It sometimes makes sense to fix the market rather than its results

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The 2015 election was an almost unmitigated disaster for Ed Miliband and the UK Labour party. Yet there was one significant success — an intellectual one. Commentators laughed when Mr Miliband talked about “predistribution”, an infelicitous term he had taken from Yale professor Jacob Hacker. Yet the most significant announcement in the post-election Budget delivered this month by George Osborne, chancellor of the exchequer, was the adoption of predistribution as a central plank of Conservative government policy.

From 1997 to 2010, when Gordon Brown was chancellor and then prime minister, the dominant influence on UK economic policy was a doctrine I call redistributive market liberalism. The thrust of RML is a separation of production and distribution, of efficiency and fairness. Broadly speaking, the market should be allowed to get on with the job of providing goods and services, and the state should intervene only to remedy adverse distributional results. RML abandoned the socialist goal of control of the means of production, while re-emphasising the concern of the left for social justice. It was an attempt to describe a “third way” between market fundamentalism and state planning.

RML has for some time had a following among economists. They are by training predisposed to applaud the virtues of the market but many, especially in universities, have leftist political inclinations. This doctrine plays a big part in the thinking of those involved in policymaking in finance ministries and global organisations. Its technocratic character means, however, that it has never had much wider political appeal.
The most important practical manifestation of the doctrine was the tax credit scheme Mr Brown introduced in 1999 and then extended to the point at which its cost today represents about one-third of total expenditure on welfare in the UK. Operated through the tax system — and dogged by administrative failures and allegations of fraud — the primary purpose of tax credits is to top up the wages of low-paid workers, especially those with children.

When Iain Duncan Smith became work and pensions Secretary in the Conservative-Liberal Democrat coalition government in 2010, he launched an ambitious plan to combine tax credits and other benefits into a single “universal credit”. But the rollout has been again affected by implementation failures. So the chancellor has adopted a different tack: a 40 per cent increase in the minimum wage — designed to cut the dependence of low-paid workers on benefits and cut the cost of welfare.

This is predistribution. Instead of fixing the results of the market, you try to fix the market itself. Britain’s statutory minimum wage was introduced in 1999 at £3.60. A range of studies showed that this sensibly cautious introduction did not have the widely predicted negative effects on low-skilled employment, and that has allowed substantial increases in the statutory minimum — to £6.50 — to be implemented since then.

The longstanding “living wage” campaign, encouraging big employers to pay more than the statutory minimum, has gained traction. Only this week Swedish furniture chain Ikea became the first big retailer to sign up to the voluntary scheme, raising its minimum payment to £7.85 from 2016. And the use of social and commercial pressure has many ad­vantages over legal prescription, allowing employers flexibility and demonstrating to the community that a business is cognisant of its social obligations.

So Mr Osborne’s use of statute is more dirigiste than his leftist opponents would favour. Still, the shift is radical. Once his plan is implemented, the real wages of the lowest paid workers will have risen by about 50 per cent in the first two decades of this century. Policies to fix markets, when supported by good evidence, make good sense.

 

This article was first published in the Financial Times on July 22nd, 2015.

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