Wayward Thatcher

By Kealey, Terence | The Spectator, July 18, 1998 | Go to article overview

Wayward Thatcher


Kealey, Terence, The Spectator


`THE THIRD WAY only leads to the Third World,' Margaret Thatcher claimed recently, echoing Vaclav Klaus of the Ciech Republic. It is a great soundbite, but it is not true. The Third Way, the halfway house between collectivism and the free market, leads to prosperity, peace and the First World. It does not, pace Margaret Thatcher, explain the collapse of the Far Eastern economies.

Great Britain and the United States, the two great economic success stories of recent years, both represent classic examples of the Third Way. The British government takes some 45 per cent of the national wealth in taxes, a share Margaret Thatcher failed to reduce during her 11 and a half years as prime minister, and the United States' federal and state governments together take over a third of their citizens' money. These are hardly examples of untrammelled laissez-faire.

A little history shows that economic growth is both more complex and more interesting than any simple catch-phrase can convey. Both the United States and Great Britain were once laissez-faire. Between 1830 and 1914 Washington took less than 4 per cent of the US national wealth and, during peacetime, Whitehall took less than 10 per cent of ours. Since 1914, tax rates have risen ineluctably yet, curiously, rates of economic growth have been unaffected. In both countries economic growth rates averaged around 2 per cent per year per person between 1830 and 1914, and they have been sustained at that figure ever since.

Free-market ideologues would have predicted that economic growth rates should have collapsed after 1914 in the face of the vast new taxes, so why didn't they? The answer is to be found in the famous Calculus of Consent published in 1962 by James Buchanan, the Nobel laureate, and his colleague Gordon Tulloch. These two economists showed that, as Western governments progressively nationalised health, education and welfare, little changed financially. The amount of money spent on those services after governments had taken them over did not rise at any greater rate than it had been rising under the free market.

Not that these are trivial sums. A modern government is little more than a Victorian friendly society with gunboats attached. Of the 250 billion the British government spends each year, 222 billion goes on health, education, and welfare and on subsidies for transport, housing and the regions. Defence takes up 22.2 billion, leaving scraps such as 1 billion for the Foreign Office, 3 billion for the DTI, 3 billion for agriculture and 7 billion for the Home Office.

But that 222 billion is largely distributed universally; it is not focused on the poor. As successive 19th- and 20th-century governments progressively nationalised the church schools, voluntary hospitals and friendly societies through which private philanthropists had channelled their donations to the poor, the rates of increase of care for the deprived and needy did not rise.

Government niggardliness has not been confined to the caring sector. The nationalised industries in Britain, when we still had them, were always complaining that they were shackled by Treasury restrictions on their freedom to raise capital, and the recent international experience of privatisation has confirmed that over 90 per cent of newly privatised companies, ranging from airlines to waterworks, both raise and spend more money than when they were in the public sector.

Here lies one of the great secrets of the success of the OECD countries. They have produced democratic politicians tough enough to be mean. The tragedy of countries such as Argentina, which at the turn of the century was one of the richest in the world, is that their politicians spend money generously. …

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