently, but well enough to put the first man in space and beat the Nazis – on public sector production.  The reason the claim is made is basically to justify a low tax economy with minimal public services.

Still, it’s worth saying why the assertion is untrue, because it is lazily spouted (and left uncontested) in many discussion shows.  A business executive can trot it out as if it was a law of nature that no-one could dispute.  In fact state creates value in a number of ways:

1. Simply providing law and order, property rights and defence creates wealth. Assets that can be defended in the courts and protected by police are worth more than those that can’t.  If you don’t think so, have a wander round the Congo basin to see what an economy does without that.  Welfare services that ensure a healthy population create efficient workers (and also, in passing, effective soldiers. Some of the push for a British welfare state came when it was found that about half our young men were too malnourished to carry a rifle in the Boer War).
2. The state has a role in direct provision of many services, like education and health care. Now, these could be provided privately, and let’s not argue whether that would be better (I’ll spare you the rant about US health care or UK rail services). The truth is the bulk of UK education, health and many other services are provided by the state.  The very existence of private providers shows that the state is wealth providing, for the same activity often goes on in both sectors.  An example: I have two knees.  One had an NHS cartilage operation, the other a private cartilage operation.  Is it seriously maintained that one of these operations created wealth, but the other one didn’t ? Or that a kid doing “A” levels at Eton is getting wealth creation, but not at Slough Comp next door ?
3. The state is often behind innovation. It is conventional to depict the contribution of the public sector as behind the times, a sluggard compared with the dynamism of a changing privately owned world.  Except for antibiotic drugs, discovered by a public sector researcher. Or the jet engine, where the state had to lick a failing private operation into shape. Or DNA & gene therapy, where the latest breakthroughs are announced from public hospital research departments, and universities. Or the internet.  Professor Mariana Mazzucato’s book “The Entrepreneurial State” shows how the new economy is based on support from the public sector.
4. The state can add value by granting permissions – like adding planning permission to a tract of land, vastly increasing its worth; allocating frequencies for radio stations and mobile phone companies; mapping areas for oil & gas exploitation; or granting permission to a business merger, allowing companies to reduce costs and raise profits. This aspect of value adding activity is rarely mentioned, but is plainly true.  The point is to ensure that the nation benefits from this power to permit – which it does in the case of auctions of phone wavelengths, but is less obvious in the area of building planning. Sometimes supermarkets or developers undertake to add a feature of public value to their project – affordable housing, social facilities, better access roads – but it’s rarely done well.

The state is so important in the modern economy that big business puts a lot of effort into getting it to do what they want.  It’s a fallacy to believe that the new right want a minimal state.  They would like quite a big state, but one that benefits them, allocating rail tracks to them, asking them to run social services, schools, healthcare and prisons, buying their fighter-bombers, selling them postal services and water supply and training contracts.  James Galbraith (son of the great JK) dealt with this deliciously in “The Predatory State” – “a system where entire sectors have been built up to feast upon public systems built originally for public purposes”. George Monbiot sometimes argues that this process has gone so long and so deep that progressives need to think of abandoning the idea of the state as a knight riding to social rescue.

So, in summary, the state is an essential part of a functioning modern economy.  It is not a limp parasite, as the right suggests, nor a way of using some of the wealth created by others for social good, as wimpy centrists sometimes advocate.  Anyone running a modern country must find ways to use the power and wealth of the state, rather than seek to disempower it.

Footnotes since writing this.  Simon Wren Lewis has demolished the ‘shrink the state’ nonsense after the spring 2024 Budget, and there’s an excellent article in the London Review of Books by Prof Stefan Cillino here. 

One reason I started a blog – really the only one (I have no fantasies about influencing the flow of public affairs) – was to get things clear in my own mind.  At the moment, it’s quite hard.  I am a card carrying liberal, so am against Trump & Brexit, and in favour of public spending and open debate.  This does not mean I have a list of beliefs that all fit neatly together, and I think that’s a good thing.  At present, controversialists of both sides appear to believe things according to how it affects their tribe.  An example – conservatives who believe in balance budgets say that cutting billionaires’ tax will expand the economy, create more wealth and reduce the budget deficit.  Er, sorry, it won’t.  On the other hand, though, progressives who have spent years saying (rightly) that far too much is being made of worries about government budget deficits and the National Debt are now apparently alarmed that Trump’s tax cuts will increase the National Debt and leave our children with a financial millstone round their neck.  No, no, no – that’s what brainless conservatives say.  We know it’s not true, and it doesn’t become true just because the government, outrageously, gives tax cuts to billionaires.

Another lot are Modern Monetary Theorists, who tell us that the government does not need to tax to fund public services, as it can effectively print money.  The function of taxation, in this mindset, is to control inflation.  OK, it’s arguable, and even the Treasury is now leaning their way on a theoretical basis (though good luck entering an election by telling the voters that there really is a magical money tree).  But if tax is there to control the price level, it surely acts by restraining spending, and billionaires actually spend a very low proportion of their income.  We’ve been saying it for years, us progressive folk.  That’s why tax cuts to the rich don’t reflate the economy.  But if that’s true, increasing taxes on the top .01% won’t reduce consumer spending.  Logically, if we are using tax in the way that MMTers say, we don’t need to tax the super-rich.  Or have I missed something ?

(My view, for what it’s worth: you sometimes need to make a choice between public services and private consumption.  If (at a time of full employment) you want to allocate more resources to public works, than you have to throttle back on private expenditure.  A progressive tax system is quite a good way of doing that. In fact, it’s the only good way).