The need for a conservative rudder, Simon Upton

In 1987 I was rash enough to publish a slender volume of essays with the title The Withering of the State. It was written in the months preceding the biggest stock market crash for a generation and fully two years before the collapse of communist regimes in Europe and elsewhere. They were heady days, particularly so in New Zealand where the familiar recipe of financial market deregulation, reduced border protection and privatisation had arrived late and in undiluted form, turning one of the world’s most complacent and protected economies into a test bed for liberalisation policies. Despite the sweeping changes, I predicted that the state would wither away only when citizens were prepared to opt “for a society which is at once disaggregated, decentralised and diverse”. Achieving a withering of the state, I concluded, would require a fundamentally different view of the possibilities of politics.

Seven years on, it is useful to ask whether there is anything different about the way we conceive of politics in western democracies that would indicate a significantly reduced role for the state. Amid the free‑market triumphalism of the 1980s, that was a fashionable scenario (along with the end of history, the new world order, the common European home and the retreat of the nation state under pressure from trading blocks without and devolution within).

While the role of the state has undoubtedly changed, there is no constituency for a radically smaller species of government; if the political left failed to regenerate its intellectual vision during the 1970s, the intellectual forces marshalled behind the banner of market liberalism have also failed to provide durable alternative solutions to many issues that retain a high political profile.

In short, while the effective reach of the state in western democracies may have changed profoundly (and in some cases, has clearly shrunk), the political mobilisation of resources remains as potent a possibility as it ever was. In other words, any vision of a steadily receding state whose functions will be taken over by spontaneous irruptions of mutually beneficent market exchange is fanciful. For that to occur, there would have to be a collective abstinence from political activism totally at odds with public expectations. The temptation to mount ballot box coups is alive and well.

There can be no doubt that ideas played a key role in explaining and, at least in part, legitimising the liberalisation that saw politicians rely increasingly on market processes rather than political management. Two lines of intellectual analysis were decisively subversive of the old order. The first was the writing of F A Hayek. Hayek has, at times, attracted the sort of cult status more usually associated with those immensely popular but ephemeral writers whose appeal resides in their ability to capture the sentiment of the times rather than to contribute any original insights ‑ the Friedmans, Galbraiths and others whose work will be of purely historical interest a century from now.

Hayek’s contribution was of a different order. His challenge to socialism was an epistemic one: that the information available to governments to achieve their ends was inevitably so limited that the unintended consequences of acting in ignorance would almost certainly overwhelm their projects. More profoundly still, Hayek offered the notion that state control over large areas of human endeavour inevitably impoverished the information available to societies in problem‑solving. In an increasingly complex and inter‑related world ‑ the global rather than the tribal society ‑ anything that limited the production of new information posed a threat to the stability of civilisation as a whole: to limit the generation of knowledge through the countless voluntary exchanges that characterise free markets was to concentrate our risks and reduce our room for manoeuvre.

It is Hayek’s description of the epistemic role of markets that places him alongside the most important political economists of the eighteenth and nineteenth centuries and accounts for his enormous influence. By locating his critique of socialism in a theory of information rather than individual sovereignty (with its attendant talk of rights and interests), Hayek provided an account of market institutions that avoided the ideological baggage of so much New Right advocacy. Hayek’s magisterial ‑ and relatively accessible ‑ analysis played a very important part in undermining the confidence of policymakers and politicians in the efficacy of government intervention. No single thinker did more damage to the notion of the planned (or socialist) economy or its social democratic managed equivalent.

The second intellectual strand to influence a new generation of economists and policy analysts was public choice theory of which the most famous proponent is James Buchanan. At the heart of public choice theory is the observation that individuals are motivated by the same interests whether they act in the marketplace or in the political sphere. This claim Buchanan describes as being rooted in “the eighteenth century discovery of the essential uniformities of human nature upon which any understanding of, and hence prospect for reform of, social intervention must rest”. At the core of this understanding lies homo economicus, who acts rationally to secure and maximise his or her interests whether in the public or private sphere. This insight provided an extremely powerful critique of public policy and political motivations. Much of what was advocated in the name of the “public good” could be exposed as the advancement of private and sectional interests under the patronage of the state.

As a means of exposing the cycle of electoral auctions that has dominated all western democracies, public choice theory has had a devastating and subversive impact on many programmes that enjoyed considerable prestige in the years following the second world war. Schemes of industrial encouragement, social security and environmental protection have in varying degrees been found vulnerable to attack on the grounds that, whatever voting coalitions they may have secured for their sponsors, their contribution to the public good was much more questionable. A species of analysis, public choice theory was tailor‑made for reforming and iconoclastic politicians and their advisers who sought to undermine the old virtues of the mixed economy and the welfare state.

But it is important to understand that, whatever facilitating influence these ideas may have had, they were not responsible for the retreat from the interventionist state. Politicians are rarely driven by philosophical convictions and those who are depend heavily on the tide of public affairs flowing in their favour if they are ever to be allowed to apply them. It is surely no coincidence that the prospect of sovereign bankruptcy in 1976 and economic paralysis at the hands of union militancy preceded the Thatcherite revolution, or that endemic corruption on a scale that eventually paralysed the established political parties was the prelude to sweeping electoral reform in Italy.

In New Zealand it was a crisis of public indebtedness that emboldened a traditionally left‑wing party to make a dash for liberalisation. However compelling the intellectual case for change, the catalyst was rooted in a crisis of domestic politics that owed little or nothing to ideological convictions. Change was, simply, inevitable because the status quo had become unsustainable (as it proved, with so many variations in places as diverse as Eastern Europe, China and Latin America). The cause of those crises was rooted in the real lives and economies of the societies in question. Understanding those causes is important in forming a judgment about how durable the changes are likely to be and the extent to which popular convictions about the role of the state have in fact been transformed.

The following influences seem to have been widespread and important.

First and foremost was the shadow of gathering fiscal crises. It is inconceivable that well‑resourced sovereign treasuries would not have been plundered by politicians to stave off radical reforms. The fact is that in almost every case, accumulating debt and debt‑servicing costs provided governments with less and less room for manoeuvre. The electoral auction of the postwar years (predicated on endless growth and prosecuted with wilful disregard for the intergenerational transfers that were implicit in many social security schemes) eventually started to catch up with the authors. Large unfunded liabilities in public pension schemes and other social programmes became a millstone as populations started to age and structural unemployment grew. Unwilling to raise taxes to finance transfers associated with promises of even more generous health, education and welfare provision, politicians first tried to borrow their way through the problem. But, as debt burdens rose and sovereign balance sheets looked increasingly sustainable, asset sales became increasingly attractive.

The second feature that underwrote the case for reform was that the economies in question had, through rafts of protection and regulatory controls, become sclerotic in the sense that Schumpeter predicted. A heavily regulated status quo became self-perpetuating. Declining competitiveness associated with ponderous bureaucracy and subsidised industries meant that radical changes were needed if dynamic growth was to be reignited. Privatisation became a useful way of retiring debt (or, more notoriously, fuelling further consumption) and injecting more dynamic management into important sectors of the economy. Politically, it was attractive to have private sector proprietors explaining and defending the huge redundancies and dislocations associated with restructuring.

Third, the role of new communications technologies and in particular their use by the media was hugely influential. The role of television in the collapse in 1989 of the old communist order in eastern Europe has been widely remarked. But the sheer pervasiveness, immediacy and accessibility of information in western economies was equally corrosive of the western corporate state.

Bureaucracies and governments can operate most effectively behind closed doors. If Hayekian analysis is correct in holding that governments can never acquire the information necessary to mimic a market economy, it is still probably true that the vulnerability of government action is at least shielded, (if not cured) when the public can be denied information as well. This doesn’t necessarily have to be achieved through secrecy legislation (although it has, notoriously, played a key part in many countries). Simply locking up huge resources in state‑owned monopolies with opaque accountability mechanisms and poor monitoring of management and assets effectively removed any counterfactual against which the success of alternative strategies could be judged. The move to corporatise many state organisations started to reveal the enormity of the misallocation of resources they had sponsored and in some cases their reckless disregard for the public good, environmental, social or commercial. The process inexorably undermined the effectiveness and rationale for continued state ownership.

On another front, the formal secrecy and mystique of government institutions was being undermined through freedom of information initiatives and news media casting themselves, after Watergate, in an increasingly hostile and investigative mould. Slow‑moving faceless bureaucracies were no match for sharp reporters with the ability to expose their inadequacies directly to citizens through the medium of television. If the incompetencies of bureaucracy could be exposed with a vividness never before possible, it is not surprising that those politicians who had presided over such systems could be easily assailed. However deflating it must be to the egos of those involved, radio talkback has been a much more influential catalyst for electoral rebellion than any number of think tanks and policy forums.

Finally (but by no means exhaustively) we may point to a generational influence. Frequently, the most forceful and articulate proponents of change represented a younger generation. While that may not have been reflected in the age of some key figures such as Thatcher or Reagan, many of those prosecuting the agenda for liberalisation were the children of the war generation. Unlike their parents, for whom securing the world against the vicissitudes of war and depression was of paramount importance, a new generation of advisers and politicians had grown up in conditions of unprecedented stability and growing prosperity. Having been shielded from risk, they were not averse to taking huge risks with public policy. The institutional memory of a world

exposed to boom, bust and the disequilibrium of war and national bankruptcy had grown dim. Those who, in the 1950s and 1960s, might have inhibited policy activism simply weren’t there to stem the tide.

Fiscal crisis, institutional sclerosis, media exposure and a generation of risk takers proved, then, to be important preconditions for rolling back the state’s claims as they had solidified by the early 1970s. But it does not necessarily follow that there will be an inevitable progression towards an ever‑smaller role for governments. The risk‑taking generation will be succeeded by another, perhaps more risk-averse; the subversive spotlight of media attention can be as corrosive of the private exercise of power as it can of bureaucrats’ and politicians’; fiscal crises can be brought under control, debt can be retired, surpluses can be accumulated. There is no automatic rule that dictates a steady retreat from political activism. The real question is the extent to which the constituency for extensive government involvement in the lives of western democracies has been diminished or at least altered. The fact is that tools remain available, through the electoral process, to change once again the role of the state.

Now it is widely assumed that globalisation of financial and other key markets has radically undermined sovereign power. And to the extent that national economies are dependent on trade and capital flows, that is undoubtedly the case. Governments are finding it increasingly difficult to run tax regimes that are markedly divergent from their trading partners’. Businesses can move. The obvious corollary is that the generosity of social security programmes dependent on those taxes will increasingly be influenced by the productivity of workforces far away. Governments will not be able to pretend that they can fund through transfer payments living standards that others are earning through superior productivity. But it is the very anonymity of forces such as these that can, in the hands of populist politicians, be the rallying cry for a ballot‑box coup.

In trying to discern the future shape of the state, we can turn to both technical and attitudinal drivers. New technologies may empower central authorities as much as individuals. Some things that were previously almost impossible for the state to enforce have come spectacularly within its power. High‑resolution cameras and electronic sensing have made speed enforcement and road pricing cheap and effective. DNA testing has already been brought to bear against criminals. But its use in determining paternity and enabling the state to recoup the costs of child support payments must be more than a gleam in the eye of welfare authorities. In short, the ability of citizens to offload their responsibilities on to the shoulders of taxpayers will in all likelihood be limited for technological rather than ideological reasons.

New technologies may also work to bring back into the political arena mechanisms for risk sharing that had existed apart from social insurance mechanisms. Genetic screening for susceptibility to acute and degenerative diseases poses particularly interesting challenges. Private sector risk pools rely for their viability on relatively low levels of predictability. If it becomes possible to predict with reasonable certainty that specific individuals will succumb to particular conditions within particular timeframes, many private risk-pooling arrangements will disintegrate as individual prognoses of morbidity dictate individually priced health management fees.

As the luck of the draw becomes increasingly transparent, communities face a profound moral dilemma that cannot be avoided. Are people left to their widely different fates or are resources redistributed to even up the quality of life that is possible? Arguments against redistribution on incentive grounds that apply in respect of remuneration simply evaporate where moral hazard is replaced by biological limitations.

It is premature to predict the course of this debate or the technical ingenuity that may be applied to its resolution. But our burgeoning understanding of the human genome is likely to wreak havoc with many inherited premises on which institutions ‑ both market and non‑market ‑ are based. At the bottom of most forms of human exchange are more or less strongly held views about human agencies. Whether the limited material of homo economicus survives the revelations of molecular biology remains as much in the balance as homo religiosus‘ survival of the enlightenment.

There will, of course, be many applications of new technologies that assist the migration of resource allocation from public authorities to the owners of private property rights. Hard‑to‑manage environmental problems that once demanded the bureaucratic control and allocation of natural resources can now be tackled in a much more decentralised way through sophisticated new monitoring capabilities. Tradeable rights and permits within socially determined parameters are likely to provide a green parallel to the property rights regimes that have long operated elsewhere in market economies. The state’s role is generally that of rule enforcer and standard setter, not resource allocator.

If there is a conclusion to be drawn from the impact of new technologies on advanced societies, it is that there is no inevitable tendency either to a fracturing or an intensification of state power. What is certain is that new realities will command popular and political attention and that governments will frequently be called upon to create new institutional frameworks within which exchanges can proliferate. What the more triumphalist exponents of market liberalism seem sometimes to forget is the socially rooted nature of property rights and the rules governing market interaction.

That brings us to the attitudinal drivers that are likely to influence the role of the state. Again, the evidence is mixed. On the one hand, the sheer pluralism of western democracies militates against centrally imposed edicts. The anonymity and social disaggregation of market economies have greatly assisted the spread of pluralistic values that have been spawned in the wake of secularisation. The hegemony of the transcendental and tragic view of life that dominated pre‑enlightenment Christendom has over the last 200 years given way to a belief system located in individual rationalism.

For a while, disagreement at the level of beliefs was at least partially rescued by the universal claims of science. But the age of heroic materialism and faith in scientific certainty seems also to be on the wane. Western democracies, whose prosperity and dynamism have been rooted in the application of science to the exigencies of physical survival, are now witnessing a profound loss of confidence in the technical hubris that has driven so much development. Concern for environmental degradation and a greatly heightened aversion to risk have inhibited the ability of governments in the western hemisphere to impose public solutions still available in less voter‑sensitive east Asian economies. Public opposition to immunisation campaigns is an example of individually perceived risk challenging the hitherto unchallenged benefits of public risk management. The chemical control of weeds and pests has been increasingly controversial. But it appears that fears of genetic engineering may yet deny us access to biological control mechanisms. Disaffection with the unpredicted consequences of government action are matched by a resistance to the unpredictable consequences of technical innovation.

This leads us to the alternative possibility: that attitudes may yet coalesce behind a crusade to mobilise the state against the uninvited risks of free‑market exchanges. I have referred already to environmental risk. But social risks probably pose a bigger threat. Inevitably, the restructuring and privatisation that has followed on the retreat of the state have meant a period of unprecedented instability. Security of employment and the access that provides to better health, education and pension entitlements has been greatly eroded. Those able to manage the risks are likely to provide a powerful electoral bloc in support of the status quo.

But, at least to date, a significant element of the populations of western countries appears to be unable to secure their positions. That may be merely a transitional phenomenon. More pessimistically, it could involve the writing off of a significant fraction of the human capital of one generation. That may be electorally sustainable in the short run but the intergenerational consequences are significant. Even without the disruption of the last decade, many socially guaranteed retirement arrangements were reliant on sizeable transfers from a smaller future working population to an increasingly numerous retired population. Increasing longevity and diminished lifetime earnings prospects on the part of the workforce could mean (in the absence of dramatic productivity gains) an increasingly intense intergenerational battle as the postwar baby boomers retire. It is inconceivable that resolution of that conflict will not be urged on the political battlefield.

Two other forces may undermine the thrust of liberalisation. Both involve inherited notions of community and shared values. For all its success in rekindling economic dynamism, market liberalism offers a peculiarly anodyne dividend: the prospect of indefinite economic growth. However desirable that may be (and to some that is an ecologically suspect proposition), it says nothing about the values and shared inheritances of culturally located citizens. The coincidence of chronic criminality and unremitting materialism, particularly in North America but increasingly in other societies, has not gone unnoticed. There is a nagging suspicion that many democracies are trading on the accumulated moral capital of the past, that the self-restraint and social responsibility that is so glaringly absent from the corrupted version of market institutions emerging in the former Soviet Union is also at risk in the very societies that gave birth to market institutions reliant for their workings on promise-keeping, self-restraint and reciprocity.

To this must be added the fear that globalisation is inimical to cultural identity. The global linkages between market economies are such that the local institutions, customs and culture that provide meaning and stability for most people are widely believed to be at risk. It may be that globalisation is throwing up changes more swiftly than cultures can adapt to them. If that is the case, the exercise of political power to defend local institutions is likely to be a popular rallying cry.

Faced with public concern about these issues, the question must be asked what legacy a decade and a half of unrelenting market liberalism has stored up for itself. Specifically, has the retreat of the state created a self‑perpetuating constituency in support of abstention from political activism? On one count, the evidence would appear to rule out renewed faith in the political allocation of resources. Public confidence in political institutions is at its lowest point for decades. Almost regardless of the success of liberalisation programmes ‑ (and the results, like the quality of the programmes, are mixed) ‑ the politicians who have been involved in pushing them through are in bad odour with voters.

Ironically, public choice theory has proved to be too successful for its own good The cynicism that its supporters engendered in their campaign against the state, has transferred itself undiscriminatingly to all political operatives, including those who urge a continued rolling back of tax-funded services. The charge of self‑interestedness that was levelled at bloated bureaucracies and their political protectors can equally be levelled at those who would roll back the state.

More seriously still, market liberalism has failed to secure itself against those who would argue for a more active state. The constitutional tools for governmental activism remain, everywhere, unfettered. To survive, an ethical backdrop (now almost wholly absent) is required. Market liberalism is by definition outcome‑blind. Whilst its supporters will argue that overall outcomes will be better (on Hayekian information‑gathering and risk‑spreading grounds), they are unable to guarantee particular outcomes for particular individuals or groups. The process of market exchange is valued above the particular outcomes that may be delivered. Support for such a contention makes claims to individual forbearance almost as heroic as utilitarianism: that however the dice roll for any one individual, the aggregate benefits of market exchange justify each individual’s participation.

The problem for market liberalism is that its reliance on market participants who are committed to the rules of the game ahead of all other values is anaemic. People are animated by much more intense and vivid claims of family, culture and ideals. But the unconstrained global operation of markets may well be completely inimical to the survival of some of these values and institutions, in which case their holders are likely to seek political solutions.

Socialism’s offer of a passage to a promised land has been found wanting on a monumental scale. But market liberalism’s promise of a voyage of discovery to an unknown destination remains an unstable bargain. Its passengers are people rooted in particular traditions, cultures and values. Unless the terms of civic association embodied in the state can secure those values, there will be ongoing pressure to replace the anonymity of the marketplace with the beguiling certainties of political activism. If that activism is to be kept at bay, liberalism needs a conservative rudder. Without it, there is only unlimited politics.

Simon Upton is Minister for the Environment and Science. His MLitt at Oxford was on social provision and contractarian theory.

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