Against the statist left

[By Chris Dillow]

Last week, I argued for leftism against classical liberalism. This week, I'll take the other line, and argue why leftists shouldn't be statists.

1. Patterned conceptions of equality are inadequate. It's not good enough to take a snapshot of the distribution of income and declare it to be too unequal.
I say this for three reasons. The first, as both Hayek and Nozick argued, is that it justifies endless ad hoc interventions, an incessant busyness. Too many leftists fail to see that political activity should stop somewhere.
Secondly, it reduces justice to a question of taste. You say a Gini coefficient of (say) 0.4 is too high. Someone else thinks it acceptable. How do we adjudicate? It's a simple slip from patterned conceptions of equality to woolly-minded post-modernist relativism.
Thirdly, it fails to see that what matters is how inequality arose. I have no problem with the fact that Thierry Henry earns 100 times more than I do. He hurts no-one (of importance) in his work, exploits no-one. His income comes from a fair process - subject to the proviso that we would, in a veil of ignorance, contract to pay out insurance if we were lucky enough to have such a high income. But I do have a problem with incomes - even much lower ones - that arise from the exploitation of power inequalities. The incomes of rent-seeking managers, or those of the beneficiaries of historic injustices, are more troubling.

2. Information is limited. Hayek was right. Central agencies just don't have the knowledge to intervene well in the economy.
Take, for example, New Labour's anti-poverty policies - the minimum wage and tax credits. How can we set a minimum wage that reduces poverty wages without destroying too many jobs? What withdrawal rate do we apply to tax credits to maximize the relief of poverty whilst reducing disincentive effects? Can complex tax credits be administered efficiently?
These questions make enormous demands upon our knowledge - too enormous.

3. Markets work. If information cannot be centralized, the case for a market economy - which makes best use of dispersed knowledge - emerges naturally. The case for free markets is not that they maximize static efficiency, but that they increase the potential to find new, better ways of doing things, and of producing new goods and services.
Simple empirics prove that markets are fantastic at giving us newer, cheaper, better goods. Just compare shops today with 20 years ago. Has innovation in state-provision really kept pace?
The question, then, is: can we make more use of this tool for increasing innovation? Can we introduce it into education and health? Can we use markets to spread economic risks, rather than rely purely upon a welfare state and macroeconomic management? A serious left would investigate these questions without prejudice.

4. There's a trade-off between big government and redistribution. In the UK, the top 10% get 32% of all UK pre-tax incomes (pdf here). Even if we could tax these at 75% and suffer no adverse incentive effect upon their labour supply, we'd only raise 24% of GDP in taxes. But actual spending is around 40% of GDP.
Simple sums, then, tells us that financing big government requires taxes upon people who aren't rich. And means the tax system can't redistribute income.
This problem is exacerbated by the fact that the rich have the power to shift the tax burden off their own shoulders. They can threaten to move offshore. They have more access to politicians to press their case. They can exaggerate the adverse incentive effects of high taxes. And their newspapers pretend that the wealthy are really only on "middle incomes", thus increasing public opposition to redistributive taxes.
The upshot of this is that the tax system is not redistributive. In the UK, the post-tax Gini coefficient is the same as the pre-tax one. And not just the UK. Vito Tanzi and Ludger Schuknecht say:

Public expenditure may often be a relatively inefficient instrument for equalizing incomes...Transfers are much better targeted in countries with small public sectors. In countries with big public sectors, only 22 percent of transfers benefit the poorest quintile. In France or Sweden, more than 20 percent of transfers go to the richest 20 percent of households. In countries with small governments, one-third of transfers reaches the poorest quintile.

5. States get captured. This highlights a more general problem - states, like any monopoly, encourage rent-seeking. The pushy and the powerful benefit at the expense of the poor. We see this in the EU's proposed imposition of tariffs on Asian shoes. Powerful and rich-ish European shoe manufacturers win. Poor European consumers and even poorer Asian shoe workers lose.
But it's also true on a bigger scale. Remember the 1950s. White trades unionists got a goodish deal from the state. But racism and sexism were rife. Blacks and women didn't benefit much (initially) from social democracy, as they weren't organized. And even today, families with children do better from the state than do the single unemployed or the mentally ill - not to mention, of course, the genuinely poor in the developing world.

6. Hierarchies are inefficient. The state is a steep hierarchy - more so, I guess than private companies; I've heard of firms delayering management but not the state doing so.
This should deeply offend all egalitarians. For one thing, inequalities of status and power are inherently bad - at least as much so as income inequalities - on top of the fact that they are, literally, deadly.
And hiearchies just don't work. As Kenneth Boulding said in this great essay:

Almost all organizational structures tend to produce false images in the decision-maker, and that the larger and more authoritarian the organization, the better the chance that its top decision-makers will be operating in purely imaginary worlds...no matter who is the role occupant, the decisions will be much the same.The inference of this theory, of course, is that fools in high places will make just the same decisions as wise men.

One big problem with hierarchies is that they are brittle - when weight is put upon them, they break horribly. We saw this most spectacularly with the fall of the Soviet Union. But a similar thing happened in the UK in the 1970s, when the post-war social democratic settlement collapsed. As unemployment and inflation both rose, statists had no good answer to the Thatcherite critique. The upshot was that workers who had looked to the state to guarantee them jobs were horribly disappointed.
The contrast here is with cybernetic principles, whereby feedback mechanisms allow systems to be stabilized by self-regulating forces, not external "expert" intervention.
What sort of policies would all this lead to? I suggest the left should support simple redistribution - a citizens' income - over complex interventions such as tax credits and minimum wages - and should consider ways in which public services can be delivered not by a monolithic state, but by competing co-operatively run schools and hospitals.
But policy-wonking is second order. The bottom line here is that the egalitarian left should oppose the state more and the market less.