The state is in crisis – but free marketeers are losing the battle for reform

Ryan Bourne
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Margaret Thatcher only won half the battle

DO YOU ever feel government isn’t fit for purpose? The evidence suggests you’re not alone. The EU elections saw anti-establishment parties tear chunks out of mainstream incumbents. In the US, Occupy Wall Street and the Tea Party have shown the degree of discontent from left and right, expressed in partisan gridlock in DC.

Some on the left, and indeed centre-right, still see the financial crisis as the watershed moment – a “crisis of capitalism” that should have proved a hammer-blow to the supposed “market fundamentalism” of the Thatcher-Reagan period. The alternative view, from John Micklethwait and Adrian Wooldridge, is that we are in fact living through a “crisis of government”, with entrenched interests constraining the scope of much-needed reform. This is the divide of our time: more governmental control of markets versus the need for marketisation of government functions.

Micklethwait and Wooldridge’s book The Fourth Revolution talks of the three and a half revolutions that have got us here. First, we had the Hobbesian intellectual case for the nation state. Then the liberal revolution of the eighteenth and nineteenth centuries prioritised the freedom and liberties of the individual. After that, the twentieth century saw the growth of Fabian “cradle to grave” welfarism.

The 1980s represented the fight-back. Propagated by Milton Friedman, it appeared politically with Ronald Reagan and Margaret Thatcher. Yet the authors only judge the period worthy of “half-revolution” status. While the scope of government was reduced (mainly through privatisation), its size was not. The “welfare” functions of the state grew – the social protection budget was largely unchanged, even after Thatcher, while health, social care, pensions, and childcare spending has grown unabated more recently.

AJP Taylor could write that, in 1914. an Englishman could go through life only encountering the state in the form of the post office or a policeman, but now government is all-pervasive. So in Micklethwait and Wooldridge’s view, the urgent task is to restrain the state, make it affordable, given demographics, and improve outcomes. Otherwise, faith in the very institution of democratic government will be lost. They examine innovations from Brazil’s cash transfer system to India’s production of hospital equipment to show what can be done.

Their warning is compelling, yet there are two huge obstacles. First, the number of people giving full-throated support to substantial reform of government is small. Those who believe in free markets convinced themselves they had won the battle of ideas in the 1980s and 1990s with the fall of overt socialism. But this did not mean the public was convinced of free markets. Even many Tories are now committed to the protection of state-centric welfare provision, the NHS and the BBC.

The second is that the left read current disaffection differently. They not only think the crisis shows why the state needs more control over markets, but also that many future challenges require further expansions of government. From Piketty’s inequality warning to climate change, from an ageing population to the problem of poor productivity in labour-intensive healthcare and education, they think we’ll have to accept the need for more state regulation, spending and tax.

To win the battle of ideas to facilitate the Fourth Revolution, those who recognise the need for liberal reform need two things: messengers to make the case for the free market, and clear explanations as to why the challenges of tomorrow would be solved better by markets, not governments.

Ryan Bourne is head of public policy at the Institute of Economic Affairs. @MrRBourne