Debates that never die

‘The Brexit shambles could have been largely avoided if there had been from June 2016 a government which — unlike Theresa May’s — was 100 per committed to taking Britain out of the EU’

Marketplace

Debates in economics, like old soldiers, never die. They only fade away, until time and fashion make them topical again. But one 20th-century debate seemed to have been killed off by both theory and practice. In the 1930s many economists came to believe that government planning was a better way of allocating resources and promoting growth than the mechanisms of the free market. This view was challenged successfully by two great thinkers of the “Austrian school”, Ludwig Mises and Friedrich Hayek.

They explained that “economic calculation”, the ability to assess demand and supply in order to achieve efficient resource allocation, depends on the dispersal of information between millions of profit-maximising, well-motivated individuals. Mises and Hayek argued that the centralisation of decision-taking in one place is wrong-headed. The planners can never be close enough to events to outperform market forces; they cannot amass and process a sufficient quantity of information to guide goods and services, and labour and capital, to the right places in the appropriate amounts.

By the 1980s experience in many countries had shown that Mises and Hayek were right. Enough had been learned to persuade — for example — both President Reagan and Prime Minister Thatcher of the virtues of the free market. Seemingly conclusive was the downfall of communism between the fall of the Berlin Wall in November 1989 and the end of the Soviet Union in December 1991. The communist countries had taken state planning much further than the economies of Europe and North America where private ownership and decentralised markets were dominant. The breakdown of the Soviet system clarified two points. Not only had the planned economies dropped far behind their capitalist rivals in the West, but also Russia’s claims that industrial output had boomed in successive five-year plans were a pack of lies.

But in the 21st century the economic calculation debate has seen a surprising resurrection. Somehow or other, modernisers in the Conservative Party have managed to convince themselves that free-market Thatcherite economics was retrograde and misguided, whereas government planning is progressive and enlightened. On November 27, 2017, the Department for Business, Energy and Industrial Strategy issued a press release, in the names of Prime Minister Theresa May and Business Secretary Greg Clark, about a White Paper on “the government’s ambitious Industrial Strategy”. It announced — among other things — “a long-term vision for how Britain can build on its economic strengths”. In the words of Theresa May, with all the eloquence, wit and passion for which she is renowned, “As we leave the European Union and forge a new path for ourselves, we need to focus on building a better future for our country.”

Now, over a year later, it is fair to ask whether the current British government and its Prime Minister could organise a strategy for anything. Economic liberals may be cynics about centralised government planning, but no one disputes that every business has to plan ahead. In particular, if companies are intending to sell products abroad or to buy foreign-made goods for the home market, they must take account of the trade regime, and check about tariffs and quotas. At the least, a meaningful UK industrial strategy — a strategy which contains a serious “long-term vision” — ought to be specific about the timing and details of our departure from the EU. Indeed, it ought to be specific about these matters many months in advance.

But that is not so. May has proposed a Withdrawal Agreement which any sixth-former can see does not take the UK out of the EU at all, and Parliament’s understandable rejection of it has left businesses uncertain about what the future holds. More than once in 2019, a no-deal Brexit has been imminent, with the government failing to announce the tariff rates that might apply only a few days ahead. The confusion has been so great that many ships have been on the high seas, and yet none of Her Majesty’s Revenue and Customs (who will collect the tariffs), the foreign suppliers or the British distributors know what tariff is to be charged when their goods are unloaded. Fortunately, tariff rates on most products are so low in the modern world that international trade continues despite the bedlam created by officialdom.

The importance of good local information and consistent decision-taking was emphasised at the end of last year. It emerged that contracts with ferry companies, worth a total of £107.7 million, had been signed by the government without a tendering process. The aim was laudable enough, to anticipate expected “severe congestion” at Dover. But one of the ferry contractors, due to receive more than £13 million, did not own any ships and had not previously operated a ferry service. Would that sort of risk have been taken if the £107.7 million had been owned by individuals liable to lose the lot if they had miscalculated? To quote from Mises’s classic work Human Action, private sector “speculators and investors expose their own wealth, their own destiny”. That is why they try to avoid mistakes.

The Brexit shambles could have been largely avoided if there had been, from June 2016, a government which — unlike Theresa May’s — was 100 per cent committed to taking Britain out of the EU. The chaos has at any rate one good result: it has demonstrated once again that the phrase “government planning” is an oxymoron. Governments are at the mercy of politicians and hence of an activity in which a week is a long time; they are inherently bad at planning and strategy, and ministers and their civil servants should not pretend otherwise.