The Record of Conservative Free Marketeers after the Fall of Communism Is a Sorry One
SEPTEMBER 01, 2001 by NORMAN BARRY
Contributing editor Norman Barry is professor of social and political theory at the University of Buckingham in the UK. He is author of An Introduction to Modern Political Theory (St. Martin’s Press).
Which political movements benefited most from the collapse of communism in Eastern Europe and the Soviet Union? Certainly not libertarianism or the free-market brands of conservatism. It is the left that has gained most. Although anybody interested in a political career will avoid calling himself a communist, collectivist thinking and public policy is no less potent than it was ten years ago.
Some former communist parties have simply changed their names, slightly moderated their collectivism, and paraded themselves as democratic socialists with new market-friendly language. It is a triumph of marketing that should send Madison Avenue firms hunting through their files. It could well become a case study for an MBA at a prestigious business school. The erstwhile socialists and central planners are now seen to be advocates of the market (with a “human face” or preceded by an anodyne adjective) and are taking credit for the obvious achievements of capitalism.
This spectacular example of economic and political deception is more prevalent in Europe than America; for although the latter has had its phony marketeers and ersatz advocates of liberty and property, the spokesmen of the American left have not had to perform the intellectual acrobatics of their European counterparts.
At least ten members of the European Union, including major ones like Britain, France, and Germany, are controlled by center-left parties. And although Italy has just recently elected the allegedly free-market government of Silvio Berlusconi for the second time, one must be skeptical of its chances of unraveling (if it needs to—see below) decades of interventionist inefficiency, massive welfare spending, and straightforward crime and corruption in government.
What is foreboding about the new socialist marketeers is that their affection for economic freedom is a veneer underneath which lurks a form of interventionism with serious consequences for liberty. Some of us might have thought that the road to serfdom had been incorrectly signposted, or had led to a stable equilibrium of privilege-seeking pressure groups rather than straight tyranny, but the evidence suggests that, although we haven’t experienced a communist nightmare, we are as far from a market nirvana as we ever were.
British Socialism and the Market
The Labour government, first elected in 1997 and re-elected in June, did appear to have jettisoned its socialist (and economically negative) intellectual patrimony, abandoned Clause Four of its constitution (which committed the party to complete nationalization of commerce and industry), promised to reform welfare (yes, “as we know it”), and presaged a new relationship with business over elegant lunches in the City of London. Indeed, their first moves did seem to suggest a new way (better than a “third way”). The Bank of England was given de facto independence, so ending decades of Keynesian manipulation of money; spending targets were set so as not to exceed growth; and the promise not to raise the income tax was honored. The first four years of New Labour were not a market paradise, but I for one went to bed for the first time under a socialist government not thinking I was going to wake up in East Germany.
But an analysis of the 1997–2001 period shows that it really was an illusion; socialism remains a threat, if not quite so deadly as in the past. However, the new socialists have found subtler ways of bringing about a collectivist society—and selling it.
True, Britain has not experienced an increase in the income tax, but there has been an addition of 3 percent of GDP taken in tax (a staggering £60 billion). The state now spends close to 40 percent of GDP (up from Thatcher’s 37 percent, and she was no paragon of minimal government) but still lower than Germany’s 44 percent and France’s 51 percent.1 In America the figure (for the federal government alone) is about 25 percent.2
In Britain this new, scarcely noticed burden came about through the pioneering of a novel fiscal phenomenon: the socialists knew they could not get away with a wealth tax or higher income tax, so they invented the “stealth” tax. And there are lots of them—for example, double taxation of dividends was extended to pension investments totaling £6 billion. Those who work in the public sector have pensions fixed irrevocably to final salaries (and paid for by the taxpayer) while everyone else depends on the buildup of a genuine fund. It is now more costly.
Fuel taxes are unbelievable by American standards—the price of gas is approaching $6 a gallon, 80 percent of which is tax. The yield of National Insurance (Social Security tax) has increased by £14 billion through widening its scope without affecting the rate; the stamp duty on the sale of property has been increased three times; and there was a “windfall” tax on profits from the privatization of utilities. This last tax was retrospective and straight theft.
Gordon Brown, chancellor of the exchequer, has even managed to make minor tax reductions for those at the bottom while overall adding an extra £1 billion a week plus.
But it gets worse. The commitment to keep spending in line with growth only holds for the life of the first Labour government; after 2002, with a new government, quite literally anything goes. Labour has already promised to increase government spending overall by 3.8 percent (with an extra 5.5 percent on education and health) and with economic growth not likely to exceed 2.5 percent, the gap can only be filled by extra taxation.
And they have the stealthiest tax increase of all—National Insurance—in reserve. At the moment there is a ceiling on this; nobody pays it on income above £29,000 a year. It has been calculated that the abolition of the ceiling would be equivalent to a 10 percent increase in income tax (something they dare not do).
But only the moderately well off (and not all of them) would notice if the ceiling were removed. And that is probably how they will plug the gap mentioned above. Anyway, the bulk of the population is under the illusion that National Insurance actually funds its health-care costs, unemployment pay, and pensions, so they think that such tax expenditure has an economic rationale.
But the real basis for the charge that New Labour is not really interested in markets is in its attitude toward government spending. The party cannot believe that the private sector can provide education and health more efficiently than the state, so its response to any problems here is to throw more taxpayer money at them. But it is never very much and never nearly enough. The state spends, through taxation, much less than people would spend privately. That is why the country has one of the worst health care systems in the developed world. Although France and Germany are superficially more socialistic, they spend, respectively 10 percent and 11 percent of GDP on health while Britain spends only 7 percent. The reason is that these countries finance health care by a form of social insurance while Britain operates primarily through direct taxation (the social insurance element there is derisory).
Also, the first two countries have up to 25 percent additional financing from entirely private sources. In France, for example, 84 percent of the population pay extra private insurance on top of the compulsory social insurance. This enables people to pay the user charges which are a feature of the French system.
The so-called market-friendly New Labour government has shown no interest in radical reform of health care. Anyone who genuinely believes in the market must oppose socialized medicine. The quasimonopolistic, rigidly organized, and choice-denying National Health Service is the last relic of Stalinist planning in the modern world, and only its complete abolition can lead to any rationality in health care. But the Conservative response to New Labour socialism has been pusillanimous. It has simply promised to match, and even exceed, Labour’s spending plans. On health the most radical thing the Conservatives have done is simply to drop hints about tax relief for those who take out private health insurance.
Europe and Liberty
The prospects for freedom are little better on the continent of Europe, and the deception proceeds on two fronts. First, the subtle assault on the market occurs within individual countries, and more ominously, the European Union makes any market-led improvement difficult. In both cases the socialism occurs behind a façade of enterprise and freedom. The façade has persisted, and has been persuasive, because the left is divided between the communists and the socialists, and the desire to keep the communists out guarantees some kind of freedom.
Britain in the early postwar years was much more socialist than the rest of Europe because the communists were not isolated but rather in the Labour Party (and government). That is why Mrs. Thatcher’s attack on the left was mildly successful. She took on the whole of the socialist movement, whereas in Europe the noncommunist left was always more respectable and not viscerally antimarket. Mrs. Thatcher is now publicly reviled in Britain.
Pre-unification Germany was the most interesting case of all in Europe.3 For Ludwig Erhard established in 1949 just about the only genuine free market (outside Switzerland) in Europe. He was a member of the Mont Pelerin Society and only used the expression “Social Market” to appease the Keynesian advisers who had swarmed round postwar Western Germany. And despite the numerous modifications that were made to the market system, Erhard was not a phony. Nor were those socialists who eventually joined him. (One, Karl Schiller, resigned from the coalition government of Christian Democrats and Social Democrats in the 1970s on a free-market issue and ended his life a convinced capitalist.) But it was not to last, and the German Social Democratic party has slipped back to old collectivist ways and has members with dubious left-wing pasts.
Still, perhaps the most dangerous of the phony marketeers were the European nominal conservatives (Christian Democrats). Their connection with classical liberal individualism was extremely tenuous, and many not only accepted the socialist consensus that governed Europe, they actually extended it. This was especially so of the British conservatives before Mrs. Thatcher.
Italy was the most egregious example of conservative legerdemain. The Christian Democrats had a permanent hold on power entirely because of the fear of communism. They used it to strangle the economy with unenforceable regulations that led to crime, nearly bankrupted the country through unsustainable welfare obligations, and enriched themselves personally.
But again, events, not ideas, are causing some more market-based policies in mainland Europe. Herr Schroeder, of the Social Democrats in Germany, has been compelled to privatize partially the ruinously expensive pension system and to introduce, reluctantly, other minor tax and welfare reforms. He has also been forced to watch as the Anglo-American model of individualistic capitalism replaces the communitarian one and as the drive toward globalization upsets the delicate but inefficient balance of “stakeholders” that characterizes the German corporate economy. They now have takeovers in Germany.
In Italy it looks, superficially, as if free-market ideas are driving the conservative/classical-liberal alliance led by Berlusconi. He himself is an amazingly successful entrepreneur who hopes to bring that style to the whole of Italy. He also has a libertarian and respected figure in the international free-market movement, Antonio Martino, in his government. But Berlusconi already has a program that, in addition to including welcome tax cuts, has ambitious spending goals for the “infrastructure.” Perhaps he should listen more to Martino than to conventional advisers.
But does it really matter? Italians ignore the regulations, don’t pay too many of the taxes, and have an underground economy that produces at least a third of national output. They might look like anarchists but they are not nihilists: they have constructed an immensely complex private world, embracing the family and business, which has quietly, and without the aid of government or “ideas,” created one of the top six economies in the world.
The real threat to economic freedom in Europe is the European Union. Its administrative headquarters in Brussels houses the phoniest of the market phonies. Still, its historical origins look free market. Originating as a free-trade area through the Treaty of Rome in 1957, the European Economic Community simply wanted to break down customs barriers that had separated Europe’s countries in the past, created massive inefficiencies, and led to war. It seemed that the old classical-liberal dream of Montesquieu, Turgot, Say, and Bastiat—that world peace would come about through commerce—could be a reality at last.
But it was not to be. Under the rubric of commerce and free trade, and the mantra of “harmonization,” the institutions of Europe actually proceeded to raise insurmountable barriers to commerce with the outside world. Trade-union power was entrenched, and American-style “civil rights”were extended to the workplace. Worst of all, genuine jurisdictional competition between member states has been gradually eliminated under the waves of centralizing regulations and directives that are enveloping the member states. Soon they will have the same welfare laws, identical industrial rules, and similar environmental standards—all in the name of free competition.
The influence of the Union is quite corrosive of any lingering market ideas. José María Aznar, the prime minister of Spain, is actually pro-free market (despite being a former tax collector), but he is currently engaged in a desperate battle to preserve the European regional grants to Andalusia, an allegedly poverty-stricken area of Spain. Well, if any people on vacation in Marbella or Málaga think they are in a poor province on the Iberian peninsula, they are obviously unaware of a basic axiom of modern economic life: hearsay and casual observation beat econometrics.
Which Way Forward for Genuine Freedom Lovers?
The record of conservative free-marketeers after the fall of communism is a sorry one. Instead of trying to carve out a distinctive position around the minimal state, free trade, the abolition of compulsory welfare, and the elimination of all regulations not directed at the protection of persons and property, they have tried to outspend the socialists and outregulate the regulators in a desperate battle to capture the middle ground.
The recent performance of British conservatives in all this has been lamentable. They say it is electoral suicide to come out against the National Health Service or cash-based and wasteful welfare. But it was shown at the recent election that it was just as self-destructive when they tried to compete with Labour at the spending game.
Statist policies are breaking down according to the iron laws that govern economic and social life. Is it not better to be in a good position, untarnished by socialist meddling, to make the minimal but effective curative recommendations when this finally happens?
- The share of spending taken by the state in major European countries increased on average from about 12 percent in 1910 to 46 percent now.
- According to the Tax Foundation, the burden of federal, state, and local governments combined is 33.8 percent of Net National Product; see http://www.taxfoundation.org/taxfreedomday.html.
- See H. Giesch, K-H. Paque, and H. Schmieding, The Fading Miracle (Cambridge: Cambridge University Press, 1992).