Ten tenets: Politics and the market economy

In his final Presidential Address at the Annual Conference in Leeds, Sir Ian

Byatt provided delegates with a thought-provoking framework of key propositions. Taken together,

they provide a skeletal overview of a stance that one anticipates Sir Ian plans to develop further. They are presented here as a stimulus to classroom discussion and debate.

PROLOGUE

The market economy in the last 200 years has been a huge success. But it has not been greatly loved. It has come under regular attack and there has been constant pressure to over-rule it, especially in the first three quarters of the last century. Attempts to replace it, in whole or in part, regularly fail. Yet the pressures remain.

It seems to me that we have come to terms with 'the economic problem' in that we have recognised that, while the fundamental problems of scarcity cannot be solved, we can organise ourselves so as to partake of (almost) continuous economic progress.

The political problem is proving more tricky. We have still to recognise that the fundamental problem of agreement cannot be solved (we still talk about what 'the country' wants), and we still have a fair way to go to establish the processes needed to complement the Rule of Law in managing a civil society.

What, then, are the issues, and what, today, is the way ahead?

I would like to present some key propositions and to outline a case for each of them.

1 From the late 18th century onwards, economic growth has transformed people's living standards.

I define living standards widely, to include a person's chances of enjoying good health, long life, leisure, and wealth.

Throughout the 19th and 20th centuries, there has been a well established process and pattern of growth: takeoff, catch-up, and frontier, with the process occurring at different rates for different countries.

In a liberal market economy:

the interaction of technology and markets, supported by the necessary investment, ensure that the frontier continues to expand at a significant rate of between 2% to 3% a year

the standard of living tends to double every generation. The prime example is the US economy.

take-off and catch-up with others work better. The drivers of growth seem to be:

- liberal trading arrangements - flexible markets - good governance - good basic infrastructure - incentives to innovate

2 Nationally, income is a stable log-normal distribution. Globally, it depends on national positions on the path of economic growth.

The distribution of welfare has many dimensions, but broad measures provide a good general picture of how economic benefits are spread among the population.

Nationally:

Changes in income distribution, conventionally measured, take place only slowly. In the UK, there is evidence of a narrowing in differentials in the first three quarters of the 20th Century and a widening in the final quarter. The rich have got richer. So also have the poor - and, until recently, rather faster.

There are differences between countries in patterns of income distribution, but they are often less than expected. Income in the Soviet Union, for example, was not more equally distributed than in Sweden.

Health outcomes and life expectancy have become more equal. The 19th Century correlations between social class and height and weight have largely disappeared.

Globally:

Most of the differences between individuals result from differences between countries. The main determinant of one's own prosperity is the country in which one was born or eventually lives.

In the growth process, these differences widen and contract depending on the timing of take-off, catch-up and frontier-growth.

Trade can be expected to reduce differences between countries, even in the absence of labour migration (the factor price equalisation theorem).

Capital is mobile, subject to governance. It is attracted by stability, and discouraged by instability. It can be subject to institutional barriers.

Aid can be useful in creating social capital if properly targeted (which it often is not) but will never be a major driver of growth.

It will take a long time to affect significantly the living conditions of the poor in the developing world. This is unfortunate, but inevitable.

3 Sustained economic growth requires good governance.

Perhaps the most important requirement is to avoid wars, and especially world wars. Wars not only destroy capital, but also create illiberal approaches to government. Are wars avoidable, or is a state of war the natural condition of mankind? Professor Michael Howard argues that it is.

Revolutions also are usually economically catastrophic. The French Revolution held back the economy of France and the Russian Revolution the economy of Russia (in both cases as the take-off was developing). Revolutions can also strengthen illiberal forces who seek to impose their will.

The rule of law in a civil society recognises the need to contain conflict, including commercial conflict, and devises acceptable ways of handling conflicting interests. This has proved beneficial to economic development. It goes much wider than the 'night watchman state' and includes competition law and the regulation of business. At its best, it involves recognition that differences in objectives are a natural part of human society and that government constitutes not the imposition of values but the accommodation of different values. It requires thinking about trade-offs, not searching for perfect solutions.