Running an Economy – Part 2

In part 1 of this series, I covered the \’spectrum\’ of how to run an economy; from a full \’free market\’ economy to a \’socialist\’ utopian central planning model. When government spending gets to a high percentage of GDP (think 45-50% and above) there can be obvious benefits including a highly educated workforce, efficient healthcare, strong national defence and even boosts to production (after all, if we\’re all being tasked with producing a smaller range of goods and services, then in theory we should all become more efficient at producing them over time).  Unfortunately, this \’focus\’ usually leads to a collapse of some sort as workers lose their inspiration and ability to innovate and the system becomes more and more bureaucratic. Productivity slows down and borrowing continues to increase until the system collapses.

On the other end of the scale, if government spending gets too low, the system also starts to collapse – crime runs rampant, there\’s no rule of law to protect personal assets or rights (good luck defending your home ownership against a armed mob). Such a state is just as liable to collapse as an overly centralised one; in Italy, the rise of the Mafia can be attributed to such a lack of central government – the Mafia was the government, serving up justice…until they became corrupted themselves.

Adam Smith\’s famous treatise The Wealth of Nations contains a number of concepts fundamental to our modern understanding of economics. One of the most basic of these is the idea that business owners will seek to maximise profits – by doing this, the whole of society benefits as new products are produced in sufficient quantity to be provided to those who can afford them. If the price rises too high (too much profit) then competitors enter the market and drive the price down forcing the original business owners to seek new streams of profit. If new entrants are prevented from entering the market, you end up with a \’monopoly\’ (a single supplier) or \’oligopoly\’ (a small number of suppliers) which limits the incentive for quality standards and increases the likelihood that individuals will be taken advantage of by the suppliers. As such, the government must intervene to prevent monopoly situations of essential goods and services (imagine if there was only one supplier of drinking water – they could charge £10 a pint and we\’d all be dying of dehydration).

The thing is, monopoly power doesn\’t just arise from private business. A government can also in a monopolistic position and this becomes increasingly likely the more they spend as a percentage of GDP. Government monopolies tend to have strong unions (NHS, Post Office, Transport for London) and sell themselves as \’essential services\’ enabling them to hold the rest of us to ransom as they demand higher wages and lower working hours. I\’ve lost count of the number of time TfL staff have gone on strike since I moved to London – by comparison I\’ve never seen anyone go on strike in any of the private sector companies I\’ve worked at.

I\’m not saying that these companies are evil or out to destroy us – by their very nature they are designed to support society at large. Unfortunately, their mentality is a high handed one – they have little to no real competition and so can do whatever they like. No matter how bad the service gets, or how high the prices, customers will have a very difficult time finding an alternative to use. Even if the private sector wanted to establish an alternative, how would they go about doing it? The barriers to entry are too high and the potential for profit too slim (if you don\’t believe me, just look at the enormous loss all three of those organisations are making every year).

The proliferation and growth of these organisations leads to a gradual \’drag\’ on a country\’s wider economy. China recently built a hospital in seven days this year – yes, just seven days from a plot of empty land to a fully functioning hospital. The UK, by comparison takes years to do the same thing. This leads private companies to move more and more jobs to more dynamic economies (read overseas), leading to falling standards for those of us left behind. Follow this train of thought a bit further and where do you end up? The UK Independence Party, Brexit, Donald Trump, and riots in France as workers are able to find fewer and fewer \’well paying jobs\’ and the national infrastructure slowly dies under a mountain of red tape and bureaucracy.

Fast forward even a bit further and you see the infrastructure starting to be actively attacked by the population. Look at the cries to stop the TV licence for the BBC. 100 years ago, this was a jewel in our crown, now, people increasingly see it as biased and irrelevant – it doesn\’t suit their needs and so they don\’t want it anymore. The response of the BBC; to talk about how \’essential\’ it is.

This is not, I would suggest, an inevitable decline – it can be reversed through a focused expenditure by the state and a breaking up of monopoly power in the private sector. The two sides of our economy must work together if we are to stand a chance of driving our economy back towards growth and improving standards for all. The on-going situation with coronavirus has put this into sharper relief but the economic reality is the same; money spent now must be paid back in the future. So let\’s make sure we spend it wisely.

 

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