State your case

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.

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