Energy and Environment

Neither socialism nor ‘compassionate conservatism’ help the poor. Free markets do

“We do not believe in untrammelled free markets. We reject the cult of selfish individualism. We abhor social division, injustice, unfairness and inequality. […]

[We believe] not just in society but in the good that government can do […]

We know that our responsibility to one another is greater than the rights we hold as individuals.”

This extract from the Conservative Party’s manifesto shows that it is not just the Labour Party that has given up on the market economy. The Tories could not have made their break with free market economics any clearer if they had publicly burned an effigy of Margaret Thatcher, pledged to reopen the coalmines (combined with a pledge to not actually use the coal for anything, because that would be un-green), and promised to renationalise British Airways. Sure, there were pro-market statements in the manifesto as well, but I have not found one that was not followed by a “but”.

There now seems to be a cross-party consensus that free markets do not work for ordinary people. Markets create wealth, but it is the government’s job to spread that wealth widely. Markets work for ‘the few’, but ‘the many’ would benefit from a larger and more active government.

The Conservative ‘detoxifiers’, as well as the Red Tories and the Good Right, who have inspired this way of thinking, see themselves as open-minded pragmatists, who care about what works for ordinary people, rather than what the Econ 101 textbook says. They see their free-market opponents as rigid ideologues, who care about ideological purity than about the well-being of actual people.

This is nonsense. There are plenty of policy options which are solidly rooted in free-market economics, which are solidly evidence-based, and which would demonstrably address the problems ordinary people face.

For people who earn modest incomes and who are not homeowners, the biggest drag on living standards is rents. UK rents, and house prices, are among the highest in the world, and the reason is that we are not building enough houses, because our planning system prevents it. I know that you have heard this a million times; I know that you are bored of hearing it, and believe me, I got bored of saying it long ago. But it is true, and it needs saying: none of the election manifestos addressed it. This is the most straightforward way of making a tangible difference to the living standards of low-income earners.

Planning liberalisation, more broadly understood, would not just lead to lower rents and house prices. It would lead to lower consumer prices across the board. It would cut the cost of, for example, retail space, which, given how competitive the retail sector is, would quickly be passed on to consumers in the form of lower prices. The vast majority of people would benefit, but low-earners disproportionately so.

Brexit provides us with a great opportunity of leaving the protectionist racket that is the EU’s Common Agricultural Policy (CAP). We now have the chance to follow the lead of countries like New Zealand and Australia, which have embraced free trade and free markets in agriculture, and where consumers have reaped the benefits of lower food prices.

But this will not just happen on its own. Switzerland and Norway have never been part of the CAP, but their domestic equivalents are even more protectionist, and their food prices, as a result, are even higher. The default option – which, at the moment, is also the most likely option – is to drift towards a CAP-replica at home, and to let the opportunities that Brexit provides go to waste. We could avoid that if politicians spent a bit less time signalling their anti-market credentials, and a bit more time thinking about consumer-friendly post-Brexit polices.

Brexit also means that we are no longer bound by the EU’s renewable energy targets, which means that we no longer have to force energy consumers to subsidise politically favoured industries via their energy bills. There has been a lot of focus on the profits of energy companies, but the cost of subsidising green energy accounts for a bigger share of energy bills than industry profits. After Brexit, we should quickly phase out green energy subsidies. This would make a real difference to energy bills, which would, again, benefit low-earners disproportionately. It does not even have to come at the expense of the aim of reducing greenhouse gas emissions: like Norway, we could still remain part of the European Emissions Trading Scheme (ETS), which is the policy that really matters when it comes to reducing CO2 output.

Childcare costs in the UK are among the highest in Europe, mostly because successive governments have over-formalised and overregulated the sector. ‘Childcare’ used to be about keeping children occupied in a safe and supervised environment. It has now been turned it into a form of pre-school education, with stringent staff-to-children ratios and a rigid curriculum. This has driven low-cost provision out of the market. Given that the UK already has one the lowest school starting ages in the world – what exactly is the point of effectively starting formal education at an even earlier age? British children spend more time in formal education than their peers in most other parts of the world, but this is not rewarded by superb outcomes in PISA or other league tables of educational attainment. So why not let childcare be childcare, and education be education?

Labour and Conservative detoxifiers talk a lot about ‘rebalancing the economy’, not just sectorally but also geographically. The common presumption is that this rebalancing needs to be done from Whitehall. Why not give cities and regions greater autonomy, and let them do the ‘rebalancing’ themselves? The UK remains one of the most centralised countries in the world. More decentralised countries, like Switzerland and Canada, tend to have various regional economic centres, rather than a single region that dominates economic life. Why not go down that route?

Five years ago, I published my book Redefining the poverty debate, which outlined a market-based reform agenda designed specifically to benefit people on below-average incomes. Whether you agree with my proposals in detail or not, the argument is surely more relevant today than it was then. The housing situation has only got worse in the meantime. On food and energy, the situation is more or less unchanged, but Brexit now gives us much greater scope to pursue the kinds of reforms I was talking about. A devolution of power from Brussels to Westminster could also be the starting point of a more far-reaching devolution agenda.

In short, there are plenty of fairly low-hanging free-market fruits left on the tree. You don’t even have to believe in ‘untrammeled’ free markets (although I do) to realise that plucking those would be a good idea.


Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

6 thoughts on “Neither socialism nor ‘compassionate conservatism’ help the poor. Free markets do”

  1. Posted 16/06/2017 at 08:53 | Permalink

    Surely it depends on which market. Health care for example has manifestly failed in America.

    The are many ways that markets can fail. A free market requires an informed buyer that will act in his or her best interests. It can be hard to be informed when it comes to health care, especially if you need to buy quickly. Also we see people will act against their best interests by factoring immediate cost against the not present now risks. “Save a little now, worry about the horrible painful death bit later. At the moment I’m alright.”.

  2. Posted 16/06/2017 at 13:39 | Permalink

    After Grenfell, you still believe profit seeking markets lead to the best outcomes for consumers? Shaving around a few thousand pounds (fire retardant vs non-retardant panels) off a £10m investment to squeeze additional flats in for more profit? You feel liberalised planning rules would help protect residents in future? Before you blame the fire on environmental regulation, just bear in mind the same insulation could have been provided but with fire retardant panels instead for a very low cost.

    You are on the wrong side of history, my friend.

  3. Posted 16/06/2017 at 17:55 | Permalink

    Beautifully written article, I am happy that educated people like you with a gift to explain things to broader audience still exist in this world where forgetting what brought prosperity and what diminished poverty is rather the norm than the rule. May all Conservative (and Labour/EU/socdem/Dem/Rep) politicians read this! Actually I wanted to write something similar in a different language for a different country but could not find the time yet.
    To Richard who commented before me: Sorry, what US has in health care, is not a free market. Free market requires free entry into industry causing a surge in competition driving prices down and quality up which is not the case there, by far. US health care example is actually so much in line with the costly housing issue Kristian describes here. The same issue – overregulation, not free market, causes US health care to be over over over priced even vs. other regulated half-markets. So no, this is not a good example of market failure, but rather of over-regulation failure.

  4. Posted 16/06/2017 at 18:07 | Permalink

    That ‘Conservative quote’ was pure Marxism. What the hell has happened to them?

  5. Posted 17/06/2017 at 17:49 | Permalink

    Kristian, you imply that housing affordability issues are mainly due to over regulation. But are these issues not actually a case of under regulation, or rather the wrong taxation?

    By radically lowering selling prices/rental incomes and increasing disposable incomes, a nice simple LVT would improve housing affordability by nearly a factor of four for typical UK households (including tenants). It would also reduce costs by allowing the market to rationalise our existing housing stock, eliminating excessive vacancy, under occupation and the tendency for sprawl.

    Loosening planning regulations won’t achieve anywhere near that improvement in affordability, and by adding to existing inefficiencies in our housing market will further increase costs.

    Lesson to be learned is that fair and efficient markets are not “free for all” markets.

    Your point about rents increasing prices is wrong. You might be surprised that in high rent London, consumer prices are the cheapest (other than embedded rents for locational goods like a hotel room, or a pint of lager in a pub). Rents are set incomes/profits at the margin of production ( I doubt planning is much of an issue for a super market on the outskirts of Hull).

  6. Posted 19/06/2017 at 04:29 | Permalink

    Economic liberalization is often associated with privatization, which is the process of transferring ownership or outsourcing of a business, enterprise, agency, public service or public property from the public sector to the private sector. Liberalized and privatized public services may be dominated by big companies, particularly in sectors with high capital, water, gas, or electricity costs.[citation needed] In some cases they may remain legal monopolies, at least for some segments of the market like consumers.

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