Why the state cannot save the economy
Instead of having arid debates about the state versus the market, we must create institutions and policies that can restructure the economy.
A question that comes up time and again in discussions of the economy is ‘What is the relationship between the state and the market?’ Underlying this query is a demand for some kind of rebalancing of the relationship – a demand premised on the idea that the current crisis is somehow an outcome of the deregulation of the financial markets.
One of the arguments that goes almost unquestioned, certainly in Europe, is that what is required is re-regulation, a systematic form of state intervention both in the financial markets and in other sectors. I find this outlook puzzling, since it is based on the assumption that the recent past has been an era of neo-liberalism where the state had a small and undistinguished role in social and economic life. In reality, the state already has a formidable presence in the economy, and has had for a very long time.
For example, in every major economy, we have seen very large government budget deficits in recent decades. In the UK and elsewhere, the public sector has played a crucial role in the creation of new jobs. Many of the financial policies now linked to the global recession are part-and-parcel of this state involvement in the economy, from low interest rates to encouraging consumer spending to the housing boom. The state has not been a neutral observer but an active promoter of these things.
Contrary to popular prejudice, the state is not a stranger to regulation. Listening to contemporary debates, you could be forgiven for thinking that the European Union (EU) is the most unregulated place in the world. Yet if you look more closely, you will find that while there has been some deregulation in some sectors, in the financial and banking markets for example, there has also been an expansion of state regulation in a whole number of areas in various different ways – including in finance and banking. Anyone who has had to put up with the rise of corporate governance and its many petty rules will know what I am talking about. The world of business is far more regulated than ever before.
So, what can the state do now? What is the role of the state today? Before we can answer these questions, we need to understand the fine balancing act that any democratic state has got to be involved in. On one hand, the state must restructure economic life and establish the basis for future growth, something that most governments recognise, at least rhetorically. On the other hand, the state also feels the pressure of political expediency and the need to maintain jobs and living standards. There is a contradiction between these two imperatives which, in the current period, most policymakers are reluctant to spell out. The UK government has been particularly loath to spell out the difficult decisions that have to be made in relation to this contradiction.
One way in which political leaders have sought to soothe this contradiction between future growth and current living standards is by promoting consumption. They believe that, somehow, if state expenditure is increased, the economy will be stimulated. And thus we can have prosperity and economic growth. This is naive. Giving more money to clapped-out car industries isn’t going to do very much for the future, nor will it even help the workers employed there in the long run because their living standards will be compromised.
So what kind of state do we need under these circumstances? It is wrong to counterpose the state to the market. The state has an indispensible role to play in creating the conditions for global recovery. It will do so not by becoming an even greater regulator, obsessed with micromanagment, nor by being the uninhibited printer of money. What is required is a strategic approach, diversifying away from consumer spending and financial services to a restructuring of the economy. In order to do this, the state will have to focus on at least five things:
- Science and innovation;
- An industrial policy, broadly defined;
- The improvement of infrastructure;
- The creation of a more productive and reliable energy sector;
- The encouragement of new, productive start-ups rather than on saving older industries.
We can all see what is wrong with the market, its imperfections and inefficiencies. But the state, too, is far from perfect. The public sector is far from being as efficient as it could be.
The first problem in relation to the state in the UK and the US today, and in other countries too, is the rise of risk aversion and the evasion of responsibility. As a result of these trends, the state has continually outsourced its authority. In some quarters, this process of contracting out responsibilities is regarded as a good thing; it is seen as part of a new reliance on private initiative. What is really happening is that the state is refusing to accept responsibility for the fact that it cannot provide, for example, world-class education for children.
Sometimes, the handing over of responsibility takes on grotesque forms. When two soldiers were shot at their barracks in Northern Ireland in March this year, what was really strange was that the barracks were being protected by a private security firm. Historically, the state has taken responsibility for the defence of the nation. Yet here we had private security guards – not famed for their high standards – protecting an army barracks in Northern Ireland. The guards themselves said that they could see what was happening, they could see the attackers coming with their guns, but they claimed that they didn’t have the training to deal with it. This process of contracting out is a bad thing, not because other people running things is bad, but because it is almost invariably driven by the state’s refusal to take responsibility.
When the UK Labour government announced that the Bank of England would become independent in 1997, that move was driven by the same impulse. The bank’s independence is itself not necessarily a bad thing, but this development showed that the government wanted to evade responsibility for economic decisions. This has also been a feature of national governments’ relations with the EU. Politicians are able to say ‘it wasn’t our decision, we were forced to do it by an EU directive’. Decision-making is done at arm’s length; responsibility is avoided.
The second problem is that the state has become very short-termist and one-sidedly tactical, far too subject to political calculations. The state therefore finds it difficult to make hard choices. Few politicians are prepared to say that the public sector will have to be cut back massively. Who spells out, publicly, the public expenditure cuts that were sneaked into UK chancellor Alastair Darling’s Budget in April?
Thirdly, something that I am most worried about as a sociologist, is the decline of the public-sector ethos. Again, this is particularly an Anglo-American problem, but it is affecting other countries, too. This ethos, which guided state actions in the past, was one that professed neutrality, objectivity, disinterestedness and professionalism. This has been eroded by an army of consultants coming in and out on a short-term basis. The civil service is no longer viewed in the same way as in the past. A distinct, institutional consciousness no longer exists. Try talking to a civil servant these days and you will find that they are more interested in you than you are in them. Why? Because they are looking to make contacts and find another job; always moving on.
Few people working in the civil service express the espirit de corps that is essential to any institution if it is to be effective. Ironically, you need a fairly conservative state institution in order to be experimentative. Unless you have a stable foundation on which to build, it is difficult to be innovative because you are constantly having to redo the things you did before.
Fourthly, the consequence of this is that the state as it is constituted in many parts of the West lacks any creative impulse to innovate. The UK government is constantly setting up quasi-state organisations whose mission is to innovate, to provide ‘blue-sky’ thinking, yet most of these organisations do not say or propose anything risky or interesting and instead churn out the same jargon and ideas time and time again.
Fifthly, something that is endemic to the state is a very inefficient public sector, particularly in Britain. The public sector cannot teach children how to read and write in a systematic way; the National Health Service is also highly inefficient given the amount of money that is spent on it. You only need to compare Britain’s health system to France’s in order to see that. The NHS is so inefficient it cannot even run a computer system. With a flu pandemic apparently on the way, the UK government has had to admit that it cannot even create a flu helpline, claiming it would take six months to do so. Setting up a helpline is not exactly rocket science.
This inefficiency will not be overcome any time soon. This is not to counterpose the state to the market, but rather to say that there are states which are weak or strong, smart or stupid. We are good at recognising failed states in Africa, but not so good at noticing the failed states closer to home. Similarly, markets are by no means always robust and there are some in major need of overhaul. What we need, and this is something we can all help to bring about, is a state with new policies that are more worthy of the twenty-first century and which is better able to meet our needs. We do need a state that can contain the most destructive effects of the global crisis, but we mustn’t think for one second that the state can save the economy. That is because we shouldn’t be trying to save the economy – we should be restructuring it.
This is an edited version of a speech that Frank Furedi gave at the Battle for the Economy in London on 16 May.
Frank Furedi is author of Politics of Fear (buy this book from Amazon(UK)) and Invitation To Terror: The Expanding Empire of The Unknown (buy this book from Amazon(UK)), both published by Continuum Press. Visit Furedi’s website here.
Previously on spiked
Frank Furedi explained why the state won’t be the saviour of the economy. He also said we need a public debate about the economy. Mick Hume saw last year’s budget as a cheap excuse for politics, and described Gordon Brown as a very ‘little Stalin’. Rob Killick looked at what’s in store for the British economy and set out a three-point agenda of what the G20 – and the rest of us – should be debating. Or read more at spiked issue Economy.
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