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Transatlantic Blog

4 arguments for the free market

    If the free market really is the best model for human thriving, why do we have to make the case for free markets generation after generation?

    Simple: People forget. Just look at recent policy developments in the U.K. for evidence. During the pandemic, Britain’s leaders have: 

    • Driven up sovereign debt
    • Adopted an unfunded temporary increase in the main welfare payment, Universal Credit
    • Dropped plans to liberalize planning regulation
    • Taken public control of South Eastern Railways due to breaches of the franchise agreement

    And the people have largely gone along with these policy decisions. Perhaps these examples seem somewhat esoteric, especially to Americans. However, they are symptomatic of an approach to policy that assumes government can rectify market inefficiencies and failures. The difficulty lies with this mindset. The implications for the future are significant.

    Borrow, borrow, borrow: Does this resonate in the United States, with its $3.5 trillion in spending, growing debt, and tax increases? While interest rates are low, so the argument goes, governments can borrow at low cost. In other words, money is cheap, so borrow to spend. Yes, but interest rates are abnormally low and will have to return to some form of normal levels in due course, at which point the cost of the debt will rise, requiring even higher levels of government expenditure simply to service that debt. In addition, the unspoken moral implications of debt involve the passing of responsibility from one generation to another. The burden will fall on our children.

    In the U.K., these will be the same children who will not be able to afford to purchase their first home because of a shortage of new-housing construction, which will lead to significant price increases. The U.K. planning system is a myriad of regulation and control at a mind-boggling level of detail (including what bricks and materials are permitted, lengthy approval processes, and so on). The answer to the problem is surely to remove levels of regulation and build more houses. The result will be that prices will fall and those seeking their first homes for themselves or their families will have improved access to the market. But at the first sign of resistance (“not in my backyard,” a minor opposition party winning special election, etc.), plans to deregulate are inevitably dropped.

    A few days ago, the U.K. government announced it will take into state ownership one of the major rail operators as a result of that operator’s failure to declare and repay previous state aid (which the operator agreed was a failure on its part and has now repaid). I simply cannot fathom the link between a breach of contract (for which there are remedies) and nationalization of the operator. This can only be the outcome of a mindset that fails to prioritize the needs of passengers and bizarrely thinks the government is capable of running a train service.

    The tax increases have arrived

    The policy consequences were capped when the government introduced its so-called Health and Social Care Levy, funded by a 1.25% increase in National Insurance contributions. Let me explain. The idea of National Insurance was originally to fund welfare and pension costs. In reality it is not a fund at all but rather one of the many avenues though which government raises revenue. It is one identified pot that then contributes to general government expenditure. It is pay as you go: The government spends, raises taxes to finance, and funds the gap through borrowing. National Insurance works as follows:

    • A tax of 12% is levied on all earnings above approximately £9,500 per annum up to a limit of around £40,000 per annum. Above that, the tax is 2%. These rates will now increase to 13.25% and 3.25%, respectively.
    • In addition, National Insurance is levied on employers at 13.8% on all earnings above the floor of £9,500. This rate will increase to 15.05%.

    This is politically skillful, at least to a degree. No future chancellor of the exchequer (treasury secretary) is going to abolish this new Health and Social Care Levy, which will, starting in 2023, appear as a separate item on all employee payslips.

    Complacency and pragmatism

    The government plans to raise from its tax increase some £12 billion to fund the National Health Service (NHS) and the long-term problem of social care. The first thing to remember is that NHS is a political project and objective rather than health care strictly focused on delivery. The political establishment, therefore, judges success in the NHS by the inputsrather than the outputs. A supposedly Conservative government has just announced a massive increase in government expenditure funded by tax increases without any thought for the implications for employment, innovation, or even a plan for how the money will be spent—other than on the NHS and social care. Note that the National Insurance increase also affects employers; this is a tax on jobs. The consequence will be increased unemployment and therefore increased welfare payments, and so the vicious circle continues.

    We are in danger of losing the moral argument for the market through complacency. Little interest is shown for liberalizing the supply side of the equation. The progressive side of the political spectrum shows little interest in the creation of the very wealth they wish us to redistribute or even the public goods they would wish us to have. There is a moral imperative to supply side economics.

    Rewinning the argument

    The current British Conservative government seems as far away from its predecessor under Margaret Thatcher in economic terms as it is possible to be. The left-of-center opposition is in disarray because Boris Johnson’s government has taken over their policy territory (we call it parking your tanks on the opponent’s lawn). The assumption is that all the millions of British voters who voted Conservative for the first time in 2019, and flipped scores of previously socialist districts, really want….more socialism.

    We need to rewin the argument for the market once again. How might we do this? Here are four suggestions relevant for all of us in market economics:

    1) We need to detach the idea that moral principle and moral high ground are linked to big government, more debt, and greater intervention.

    There is an appalling lack of economic literacy and moral education. We fail to teach people how to make moral economic decisions in a market context. More government is rarely the answer to any question. A vision for the power of civil society in which intermediate institutions, often church focussed, provide welfare and support which is local, relational and targeted alongside a competitive market economy in which jobs are created, wealth created and ideas and innovation set free. The people die for a lack of vision.

    2) We must reassert the power of the supply side of the economy. Wealth creation is a moral imperative.

    If there is a lack of housing, what will generate more housing, a rental cap, a subsidy or relaxing planning restrictions? The former two will restrict new builds, the latter will increase them. An increase in the supply will lead to a relative fall in price and hence enable access to the housing market at the entry level. We can release the power of the supply side by encouraging competition, innovation and enterprise. Every single time government proposes demand-driven measures we can reply with an alternative supply side policy. In addition, we can encourage our think tanks and policy institutes to develop specific policies in different areas of the economy. We should own the supply side and teach and proclaim the benefits.

    3) The power of enterprise, innovation, and low taxation needs emphasizing. These are God-given gifts reflected in the creation order for the good of our human societies.

    How is entrepreneurship, innovation and creativity encouraged? Perhaps by incentive rather than government handout? Perhaps by allowing innovators to retain a higher proportion of the profits generated by their ideas, or by incurring a lower level of taxation? Surely it is this sort of approach which sets entrepreneurs free? The benefits of this will accrue to us all. Wealth creation through enterprise increases the size of the national income. It is a complete fallacy that the size of pie is fixed and that politics is about how to divide up that fixed pie – the real power of enterprise, the real power of God’s creation is that the creation of wealth for the common good truly reflects God’s purpose and character in all his abundance; the pie can grow! We can harness the market to provide solutions to environmental problems that do not simply involve government regulation and control, everything from trading in fish shares to the development of battery technology.

    4) The place of the family and the nation-state must also be stressed. This may be rather unpopular but, it seems to me, alongside economic liberalization we need a clear priority to be afforded the institution of the family (rather than the power of the state) and free-trading nation-states (rather than protectionist superstates).

    An additional dollar raised in government revenue through taxation means a dollar less in the pockets of individuals, a dollar less for the care, love, well-being and development of the family and, indeed, a dollar less for philanthropy in civil society. The family is the powerhouse of society, of God’s purpose and order, of the economy itself. Small and family businesses are the most trusted businesses in society. They represent jobs, wealth creation, innovation and contribution to society. They care for their employees, contribute to local communities, and can represent a stability from generation to generation that government can only dream of. We can revitalize the family as a social, civil and economic entity.

    In sum, we must make clear and coherent arguments for a small state, the liberalization of the supply side of the economy, and a Christian emphasis on civil society and the family. In this way we will set the context for true freedom and true responsibility. This argument has to be remade and rewon in every generation.

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    Rev. Dr. Richard Turnbull is the director of the Centre for Enterprise, Markets and Ethics and a trustee of the Christian Institute. He holds a degree in economics and accounting and spent over eight years as a chartered accountant with Ernst and Young and served as the youngest ever member of the Press Council. Richard also holds a first class honours degree in theology and PhD in theology from the University of Durham. He was ordained into the ministry of the Church of England in 1994.

    Dr. Turnbull served in pastoral ministry for over 10 years and for seven years was the principal of Wycliffe Hall, Oxford. He has written several books, is a Fellow of the Royal Historical Society, and a visiting professor at St Mary’s University, Twickenham.