God Save the Market!

Former Labour leaders one and all, Britain's "Gang of Four" are sparking a new promarket consensus.

People in Britain or the United States who see the Social Democratic Party as a rather milder Labour Party are misreading British politics. But they are misreading even more the shifts in technology and living habits that underlie a major political realignment.

The political landscape of Great Britain has changed dramatically, so much so, I predict, that British government until the end of the century and into the 21st century will now probably alternate between two market-oriented parties or coalitions—the new, "liberal" Conservatives and the Social Democratic/Liberal Alliance. They will certainly be more market-oriented than the Labour and Conservative parties that have dominated British government for 60 years.

The most important result of the approaching new convergence of policy is that both coalitions will be able to pursue market-oriented programs without the risk that their reforms will be reversed, as Labour often threatened in the past. Their task will also be eased by the British bureaucracy's shift away from the attitude that policies reinforcing the market structure of the economy and society should be resisted—what could the reforms do but create temporary dislocations, for they would likely be abolished by the succeeding government? (This was actually the fate of much British economic legislation after the war. The archetypal victim was the steel industry, which was nationalized, denationalized, renationalized, and is now being simply run down.)

Much of the long postwar antimarket consensus shared by Conservatives and Labour reflected the political competition for votes, with both parties offering security to workers in heavy industry and "public" services and making welfare bribes. It also reflected the tendency, analyzed by the economists who have studied public-choice phenomena, for the policies of political parties in a two-party system to converge.

Today, the convergence is increasingly promarket. And the changing consensus rests on an older proposition in simple monopoly theory: a firm is less likely to give you exactly what you want if you cannot go to a competitor. So in politics. The Conservatives are more likely to sponsor market policies the more they hear their competitor—now the Social Democratic/Liberal Alliance—talk about decentralization, choice, competition, and harnessing market forces.

The Social Democrats: market populists versus Labour paternalists

The climacteric in the British political system, and its importance for British economic policy, is that the Labour Party is being replaced by an alliance of the Liberal Party, which has been out of office since 1915, and the Social Democratic Party (SDP), which was formed in 1981 by four senior Labour leaders who broke away from their party. Known as "the Gang of Four," they had all held positions in recent Labour government cabinets: Roy Jenkins, former chancellor of the Exchequer and high commissioner of the European Economic Community (EEC); William Rodgers, former transport minister; Shirley Williams, former education minister; and David Owen, former foreign minister, health and social security minister, and the group's most radical rethinker of policy.

My analysis of the prospects for British politics and economic policy in the 1980s and 1990s is not affected by the Alliance's showing in Britain's general election in June. The Alliance won 26 percent of the popular vote, almost double the Liberal Party's 13.8 percent showing in the 1979 elections. But because of Britain's electoral system, it won only 23 of the 650 seats in Parliament. Of the two parties, the SDP did worse: while the Liberals registered a modest net gain of 7 seats, the SDP lost all but 6 of its 29 MPs. Among the losers were Rodgers and Williams. Even so, they retain much influence within the SDP.

Despite this disappointing showing, the party is far from dead. Its ex-Labour leaders are still in the process of shaping its policy. What some of them are saying this year is different from what they said in 1982, still more than 1981, and will be different again in 1984 and 1985. That this process should take time is not surprising.

The essence of the development is that they are moving in thought, and in spite of its Labour origins, the SDP will emerge as a market-oriented party over the coming 5 or 10 years. How fast and how far we shall see, but the signs are that it will emerge as more market-oriented than the Liberal Party, which is now more social-democratic in the European sense than liberal in the classical sense of libertarian.

There is a debate within the SDP between Labour-oriented paternalists like Shirley Williams and market-oriented decentralists like David Owen. The debate will continue, but it will end in victory for the market-oriented leaders. This will happen not because political leaders have seen new (or rather old) truths. It will happen because all the postwar collectivist policies before the advent of the Thatcher government in 1979 failed and above all because the party leaders will have seen that it is better—for liberty and prosperity—to go with rather than against the grain of the market.

The market forces that are impelling this political shift are technological change (supply) and incipient social advance (demand), which reflect the preferences, suppressed capacities, and emerging aspirations of ordinary people. On the technological-supply side, as SDP leaders are recognizing, an open society with a free market is the only hope for the rapid incorporation of technological innovation into the British economy. For 20 years, that economy has been ailing under increasing government and other centralized control that capitulated to organized interests opposed to change, mechanization, and modernization generally.

The "social''-demand market force lies in the embourgeoisement of the masses ("the working classes"). They will reject producer dominance in state industry and welfare, and they will demand better quality in education, health, and housing than government can supply out of tax revenues. This social demand will be reinforced by the revival of the family as the social unit and the growing emancipation of women, whose social roles have traditionally required greater practical understanding of the market than men's.

David Owen, the heir apparent to SDP leadership now that Roy Jenkins has stepped down, has realized all of this sooner than other SDP leaders. Referring scornfully to the clause of the Labour Party Constitution that defines Labour's goal as "the common ownership of the means of production, distribution and exchange," Owen has declared, "Those of us who broke away from Clause IV socialism did not do so merely to peddle Fabianite revisionism.…The task for the Social Democrats and Liberals is to develop the concept of the social market." Two of the other three of "the Gang of Four" have also been recognizing these new forces, even if less coherently.

In a televised lecture delivered while he was high commissioner of the EEC, Jenkins warned that government spending of 60 percent or more of the national income would endanger liberties. No British socialist would say that: he wants 95 percent or 100 percent.

And SDP leader William Rodgers, considered a tough and shrewd politician, said soon after Labour's defeat in the 1979 elections: "What is wrong with choice and diversity? Why should enterprise and opportunity be dirty words?…Many people see social progress as a higher net income and more money to spend on themselves." By 1982, Rodgers was talking of letting "the market economy work more efficiently."

The course of internal debate in the SDP and the Alliance as a whole between the market-oriented populists and the lingering state paternalists is demonstrated in the case of education policy. "Free" education, financed by taxation, has been a sacred cow of British politics in all parties almost since it was begun in 1870, but in the last few years it has been losing its hold on public opinion.

The paternalist view was put strongly by the fourth member of "the Gang," Shirley Williams, in 1981. In her political testament, Politics Is for People, she wrote that "the freedom to send one's children to an independent school is bought at too high a price for the rest of society." But that was two years ago. More recently, Williams's totalitarian approach has been replaced by ideas for narrowing the gulf between government and private education. Her paper prepared for a seminar in Israel in May indicated that she was moving rather quickly in a libertarian direction.

They're "new" Conservatives—but socialized medicine is "safe"

The term social market, used by both David Owen and Conservative leader Keith Joseph, requires comment. In Britain (as in Germany), it is not an economist's analytical term but a politician's tactical euphemism—a weasel-word. It expresses the politicians' anxiety to demonstrate to the populace, who have votes as well as compassion, that the market can be efficient and humane.

Economists have long argued that there is a remedy if the market economy produces inequality of income that prevents the lower-paid from buying civilized minima in food, housing, education, and health care. So as not to distort the incentives that lead to maximizing efficiency, income can be redistributed outside the market to pay for food, housing, etc., inside the market. This is the neglected promarket method that was abandoned (or forgotten) in the British welfare state that redistributes "free" services outside the market.

British Conservatives have at long last learned and applied this issue of the market since 1979, boldly in some cases and hesitantly in others. Council ("public") housing, which rose to 6 million units by 1979—or one in three homes—is being sold to tenants, but at a rate that will take half a century to dispose of the lot. Elsewhere, the Conservatives have barely begun to desocialize welfare (or even the mass of nationalized industry). They have been painfully slow on reducing the power of government over education and, most ill-advised of all, they have said the National Health Service is "safe" with them.

Still, in the new political competition between the Conservatives and the SDP that has been proceeding at a quickening rate, the Conservatives have a long lead. Sir Keith Joseph, a key figure in the Thatcher government, first spoke of the "social market" in the mid-1970s. More recently Sir Geoffrey Howe, another leading Thatcherite, used the term liberal Conservatism in an article on the philosophy and politics of the new Conservatives in the Journal of Economic Affairs. "We are strongly committed to economic and social policies founded on freedom," he explained. "We are attached to and have faith in the potential of individual effort. We want to harness that effort to the common good.…We are committed to the rule of law rather than the authority of the state.…In the best and true sense of the word, we are liberal Conservatives."

Howe was unambiguous about basing liberal Conservatism on an increasing use of markets in industry, where the argument is clear. But he was equally forthright about turning to markets in welfare, where the argument is not well known, where it is apt to produce emotional reactions about callousness toward the poor, and where there is strong resistance to reform from teachers, health workers, social-service officials, local politicians (not least in the Conservative Party), and trade unions.

Yet that is the philosophy that the Conservatives are developing strongly. Evidently they are determined to go ahead with their market-oriented policies in their second term and expect public support for it. As the June general election approached, statements of policy became less explicit, perhaps to avoid arousing the vested interests that will have to be dislodged. But the new instruments of policy will have to re-emerge. Howe's general principles are a landmark in the public declarations of the formerly paternalistic, patrician Conservative Party—and in British political history.

This is the strong challenge to the Social Democrats and the Alliance as a whole. David Owen and the others must proceed to clarify their counterproposals. The new Conservative challenge is appealing over the heads of the Alliance parties' leaders to their followers in all social classes, and they succeeded in attracting millions of working-class votes in June. The prospect of smaller government, lower taxes and fewer bureaucrats, owning a home, acquiring a business or property ("every man a capitalist") carries with it the anticipation of more after-tax earnings to pay not only for home improvements, clothes, and holidays but also for better education and medical care. For the more distant prospect is of more choice in education through school vouchers and "open enrollment" (across district lines) and in medical care through private health insurance.

The future of Britain: initiatives from the bottom up

The interaction between economic ideas and the political realignment is two-way. First, the Social Democrats broke away from Labour largely because the orthodox Labour-socialist solution of more government control for almost every problem had been tried and found dismal. In 10 years of Labour rule between 1964 and 1979, and in the whole postwar Labour-Conservative anti-market consensus, the orthodox approach failed. So much for the socialist/centralist idea. Second, the effect moving in the reverse direction is that the party realignment is opening the way to a readier hearing by "practical people" in all parties (except Labour) for ideas that would have been dismissed five years ago as "politically impossible."

These two influences will reinforce each other. And their interaction will be strengthened by three profound changes in British society.

First, the British people are going to support whichever of the two coalitions, new Conservative or Alliance, is the more effective in opening up opportunities for new services and expenditures. But they will not wait for political parties (or bureaucracies) to reshape the institutions that will give them the wider choices now increasingly within their financial reach. They will simply not use "public" services in fuel, transport, education, medicine, housing, garbage collection, and many more. They will "go private" and pay in the market. Britain cannot much longer be run half consumer sovereign, half welfare supplicant; half free, half slave!

Second, where they resent taxes to pay for "public" services they reject or think should not be provided (such as subsidized Council housing for the nonpoor), people will simply not pay their taxes. This rejection of government is undoubtedly spreading, and no one knows its extent or rate of growth. The official statistic of 7½ percent of national income escaping taxation is, I would say, certainly too low.

Third, the rate of technical and social change is now probably too fast for centralized government institutions to absorb. The polity will lag behind the economy and society. The question is which of the two coalitions will sooner recognize the urgent need for government to streamline its own processes and make the economy more flexible and decentralized.

Will the Alliance beat the Conservatives in the market competition?

The SDP's loss of seats in the June election will not halt the long-term political advance of the Alliance. The SDP attracted 3.5 million votes after less than three years of activity, after all. It has yet to resolve its internal debate between the old paternalists and the new libertarians. But an increasingly affluent society will not want even more paternalism; so the libertarians will win the argument.

Already, David Owen, who looks to be emerging as the market-oriented leader of the SDP, has caught up with the new Conservatives on the central theme of "the social market" and is saying some courageous, even "outrageous," things first. Minister of Employment Norman Tebbit, one of the strongest ministers in the Cabinet, has lately talked, although tentatively, about making strikes in the public sector illegal. Owen said as much in March—not tentatively. The SDP leaders, all of whom had to handle trade unions directly when in the Labour cabinets of the 1970s, know them better than do the new Conservatives because they were (then) on the same side in politics. Moreover, the SDP can take a tougher line because of its mostly Labour, trade-union, or working-class origins—its leaders cannot be written off as Conservative or capitalist "class enemies" of the people.

On the general working of the economy, Owen is as outspoken as the most advanced Thatcherite: "One of the skills of managing the overall national economy is in understanding the extent to which an amalgamation of public and private sector attitudes and policies destroys the dynamics of the systems, when curbing profits limits investment, when squeezing prices limits expansion, when interference in wage bargaining affects productivity, when job security impairs innovation and risk taking."

That is about as "Whiggish" a free-market declaration as any British politician, even Sir Keith Joseph, has made for some years. And it is more penetrating than most. Not least, Owen is no narrow nationalist, and no less liberal than Sir Geoffrey Howe.

The Labour Party will take a long time a-dying. But it is putting itself out of court by allowing its policies to be dominated by economic technocrats with a nationalistic, almost autarkic "Alternative Economic Strategy" for Britain or, even more hilariously unrealistic, for the whole of Europe. The party will eventually split again between the socialists and remaining democrats. Only the aging Labour stalwarts will vote Labour, plus some idealistic young, misled by the latest edition of socialist promises. Middle-aged men with home mortgages, two cars, and video recorders will not—and their wives are preceding them; they increasingly voted Conservative or Alliance in June.

Classical economic liberalism is returning to Britain because it makes possible the acceptance of new enterprise, competition, and the test of the market—the only cultural ambience in which we can keep pace with Europe, America, and the Far East. The days of government initiatives based on ignorance of public preference, distorted by political calculation, and susceptible to sectional pressure groups are numbered. The future of Britain lies in creating all possible initiatives from the bottom—by individuals, groups and small firms, commercial enterprises, cooperative ventures, and mutual aid. That is the truth that, ironically, Labour is doomed by its philosophy to reject.

The two political contenders who do see the truth start with unequal advantage. The new, liberal Conservatives have a long start. The SDP and the Alliance could catch up and pass them in 5 or 10 years. But the important effect on current economic policy is that it can be more market-oriented because, after the experience of nearly 40 years of anti-market policies, both coalitions alternating in government will have to accept the principle. They will differ on how to "make the market economy work more effectively," but there will be no party that wishes to destroy it, because it will be accepted at last, after 100 years of futility, that it is indestructible.

Arthur Seldon is advisory director to the Institute of Economic Affairs in London and an author of several books on free-market economics. This article was drafted before and revised after Britain's general election in June.

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The SDP's Rising Star

In various accounts of "the Gang of Four" that founded Britain's Social Democratic Party in 1981, there are descriptions of Roy Jenkins as easy and accommodating, William Rodgers as thoughtful and charming, and Shirley Williams as warm and sincere. But descriptions of David Owen, expected to be chosen the next SDP leader, are very different.

The Manchester Guardian has referred to Owen as "abrasive and difficult," and the New York Times reported that he "irritates older colleagues by his disinclination to suffer fools at all, let alone gladly." A former SDP official told REASON that Owen is "cold and calculating," "arrogant," and "the most ambitious man I've ever met in British politics."

Owen may not be the most lovable individual in the United Kingdom, but he's certainly one of its brightest politicians. His beginnings in politics were unusual. In a country where politicians frequently have backgrounds in law or history or journalism, Owen was trained as a doctor, which profession he practiced briefly. (Few other members of Parliament have published articles in such distinctly apolitical journals as Neurology and Clinical Science.)

Moreover, Owen got his start in politics as a Labourite representing a Conservative constituency. In 1964, at the ripe old age of 26, he first ran for Parliament to represent Torrington but was defeated. Two years later he ran in the Conservative stronghold of Plymouth-Sutton and scored an upset victory. Although the boundaries of his district were altered slightly, he has been representing essentially the same constituency for 17 years now. Even a Conservative landslide was not enough to unseat him in the 1979 general elections that made Margaret Thatcher prime minister.

In the late 1960s and early 1970s, Owen's career progressed at a steady but unremarkable pace. When Labourite Harold Wilson was prime minister, Owen held a handful of minor posts. When conservative Edward Heath was prime minister, Owen was opposition spokesman on defense issues, although he resigned in 1972 because of Labour's foot-dragging on British entry into the Common Market. In the Labour government of James Callaghan, Owen had the respectable position of health and social security minister, then moved to the second spot in the Foreign Ministry.

In 1977, Foreign Minister Anthony Crosland died. It would have been customary for Callaghan to pick a new foreign minister from among his senior cabinet ministers. Instead, he bypassed his cabinet and elevated Owen to foreign minister. Then 39 years old, Owen was Britain's youngest foreign minister in recent memory.

As foreign minister, Owen was a firm believer in detente and multilateral disarmament, which put him in conflict with unilateral-disarmament advocates on Labour's left wing. He cooperated with the US Department of State, and his Third World policies—particularly on the question of Rhodesia—closely paralleled the views of then-UN Ambassador Andrew Young.

Within the Labour Party, according to the New York Times, Owen was "a radical in many things, [but] he nonetheless abhorred the Marxist and Trotskyist element in his party." Owen's disenchantment with Labour reportedly began at the 1980 party conference in Blackpool, when he was hissed while delivering a speech defending the Atlantic alliance. It was the next year that he helped found the SDP.

In an ongoing tactical debate with the SDP over where to direct its appeal, Owen has consistently argued for going after left-of-center voters who are alienated by Labour. Two years ago, in the first contest for the new party's leadership, Owen ran against Roy Jenkins, an advocate of more-conservative tactics and a closer coalition with the Liberals. Owen lost.

But in 1983, Owen's opportunity came. He eloquently defended the Thatcher government's successful Falkland Islands campaign, and during the election, the Guardian noted that it was Owen rather than Jenkins "who emerged as the star of the show." Days after the election, Jenkins stepped aside as SDP leader, endorsing Owen as his successor.

After Jenkin's desultory leadership, Owen may provide a useful boost for the SDP. In the wake of the election, the Guardian considered whether the Labour and Conservative parties would be able to derail the SDP and maintain their old monopoly on government. The paper concluded, "If Dr. Owen can sustain the appeal and momentum he has built up since the Falklands war, that could well prove to be a formidable task."

—Paul Gordon