WAYWARD THATCHER

The former prime minister followed the Third Way. So why is she attacking

it, asks Terence Kealey `THE THIRD WAY only leads to the Third World,' Margaret Thatcher claimed recently, echoing Vaclav Klaus of the Czech Republic. It is a great soundbite, but it is not true. The Third Way, the halfway house between collectivism and the free market, leads to prosperity, peace and the First World. It does not, pace Margaret Thatcher, explain the collapse of the Far Eastern economies.

Great Britain and the United States, the two great economic success stories of recent years, both represent classic exam- ples of the Third Way. The British govern- ment takes some 45 per cent of the national wealth in taxes, a share Margaret Thatcher failed to reduce during her 11 and a half years as prime minister, and the United States' federal and state govern- ments together take over a third of their citizens' money. These are hardly examples of untrammelled laissez-faire.

A little history shows that economic growth is both more complex and more interesting than any simple catch-phrase can convey. Both the United States and Great Britain were once laissez-faire. Between 1830 and 1914 Washington took less than 4 per cent of the US national wealth and, during peacetime, Whitehall took less than 10 per cent of ours. Since 1914, tax rates have risen ineluctably yet, curiously, rates of economic growth have been unaffected. In both countries eco- nomic growth rates averaged around 2 per cent per year per person between 1830 and 1914, and they have been sustained at that figure ever since.

Free-market ideologues would have pre- dicted that economic growth rates should have collapsed after 1914 in the face of the vast new taxes, so why didn't they? The answer is to be found in the famous Calculus of Consent published in 1962 by James Buchanan, the Nobel laureate, and his colleague Gordon Tulloch. These two economists showed that, as Western gov- ernments progressively nationalised health, education and welfare, little changed finan- cially. The amount of money spent on those services after governments had taken them over did not rise at any greater rate than it had been rising under the free market.

Not that these are trivial sums. A mod- ern government is little more than a Victo- rian friendly society with gunboats attached. Of the £250 billion the British government spends each year, £222 billion goes on health, education, and welfare and on subsidies for transport, housing and the regions. Defence takes up £22.2 billion, leaving scraps such as £1 billion for the Foreign Office, £3 billion for the DTI, £3 billion for agriculture and £7 billion for the Home Office.

But that £222 billion is largely distributed universally; it is not focused on the poor. As successive 19th- and 20th-century govern- ments progressively nationalised the church schools, voluntary hospitals and friendly societies through which private philan- thropists had channelled their donations to the poor, the rates of increase of care for the deprived and needy did not rise.

Government niggardliness has not been confined to the caring sector. The nation- alised industries in Britain, when we still had them, were always complaining that they were shackled by Treasury restrictions on their freedom to raise capital, and the recent international experience of privati- sation has confirmed that over 90 per cent of newly privatised companies, ranging from airlines to waterworks, both raise and spend more money than when they were in the public sector.

Here lies one of the great secrets of the success of the OECD countries. They have produced democratic politicians tough enough to be mean. The tragedy of coun- tries such as Argentina, which at the turn of the century was one of the richest in the world, is that their politicians spend money generously. When we too produced such leaders, men like Harold Wilson or Ted Heath, the economic consequences were ghastly; hence New Labour.

But we aspire to fairness. People do not like laissez-faire because it fails to meet this vital human need. Margaret Thatcher once claimed that there was no such thing as society. The vast reaction against that quote, even if it was taken out of context, speaks of the passionate human commit- ment to social justice. To understand why, we have to turn to another book, Matt Ridley's Origins of Virtue. There, Ridley explained how and why we humans evolved emotions such as fairness, trust and envy. Life as hunter- gatherers millions of years ago was tough, so we evolved a collective culture to ensure that we faced predators, prey and the challenges of child care together. But that co-operation was threatened by com- petition between individuals. The domi- nant males tried to monopolise the prettier girls and the warmer caves. The prettier girls aspired to high-status sperm and to home comforts.

To ensure that all citizens, successful or not, would still commit themselves to com- munal enterprises, we evolved a strong sense of fairness. It is this which ensures that the powerful treat their underlings and their peers decently, and that those underlings and peers demand that decent treatment. Our inherited sense of fairness underlies much socialism, much Christiani- ty and much compassion.

Private compassion flourishes under the free market, but laissez-faire does not address the need for transparent fairness. Even if private philanthropy is more appropriately targeted and more generous to those in need than any bureaucratic agency can be, neither donors nor recipi- ents like it. Poor people do not want chari- ty, they want rights. The philanthropists resent the 'free riders', the prosperous but uncharitable persons who evade their responsibilities to the poor. Many people therefore, both rich and poor, prefer taxes and a coerced equality of giving.

Ethically they may be wrong. The Pope has argued that only when individuals give of their own free will are their morals stretched and trained, but most voters adhere to Rousseau and the General Will. They want to give and receive as deter- mined by Parliament.

Margaret Thatcher was not fair in her general comments on the Third Way because she blamed it for the economic problems of the Far East. But the flagging tigers of the Pacific Rim are more laissez- faire than ourselves. They enjoy lower taxes and less social provision than we do. Their problems are not those of collec- tivism but of government corruption, cronyism and a lack of democratic accountability. These are, ironically, the very problems that helped bring down Vaclav Klaus's government in the Czech Republic. They are not related to the rates of taxation.

When in power, Margaret Thatcher did not roll back the boundaries of the state, she redefined them. Helped by John Red- wood, she established that the state's prop- er role in wealth creation was that of umpire rather than player, but her govern- ment greatly increased its expenditure on health, education and welfare. In practice, if not in rhetoric, she was as much a fol- lower of Kenneth Galbraith as of Milton Friedman, and she has only been able to portray herself otherwise because it has suited her opponents to collude in her mythopoeia. It is time for her to reconcile her words and her deeds.

Terence Kealey's book, The Economic Laws of Scientific Research, is published by Macmillan.

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