The end of bitter-pill economics
How the case for free-market reforms has become a lot easier to make
Dr Kristian Niemietz is the IEA’s Editorial Director and Head of Political Economy
Why are free-market reforms so difficult, and why are policy changes in the opposite direction so easy?
If you ask one of Britain’s twelve remaining classical liberals, they will typically say that this is because free-market reforms are often painful in the short term.
Take trade liberalisation. Almost all economists, including those that would never describe themselves as free-marketeers, agree that open economies are more successful than closed ones. A protectionist economist is hard to find. However, if an economy has hitherto been shielded by protective barriers, and you suddenly throw the gates wide open and expose it to the cold winds of international competition, there will be sectoral contractions. Some people will lose their jobs through no fault of their own, and these may often be people with few transferable skills, who have no obvious alternatives. You cannot blame these people for resisting, and you will not win them over by talking about comparative advantage or by showing them a line-goes-up graph.
Or take industry subsidies. It should be obvious enough that an economy cannot subsidise itself rich. When I give talks on this, I ask people to imagine an economy with only two sectors, one growing, one shrinking. If the government subsidises the shrinking sector, it can only do that by taking resources out of the growing one (because, as per assumption, that is all there is). The fundamental logic does not change if we are dealing with an actual economy with hundreds of different sectors. Nonetheless, if some industries have grown dependent on subsidies, and you now make them go ‘cold turkey’, they will contract, and some of them will not make it. Again, people will lose their jobs, and those will often be people who are not well prepared to deal with the consequences. Even a heartless free-marketeer can acknowledge that that is a problem.
Or take rent controls. There is a near-consensus among economists, including left-wing ones, that rent controls don’t work. Nonetheless, where they have been in place for a long time, some people will have made their living arrangements around them. When you then abolish those controls, some people will see sudden, dramatic rent hikes, leading to economic evictions, and people’s lives being upended.
And so on. In short, we liberals often assume that the biggest obstacle for the kind of changes we would like to see is not so much disagreement about the desirability of the end state, but the short-term cost of the transition.
I’ll give a few examples.
In 1989, Francis Fukuyama wrote about how the political leadership of the Soviet Union had fallen out of love with Marxism, and had come to appreciate the benefits of the market economy. But what was stopping them from following through with the necessary reforms was the short-term cost of the transition:
“There is a virtual consensus among the currently dominant school of Soviet economists now that central planning and the command system of allocation are the root cause of economic inefficiency, and that if the Soviet system is ever to heal itself, it must permit free and decentralized decision-making with respect to investment, labor, and prices. […] [T]he problem is no longer a conceptual one: Gorbachev and his lieutenants seem to understand the economic logic of marketization well enough, but […] are afraid of the social consequences of ending […] dependence on the state sector. […]
The conservative opposition in the USSR, consisting both of simple workers afraid of unemployment and inflation and of party officials fearful of losing their jobs and privileges, is outspoken and may be strong enough to force Gorbachev’s ouster in the next few years.”
Jean-Claude Juncker (who is not a liberal, but in today’s economies, any serious reformer will have some overlap with liberals) put it even more succinctly when he said: “We all know what to do, but we don’t know how to get re-elected once we have done it.”
Roger Douglas, the former Finance Minister of New Zealand, did know how to get re-elected afterwards. His advice was to impose short-term costs on lots of people at the same time, so that they cancel each other out:
“Apparent requests from interest groups to a slower pace [of reform] often turn out, on closer analysis, to be resentment that government is not moving fast enough to abolish privileges still enjoyed by rival groups. Privileges impose costs on everyone else. […]
Removing privileges evenhandedly across the board reduces the grounds for interest groups’ opposition and offers them a more constructive role in a better society.”
The common theme here is the idea that liberal reforms are difficult because of the associated short-term cost. This idea has been true for a long time. It still remains true today, in several areas. I could easily name a few contemporary examples, and will probably write about those in due course. But if we think about the biggest barriers to economic growth in Britain today: is fear of the short-term cost of removing them really what is holding us back? Is this really a meaningful way to think about Britain’s poor economic performance today? I don’t think it is anymore.
Take energy, which is one of our biggest roadblocks. Energy consumption per capita in Britain is down by about a third since 2007, mostly as a result of our policy of unilateral decarbonisation, under which we are deliberately depriving ourselves of energy. What would be the short-term cost of scrapping that anti-energy agenda? There isn’t one, really. Yes, Greta Thunberg would be sad. Roger Hallam would post a few unhinged 10,000-word tweets. Just Stop Oil and Extinction Rebellion might go on a little reunion tour. George Monbiot would have another meltdown in the pages of the Guardian, going on about Dark Money and Tufton Street. But so what? Who would lose their job, as a result? Which industries would have to shut down? Who would be, in material terms, poorer?
Being on the pro-energy side – the side that wants to end energy rationing – is, in a way, a luxury position for liberals to be in. Our predecessors were the economic policy equivalent of a dentist, telling people things they did not want to hear, and prescribing a painful, unpleasant treatment that would only pay off in the long term. An energy abundance liberal is more like a fitness trainer recommending a form of exercise that is beneficial in the long term, but that can also be quite fun even in the here and now. The long-term effect is positive, and the short-term effect is… also positive, just less so.
Yes, there are legitimate questions about how quickly we could realistically mobilise additional energy, and how much of a difference this would really make, given the international nature of energy markets. But those aren’t short-term costs; that’s a discussion about the timing and magnitude of the short-term benefits.
I can’t remember the last time I had an opinion which was so easy to defend. For once, we liberals are the ones who can promise goodies, while our opponents are the ones who are taking nice things away from people. I know we always say that there’s no such thing as a free lunch, but there sort of is, if lunch has already been served, and we’re just denying ourselves the pleasure of tucking into it.
Or take the other big bottleneck that’s holding back prosperity: Britain’s inability to build things. What would be the short-term cost of removing the obstacles to building things?
I know that there would be a short-term political cost, in the form of a furious NIMBY backlash, but I’m talking about the economic cost. Who would lose their job if we decriminalised building things? Which industries would disappear? Whose wages would shrink?
Nobody would be, in a material sense, worse off. Yes, a lot of NIMBYs would be sad. They might have to put up with the sight of some houses. Well, boo-hoo.
I generally think that free-marketeers should be sympathetic to the people who are negatively affected by the economic reforms we advocate, and think about ways to soften the impact. If I had been around during the Miners’ Strike, I would have been firmly on the side of the government of the day – but I would still have felt sorry for coalminers losing their jobs. These people had done nothing wrong. It was not their fault that the industry they worked for was losing its economic viability.
But I can’t find it in me to feel any sympathy for a NIMBY who can’t cope with the fact that other people also want somewhere to live. If having to look at some buildings that you’d prefer not to be there is the worst thing that’s ever going to happen to you, you can count yourself very lucky indeed. When it comes to building things, it’s not about incurring a short-term cost for the sake of a long-term benefit. We could have a small benefit in the short-term, and even larger benefits accumulating over time. Nobody really loses, in a meaningful sense.
There are other examples of that kind. The British economy today is an economy that needlessly holds itself back, in ways that do not really benefit anyone, or at least not in economic terms. Being a free-marketeer in such an economy is, in a sense, an easier job than being a free-marketeer in an economy that is distorted in ways that require painful corrections (such as Britain in the 1980s).
Today, as in earlier decades, free-marketeers have the medicine that can cure the patient. But back then, that medicine was a bitter pill, whereas now, it is a cherry-flavoured candy.
We are, in that sense, lucky, and we should make more of that.
What we’re reading
Not Economics. Our own Christopher Snowdon has written for Spiked about the background of Miatta Fahnbulleh as Energy and Net Zero Secretary. Working through her background at the New Economics Foundation, Snowdon presents Fahnbulleh as a committed advocate of “degrowth”, with longstanding support for rapid net-zero targets. Any hope for the new government to deliver prosperity is unlikely with anti-growth ideas influential at the apex of policymaking.
Oh, Canada. For Reason, Eric Boehm has argued that Donald Trump’s decision to impose a new 50 per cent tariff on many Canadian imports is less a vote of confidence in protectionism than an implicit admission that his earlier trade war failed. Reduced trade between the two nations demonstrates that tariffs provoke countermeasures which hurt exporters on both sides of the border. Trump’s response shows the self-defeating logic of trade wars, leaving everyone involved worse off.
Burnham’s in-tray. Neil O’Brien has been examining the large number of unresolved policy, financial, and political challenges that Andy Burnham has inherited from Keir Starmer. On his Substack, the Tory MP questions whether Burnham can reconcile his ambitions for greater public spending with the UK’s difficult fiscal position and goes through the various controversial policies over which there is no clarity as to whether they will continue. This is a premiership of contradictions.
Style over substance. Joseph Dinnage has also been writing about our new Prime Minister, over on CapX. He makes the case that while Burnham’s political style and ability to connect helped him emerge as an alternative to Starmer, he will require far more than bushy eyebrows to tackle Britain’s deep-seated economic problems. He needs to embrace policies that encourage enterprise and investment; he must move from being a charismatic critic to a capable Prime Minister.
The kids were alright. For Works in Progress, Samuel Hughes has challenged the long-standing idea that medieval parents were emotionally detached from their children on the basis that high infant mortality rates meant they viewed children as disposable. Although child mortality was extremely high, most families had only a few children, and parents were heavily invested in their futures. The idea that hardship erased parental love is a misleading historical myth.
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