It is time for the Right to make Peace with the State

To paraphrase John Maynard Keynes: Practical men, who believe themselves to be exempt from any intellectual influence, are usually the slaves of some defunct ideology.

For many ‘practical’ policymakers on the Right, that defunct ideology is pure free market economics, or ‘Neoliberalism’, and has been since the Thatcher/ Reagan revolutions of the 1980’s.

The neoliberal attitude to progress is that state intervention is a hindrance to private initiative, which if left alone, will lead to economic and social progress.

Or in the words of the influential neoliberal economist Milton Friedman:

The greatest advances of civilization, whether in architecture or painting, in science and literature, in industry or agriculture, have never come from centralized government. 

Therefore economic policy should be focused on reducing the scope of the state. This reasoning explains why no one can criticise free market think tanks, the Tea Party or centre right newspapers for proposing complicated economic policies. Usually 5 words can summarise their position on any economic issue whatsoever: Less Spending. Less Taxes. Deregulation.

There is a problem with this approach to economic policy; historical evidence suggests it is deficient. Ironically, two of these examples, outlined below, are to be found in The Ascent of Money: A financial History of the world by self proclaimed Thatcherite, Niall Ferguson. To his credit, Ferguson is a better historian then he is ideologue.

The world’s first Public Company

Tesco, Google, Apple and BP are examples of the large public companies that are essential to modern society. They are essential because they can raise large funds to operate on a large scale, without which a company like BP couldn’t invest billions into oil refineries to fill petrol stations.

Public companies attract large funds because they offer shareholders two assurances: Limited liability, that shareholders can lose no more money than they invest, and the option to exit an investment by selling on a stock market. These assurances make public company stock attractive to large numbers of potential investors.

Thus, the innovation of a public company with limited liability that is traded on a stock market was one of the ‘great advance[s] of civilization’. But one that – contrary to Milton Friedman’s claims – was a direct result of ‘centralised government’ action:

As Ferguson explains, the story of the Public Company originated in Dutch efforts to wrest control of the lucrative Asian Spice trade from the Portuguese and Spanish.

The great difficulty merchants faced was that voyages were very long – a fourteen month round trip being well below average – and hazardous, with many ships not returning.

By 1600 there were six fledgling East India companies operating out of Dutch Ports. In each case the entities had a limited term – usually the expected duration of a voyage – after which funds were repaid to investors.

Ferguson explains that this business model was insufficient to build the permanent bases and fortifications necessary to supplant the Portuguese and the Spanish.

That’s why the State intervened,

‘Actuated as much by strategic calculation’ as the profit motive, The Dutch parliament proposed to merge the existing companies into a single entity (United Dutch Chartered East India Company, or VOC for short) which was given a trade monopoly on all Dutch trade east of the Cape of Good and west of the Straits of Magellan  

It is worth spending a moment reflecting on how poorly received any equivalent policy would be in the current UK climate – were the government to propose that all firms in an industry merge into a monopoly to serve the national strategic interest. The centre right press would be up in arms. It would simply not be politically feasible.

Unimpeded by the constraints of 21st century Britain, the 17th century Dutch government could engage in innovative institution building. The new VOC structure contained several novel elements that made it a forerunner to the modern public company:

-The principle of limited liability was implied.

-Subscription to the company’s capital was open to all residents. Even servants were among those who rushed to hire shares – anticipating the present age of mass stock ownership.

It lasted for 21 years, a longer period than its predecessors – anticipating the infinite life of modern corporations.

The new company raised 6.45 million Dutch guilders, making VOC the biggest corporation of the era (its English rival only had 820k guilders).

Crucially, a secondary market came into existence allowing shares to be bought and sold. Initially such transactions were done in open air markets but so ‘lively’ was the market that a specialised building – the world’s first stock exchange – was built to house the trading.Ferguson writes: ‘what went on there before noon and 2 o clock each workday was recognizably revolutionary’.

Or, to put it another way, the ‘revolution’ of the world’s first stock exchange came about as a by-product of a state sponsored monopoly.

The capital rich company now had the resources to succeed. By the 1650’s, VOC had established an effective and highly lucrative monopoly on export of cloves, mace and nutmeg.

The World’s first stock market and large scale corporation did not arise out of spontaneous free market action but out of robust state design. Ferguson shows a similar process driving the expansion of home ownership in post war America.

The great American Suburb

Before the 1930’s, Ferguson reveals, little more than two fifths of American households were owner occupiers. Mortgages were short – term, usually for three to five years and the principal was not repaid until the end of the loan term, leading to a ‘balloon sized’ final payment.

Enter the State: As part of Franklin Roosevelt’s New Deal, the American government encouraged mass property ownership as a bulwark against socialism, stepping in where the ‘market had failed’.

Several measures were adopted but what ‘really made the difference for American homebuyers’ was the Federal Housing Administration (FHA) – which did the following:

– Provided federal backed insurance for mortgage lenders to encourage large (up to 80% of purchase price), long (twenty year) and low interest loans.

– Standardised the long – term mortgage and creating a national system of valuation and official inspection, laying the foundation for the national housing market,

‘This market came to life’ Ferguson explains , when a new Federal National Mortgage Association – Fannie Mae – was authorised to issue bonds and use proceeds to buy mortgages from the savings and loan associations (US version of mutual societies).

‘Because these changes reduced the average monthly payment on a mortgage, the FHA made home ownership viable for many more Americans than ever before’ Ferguson writes. ‘Indeed it is not too much to say that the modern United States, with its seductively samey suburbs, was born here’

The influence of the tea party probably makes any repeat of New Deal style planning impossible in the US today. George Osborne hopes and prays for a ‘private sector led’ recovery as he cuts the deficit, but it is proving slow in coming. As both countries struggle with the after-affects of the financial crisis, ideological straitjackets on the right hinder the way forward.

The Thatcher and Reagan movements were products of a bygone era. The notion that an activist State or (whisper it) ‘economic planning’ is always wrong has historical counter examples. After the Soviet Union fell, the Left had to make its peace with markets and capitalism. Maybe in the midst of the biggest recession in a generation, it’s time for the Right to make its peace with the State.


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