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?
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.