The mixed economy

It was only after the collapse of the Soviet Union and the death of Chairman Mao that accurate accounts of life under these regimes became available. Prior to then, many in the West believed that communism might indeed create a better world, particularly following the misery of the Great Depression and the Second World War. George Bernard Shaw’s 1933 letter to The Manchester Guardian starts, “Increasing unemployment and the failure of private capital to cope with it throughout the rest of the world is causing persons of all classes and parties to watch with increasing interest the progress of the Soviet Union. And yet this is precisely the moment that has been chosen to redouble the intensity of the blind and reckless campaign to discredit it.”

Indeed some 10,000 Americans did emigrate to the Soviet Union as a result of such reports, only for many to disappear into the Gulag during ‘The Terror’ of 1937 and 1938. (Tzouliadis, 2008) Libertarian writers of the time, such as Hayek with The Road to Serfdom (Hayek, 1944), were concerned more with alerting readers to the dangers inherent in communism, rather than with trumpeting the merits of capitalism. Their main concern was the preservation of the basic freedoms threatened by the communist creed.

The Second World War inevitably brought an unprecedented level of government control, particularly in Britain where German blockades meant severe rationing. The end of the war brought opportunities for reconstruction, and it was generally accepted that the government would play a big part in that as well. Much of the groundwork had already been completed with the Beveridge Report, published in 1942, which became the basis for a wide range of policies collectively known as the Welfare State.

In the 1945 election, held just months after the end of the War, a Labour government swept into power with a 145-seat majority and just short of 50 per cent of the vote, and immediately embarked on a programme of nationalisation. The Conservatives had already created the British Broadcasting Corporation (BBC), the Central Electricity Board and the London Transport Board, while the General Post Office (GPO) had been a government department since 1868. By 1951 the coal mines, gas production, the iron and steel industry, civil aviation, telecommunications, the Bank of England and of course healthcare through the National Health Service (NHS) were all under government control.

The British Labour Party, and indeed all the mainstream socialist parties in the First World, differ fundamentally from the Communist regimes of China and Russia in that they retain a strong belief in the Rule of Law and in the accountability afforded by a genuine multi-party democracy. They have also endeavoured to encourage rather than outlaw private enterprise. Nevertheless, Clause IV of the Labour Party’s constitution, originally adopted in 1918, did read as follows until Tony Blair finally secured its amendment in 1995:

“To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution, and exchange, and the best obtainable system of popular administration and control of each industry or service.”

Post-war politics in the Western World is commonly portrayed as a struggle between the left-wing, anxious to increase the role of the state for the good of all; and the right-wing, who believe government control needs to be reduced if the full benefits of the free market can be realised. The decades following the war did see successive left and right wing parties gain power on both sides of the Atlantic, however by the end of the 1970s it was apparent that the left had lost steam in the face of rising unemployment and rising inflation – a combination that became known as ‘stagflation’. It was against this background that Margaret Thatcher won the 1979 election in the United Kingdom and Ronald Reagan the 1981 election in the United States, both with pledges to reduce the size and the influence of the public sector and seemingly swinging the western world firmly towards the right.

When the Soviet Union was dissolved in 1991 it looked as though the struggle had finally ended with capitalism the victor and the benefits of private enterprise clear to all. House prices had rocketed and high-streets were bustling with consumers. It was only the ‘credit crunch’ of 2007, revealing the precarious nature of many of the transactions that had created the boom, and the devastation wrought in the Middle East as a result of the ‘neo-conservative’ policies adopted by George W. Bush, that opened the door to widespread scepticism of the free market system.

However, this portrait of an ongoing struggle between socialism and capitalism is only accurate at a superficial level, and then only because it is useful to both sides of the political spectrum. For despite their posturing, both have devoted much the same level of resources to the public sector since the end of the Second World War, and considerably more than their predecessors would have countenanced.

In the decade preceding the First World War, government expenditure in the UK amounted to less than 13 per cent of GDP. War brought inevitable increase, with government expenditure rising to a little over 46 per cent of GDP by 1918. However this fell back to around 25 per cent when conflict ended, and remained there for the next couple of decades, only to climb again to over 60 per cent at the height of the Second World War.

In the years immediately following the war government expenditure fell back once again, amounting to 36.5 per cent in 1951 when the Conservative Party took power. By 1964, when Harold Wilson won the election on behalf of the Labour Party, the proportion remained unchanged. Since then it has remained fairly steady, occasionally dipping below 40 per cent and rarely exceeding 44 per cent (Office for National Statistics). The picture is much the same in the United States with government spending rising to around 35 per cent in the early 1980s and remaining between 35 and 40 per cent since.

A more accurate portrait of the First World since World War II is of the slow evolution of the ‘mixed economy’, so called because it combines a private sector, where free markets operate within a supporting framework of law, with a public or planned sector funded by taxation and managed by government at both a local and a national level. Despite their posturing, both sides of the political divide are in broad agreement as to the desirability of such a solution, and indeed it does seem to overcome the disadvantages of both extremes.

Milton Friedman himself was in favour of a government that:

“… maintained law and order, defined property rights and other rules of the economic game, adjudicated disputes about the interpretation of the rules, enforced contracts, promoted competition, provided a monetary framework, engaged in activities to counter technical monopolies and overcome neighbourhood effects widely regarded as sufficiently important to justify government intervention [which covers anything from waste disposal to town planning], and which supplemented private charity …” (Friedman M. , 2002, p. 34)

He also conceded the need for a government-funded education system, at least up to secondary level, and a limited degree of health funding, although he would have balked at anything the size of the NHS.

Most western governments, whether of the left or right persuasion, add the provision of basic infrastructure such as roads and rail track, a central bank that controls the money supply and the interest rate that it charges the private sector, a basic state-funded pension, and a degree of financial assistance for the poor.

These services are, in the main, funded by taxation, which also serves to provide a mechanism by which the government can influence the operation of the free market and curb the unfortunate side effects we discussed in the previous chapter. In the UK, for example, taxation on alcohol and cigarettes is very high, with the intent of reducing consumption and helping to fund the costs incurred by the NHS as a result of their use.

On the other side, the public sector finds itself in competition with the private sector and operating within a democracy. Citizens are free to choose their employment, which means the government must pay the market rate for labour, and offer similar terms and conditions. Regular elections by secret ballot, open to all adults, introduce a level of accountability to government members, and serve to curb the power of individual political parties.

Few can argue that the mixed economies enjoyed by the First World have brought huge benefits to their citizens, raising both living standards and life expectancies. However they have also proved highly wasteful and highly exploitive of less developed countries, and particularly the Third World. They have led us to consume far more than we need or can afford, often to the detriment of both the less fortunate and the environment in which we live. To understand why this should be so, we need to turn our gaze back to the so-called ‘free market’ and examine more closely how it actually operates in the real world.

Chapter 4: Fixing the market →