Tony Blair’s Right: Labour should have cut spending in 2005

Towards the end of his life, famed economist John Maynard Keynes remarked “I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago;” the invisible hand being, of course, Adam Smith’s idea of the free market and demand and supply dictating the allocation of goods rather than resources. In much the same way this week, Tony Blair admitted that “we should have tightened policy” on government spending in 2005, in the process vindicating David Cameron’s assertion that Labour overspending is the reason for the economic mess we’re in. So why is it that those prominent interventionists often regret their decisions?

tony-blair

Quite simply, it’s because big government spending damages an economy far more than it helps it, and this often becomes clear in retrospect. The reason for relying on the invisible hand and small government economics is simple: individuals know how to spend their own money far better than the government does. They make better choices, rewarding successful ideas and firms with their custom, while products that are not as popular die out. In this way, society advances as the people wish it to.

In contrast, government too often spends money with criminal inefficiency. When spending increases in a public body, it is rare that the money will be targeted effectively. Indeed, as Dr. Max Gammon found out when investigating the NHS, the higher the expenditure to improve services, the lower the quantity and quality per pound spent of said services. He found across the board that increases in expenditure led to a greater percentage increase in bureaucrats and administrators employed than it did doctors and nurses. Milton Friedman named this phenomenon the ‘Theory of Bureaucratic Displacement.’ The key lies in understanding why increasing spending in state run organisations such as the NHS or the armed forces frequently does not increase efficiency. In the free market, there is a producer and a consumer. The consumer will always be looking to get the most for their money and so will buy from the company that offers best value. This gives the producer the incentive to produce more cheaply and maximise efficiency, which will increase profitability and allow the company to expand. Centralisation occurs within the ever expanding company because it is easier to make large scale business decisions with a small group of people working towards the common aim of greater profit through increased productivity.

This private sector model enables economies of scale and so exemplifies the benefits of centralised organisation. But in the public sector, increasing centralisation too often fails to result in increased efficiency. Instead, whole tiers of bureaucracy seemingly exist solely to “seek assurance” for ministers about where the money is going and what it is achieving. “Feeding the beast” is a recognised phenomenon that diverts time, energy and resource from delivery. Meanwhile procurement in the public sector is hugely circumscribed, complex and long drawn-out, and yet is led too often by project managers with no specialist expertise, on the basis of specifications drawn up with inadequate data or understanding of the service being procured. Multi-millions of pounds of public money are committed on the basis of quality and value for money criteria to organisations (whether public or private sector) that deliver neither quality nor value for money services.

And yet there is no personal benefit or cost for those taking the decisions – no price to be paid when the weapons, helicopters, or NHS 111 service procured fails to meet requirements. In this context, it can be no surprise that every pound spent by the government does significantly less than a pound spent by a private sector firm, or that clear-sighted leftie big-spenders come, eventually, to renounce their views.

When Tony Blair admits that less state spending during that latter part of his tenure would have been a good idea, he is correct. It’s just a shame he couldn’t have seen sense when he had the chance to make a difference.

Elliot Burns

2 COMMENTS

  1. @MatthewPearson

    The NHS has multiple layers of private sector contribution within its massive bureaucracy. The American System has a mountain of regulations and laws upon it. Neither is a true State or Free Market system.

    Nor has anybody ever claimed that a State institution can do no good, nor that a free market institution can do no harm.

    Elliot Burns makes a grand argument on a large scale, while you close the argument down into specific examples. What you did was clever, but was every bit as unproven as the original article. Quoting the Guardian did nothing to improve that.

    You’re both entitled to your view. Personally, I’m with the author. As a broad generalisation, free markets beat state monoliths every time.

  2. Let’s just examine this statement: ‘In this context, it can be no surprise that every pound spent by the government does significantly less than a pound spent by a private sector firm’, in the light of the NHS. After all you brought it up in your article as if somehow it was the cash equivalent of a blackhole, swallowing everything the tax payer throws at it and giving nothing out in return. A cursory examination of the facts reveals the NHS to be the second most cost effective health service in the world. By your logic it should the worst on this measure. The US has a health service dominated by the private sector, so according to your logic it should be the most efficient health service in the world. Pity then (for your jejune arguments at least), that it is one the most expensive and inefficient. The reason the US system is so expensive and inefficient is the complex layers of bureaucracy created by the health insurance systems and the need for every organisation involved in care to take its cut of the pie. Funnily enoughthis is exactly the kind of recipe for inefficiency which you lay at the feet of the public sector above. The truth is that this whole issue is way more complex than you are able to grasp at the current moment in your thinking. Perhaps like Tony Blair you need some time to mature and consider your position 🙂

    You can read about this here

    http://www.theguardian.com/society/2011/aug/07/nhs-among-most-efficient-health-services

LEAVE A REPLY

Please enter your comment!
Please enter your name here