Brussels cannot know best

Britain must take a lead in weaning Europe off its big-state habit, arg ues Robert Skidelsky

Jacques Delors, stepping down as President of the European Commission at the end of this month, seemed to be fashioning his political epitaph in a newspaper article before Christmas. "Thatcher defeated, says Delors", the headline ran. The Commissi on President was reported as saying that socialism had defeated her brand of "ultra-liberal economics".

The claim is startling enough to merit consideration. Over the last 15 years, communism has collapsed the world over, most developing countries have abandoned their policies of state-led industrialisation, a global economy has re-emerged for the first time since 1914, all governments have been privatising state-owned enterprises, and inherited social welfare systems are under intellectual attack as never before. These are odd indicators of the advance of socialism.

But let us suppose that by socialism Mr Delors does not mean what socialists have traditionally meant, but something more like statism, or what the French call dirigisme, and what I would call collectivism. Here, he has a point. I would claim that the intellectual battle against collectivism has been or is being won everywhere except in Western Europe. Here, it still rages.

It is nothing less than the battle for the future of Europe. Is the goal to be a Fortress Europe, homogenised and harmonised, bristling with defences against the outside world, or a liberal commonwealth whose strength derives from the diversity of its members and which looks outward to the world beyond its borders? It would be one of the great ironies and tragedies of history if Western Europe were to embrace collectivism to protect itself from a world rapidly abandoning it.

By collectivism, I mean what the jurist Dicey meant 80 years ago: "Government for the good of the people by experts or officials ..." To paraphrase the remark of the old Labour politician Douglas Jay, "The gentleman in Brussels knows best." A collectivist society is one in which bureaucratic purposes have replaced private purposes in shaping economic and social life.

This may be contrasted with the liberal view in which the state exists to fill the gaps in the private - both market and voluntary - provision of goods and services; and in which representative government is a contrivance to limit state power, rather than a device for shaping the organisation of society. This liberal-conservative conception rests on the primary value attached to individual liberty, but also on the inescapable knowledge limitations of the central authority - an argument notably put by th e great anti-collectivist economist Hayek.

There are five principal measures of the degree of collectivism in any society: state ownership of industry, central planning, state spending as a share of national income, regulation, and state control of the movement of goods, services, capital and labour across frontiers. The less the state does in all these areas, the more liberal a society is, and vice versa.

What do these indicators of collectivism yield? The state as owner and as planner is virtually dead. Goods, services, capital and labour are probably freer today to move across national frontiers than at any time since the First World War. This is one ofthe genuine achievements, within its area, of the European Community, paralleled by the Nafta treaty in North America, though the Gatt process of global tariff reductions has also played an important part. However, there has been a partly compensating increase in non-tariff barriers, and the European Union is currently more protectionist than most.

However, as regulator and spender, the state is alive and well. People today feel more regulated than at any time in the past, though whether this feeling is objectively justified is less clear. Regulatory creep has largely resulted from the continuous enlargement of the concept of "harm". We now expect the state to protect future generations from the harm the present generation inflicts on the environment. Every minority self-conscious enough to organise claims protection against harm supposedly inflicted by majorities. The law, like the press, has become too intrusive, and a retreat from the "nanny" state is long overdue.

But the main unfinished business of the conservative revolution is to roll back the state as spender. In 1880, the average of public spending as a share of GNP in six selected industrial countries was 10 per cent. Between the wars, it was 25 per cent. By1985, it had reached 47 per cent. The Swedish state spent six per cent in 1880, and 65 per cent in 1985.

It is sometimes argued that this rise in the ratio of state spending to national income is an inevitable part of modernisation. As societies get wealthier and more urban, their demand for publicly funded goods and services, especially health care, education, pensions and so on, rises faster than total wealth.

The first thing wrong with this argument is empirical. The very high share of state spending in national income is essentially a Western European phenomenon. Although it has risen everywhere, it has done so much less in the United States and east Asia. In Hong Kong, where per capita income is now higher than in Britain, the government spends less than 20 per cent of GDP, yet social services in Hong Kong are not noticeably inferior to those in Western Europe.

The logical point is that though the demand for social services may rise as societies become wealthier, they are not public goods, and therefore there is no reason why they have to be supplied through the tax system. In fact, the more wealthy societies become, the more one would expect people to be able to make private arrangements for education, health care and security in old age.

Why should it matter that the state spends close to 50 per cent of the national income? The basic answer is that the greater proportion of goods and services provided by what is called "public choice", the greater the opportunity for the choices of officials to prevail over those of individuals and households. As Hayek put it in 1944: "once the communal sector ... exceeds a certain proportion of the whole, the effects of its action dominate the whole system." If the state takes over a large part of

the functions of private and local institutions, it changes the character of the population - for the worse.

A second argument has to do with the little-understood connection between high state spending and inflation. In 1945, the statistician Colin Clark claimed that a tax-income ratio above 25 per cent generated inflationary pressures. According to Clark, inter-war experience showed the limit of tax tolerance in European societies was about 25 per cent. If governments tried to increase taxes above this ratio to pay interest on the national debt, a pro-inflation constituency would develop to reduce the real claims of the bondholders and thus allow the previous tax-income ratio to be restored.

It is very likely that tax tolerance is greater now than it was in the 1920s. Experience in the 1950s and 1960s suggested that the safe tax-income ratio - the ratio consistent with stable prices - was nearer 30 per cent than the 40 per cent prevalent in Western Europe today. Faced with a taxpayers' revolt, high-spending governments have increasingly switched to indirect taxes to raise the necessary revenues. But there is a limit to how far they can go on doing this before people stop buying the things that are too heavily taxed, or resort to the black market. If the tax weighs too heavily on the poorest, Parliament may simply refuse to vote it, as Kenneth Clarke found out the other day.

In discussing Clark's thesis in 1977, Nigel Lawson commented: "The real evil of excessive government spending, and the excessive taxation that must necessarily accompany it, lies not in the probability of inflationary pressure but in the certainty of misallocation of resources, economic and social debilitation, excessive state power, and - very far from least - the erosion of personal freedom."

Here, I suggest, lies the battleground of the future between right and left. The right instinctively inclines to low taxes and low public spending, the left the other way. But to fight successfully on this terrain, Conservatives will have not just to ask, but debate, some fundamental questions about the purpose of the welfare state. The issue, as put by the economist Harry Johnson in 1969, is whether the "functions that have been assumed by the state in respect of social security, medical car e, and so on ... continue to be appropriate in a more literate professional and privately wealthy society." His answer was that we need to redefine the "appropriate distribution of responsibility between the individual and the state."

Here is a meaty and necessary intellectual agenda for those who believe that politics have become insufferably boring. By opening up this flank, Conservatives can not only recover a distinctive voice in British politics, but, as in the 1980s, give a leadto all the anti-statist forces in Western Europe. We should not be opting out of Europe's social vision, but persuading them to opt into ours.

The writer is professor of political economy at Warwick University and chairman of the Social Market Foundation.

Andrew Marr is away.