Home—Blog—Why we have to protect the state if we want to get rich
Jun 27, 2012, 12:36
Posted byMerryn Somerset Webb
Comments (34)
Much of the discussion about the payment or non-payment of taxes is caught up in the language of fairness.
Non-doms think they shouldn’t have to pay as they don’t use the NHS, the education system or any of our institutions. Avoiders think the same - as indeed do evaders. Almost everyone seems to think that the fact that they don’t use certain services provided by the taxpayer means that they shouldn’t have to pay for them. This is, of course, ludicrous.
Why? Because, while we totally agree that the state is much too big and much too expensive (see endless blogs past), the fact remains that the institutions of the UK – paid for by most of us – are vital to everyone’s prosperity.
This argument is taken up by John Kay in the FT today. He looks at the $40bn-odd nicked from Egypt by Hosni Mubarak and family during their reign, and notes that the real damage imposed by men such as Mubarak is not the money they might have stolen but the fact that “the system that enables them to steal it destroys opportunities for others to generate wealth”.
If you have to pay $100 each to ten corrupt officials before you can start a small business, you are going to have major cash-flow problems long before your first sale. So the damage is in the businesses that never start, the ones that are forced into failure by corruption, and just as much in the clever would-be entrepreneurs who see the money tree growing in politics and enter the bureaucracy instead.
The point? “Institutions are the key influence on economic prosperity.” You can have as clever and an entrepreneurial population as any in the world, but without institutions that put a lid on extractive activity or rent-seeking, and institutions that are trusted to enforce property law, you will never have general prosperity. You might have rich men and politicians masquerading as businessmen – as in the case of the courts of Louis XIV and our own Stuarts in the past, and of the likes of Russia today – but financial success will come from not the resrouces and activities people create, but the ones they control.
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All this has been recognised by many of the great and good in the past. Lucy Kellaway pointed out in the FT earlier this week that most of the “super successful” get that way mainly “through luck”.
And Warren Buffett, back in 1995 told a journalist that “I personally think that society is responsible for a very significant percentage of what I have earned. If you put me down in the middle of Bangladesh or Peru or someplace, you’ll find out how much this talent is going to produce in the wrong kind of soil. I will be struggling 30 years later.” By "society" here I think we can assume he means the institutions of the US – the markets and the laws on which those markets are based.
Cambridge economist Ha-Joon Chang makes a similar point in his great little book 23 Things They Don’t Tell You About Capitalism. He reckons we focus far too much on the individualistic nature of entrepreneurialism. We worship the likes of Thomas Edison and Bill Gates, but forget that “in the course of capitalistic development, entrepreneurship has become an increasingly collective endeavour”.
Edison and Gates managed what they did in large part because they were “supported by a whole pile of collective organisations”. Think the scientific infrastructure; the commercial law; the educational system (that supplied the scientists they needed along with the engineers and managers); the financial system that let them raise capital; the patent and copyright laws that protected their wealth; and the easy accessible market that let them sell their products unhindered. Without these things Edison and Gates wouldn’t have had a hope.
This is something to think about when we look at why poor countries aren’t developing. But it is just as important to remember that our institutions are what have made us developed countries. We need to keep them safe both by financing their protection (yes that does mean paying tax) and, as Kay points out, by recognising how vulnerable they are to extractive activity if not protected.
After all, much of what happens in the financial sector is more extractive than productive, and the activities of those involved in corporate lobbying these days “differs from those who brought soldiers to the side of the Yorkists or Lancastrians only in that they have adapted their methods to changing times”.
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(27 June 2012, 01:44PM) Complain about this comment
It seems finding an acceptable level of State is part of the problem, probably goes back the the maths issue Michael Gove bangs on about.If each of the political parties had a more striking image to portray their interpretation of State involvement we could base our elections more around X factor lines and beef up the involvement of everyone? Maybe these would aid reaching a value?Labour Page 1 : The importance of Statehttp://historysshadow.files.wordpress.com/2012/03/stalin_wallpaper.jpeg?w=461&h=346Lib Dems Page 2 : Size isn't everythinghttp://quicktake.files.wordpress.com/2011/05/bureaucracycartoon.gif?w=300Conservatives Page 3 : Somethings shouldn't be seenhttp://quicktake.files.wordpress.com/2011/05/ed-cartoon-thur-31-dec_w452.jpg?w=300
(27 June 2012, 02:06PM) Complain about this comment
We need the rule of law. I think no one would disagree with that. And that the UK is not completely corrupt yet is certainly a huge advantage over probably most of the rest of the world. But this argument is only good to justify a state providing the rule of law, not a state whose main activity is the redistribution of wealth. It is a dangerous fallacy to believe one needs to protect every aspect of the current state in order to preserve the rule of law. Especially since this current state is less and less providing exactly this and is more and more becoming the main violator of rights. If you are really interested in the rule of law you need to retreat your loyalty to a system that is clearly moving away from it.
(27 June 2012, 02:59PM) Complain about this comment
Max, I applaud your perseverance, but I do worry that you are a little over concerned about the centrally planned socialist superstate that you think we're living in.You say the state just re-distributes wealth - most welfare is pension payments, to people who paid their taxes. Do do want to stop old age pensions? Is Family Allowance really so outrageous? (I don't have children btw.) The rest of govt spending may or may not be well spent, but it's not re-distributive. In any case, Merryn says in her post that she believes the state is too large. I'm not sure if I agree, but that's a perfectly arguable position. And if you read her post carefully, there's not much she is saying has to be provided by the state -rule of law, courts, and education is about it. She may or may not think other things should be state provided, but the point being made is that some bare minimum is needed, and that needs to be paid for.
(27 June 2012, 05:10PM) Complain about this comment
How much of the country's production does the state need to consume? Is 50 percent enough? 60 percent? 70 percent? At what point does it become a farce? In France it is above 55 percent. Britain is not that far behind. The institutions that you speak of existed in Victorian England (with the state barely in single digits as a percentage of GDP). America was the same. We don't need the state to consume 60 percent of the economy to have a productive economy. What percentage of Britain's budget is used by police, the courts and the army (the three essential functions of the state)? And how much is consumed by the welfare state? Once you compute it, you realise that the "essential state" has been buried underneath the nanny state. Watch Martin Durkin's "Britain's Trillion Pound Horror Story." Sums it up.
(27 June 2012, 05:24PM) Complain about this comment
@4 JREwing. .... Don't forget the banks. The government has pretty much told them they can do what they like and the country will bankroll them.
(27 June 2012, 05:34PM) Complain about this comment
#5 Ellen .Except of course Barclays. Caught with their fingers in the cookie jar again. After all his bleating about stop bashing bankers I see Diamond Bob is to lose his bonus (about 10% of his total annual package). Is this modest pennance for being found out or is it supposed to be a suitable substitute for a jail sentence? Unscrupuluous, greedy, liars all, and many of them funded by the state.
(27 June 2012, 07:46PM) Complain about this comment
Evening all you small state fans. I've been looking at a list compiles by those well known communists, the Heritage Foundation and the Wall Street Journal (it's on Wikipedia, hard to link on phone).I looked for those countries with the tax burdens under 10% of GDP, but excluded those which I think have large oil revenues such as Libya, Iran, Saudi. The sub 10% club is: Bangladesh, Bhutan, Burma (do they have oil?), Burkina Faso, Central African Republic, Chad, Congo, Ethiopia, Gabon and Yemen. There are no figures for Somalia or eritrea. Hong Kong narrowly misses out at 13%, but then so does Haiti at 10.3% and Guinea-Bissau is agonisingly close at 10.2%. The lowest overall is Equitoreal Guinea at 0.9%, but I think they have oil. The basket case war torn hell hole that is Germany is 40.6%.
(27 June 2012, 09:19PM) Complain about this comment
Not sure what our heights have to do with anything Luke, but tax is only part of the source of State funding.How large is the largesse once you factor in PSBR and this new fangled QE funny money?I think you'll find our big brother is one of the biggest!
(27 June 2012, 10:11PM) Complain about this comment
Romford Dave, you are correct. I'm not sure how to allow for QE or temporary budget deficits, which is why I used tax. UK tax as a proportion of GDP is relatively high - 38.9%, and govt spending is higher - 47.3%. If you don't like that, go to any of the countries I listed as sub 10% tax, or if you do't fancy them, Iran has a tax take of 6.1%, Nigeria 5.9%, and Mexico (with a moderate murder rate) a mere 8.2%. Stop moaning, go to these havens of good governance and fiscal prudence NOW. I'm hazy on the details, but my guess is that Yemen has relaxed immigration rules. So go, now,and report back on your new found wealth and prosperity. Don't wait- go.
(27 June 2012, 11:56PM) Complain about this comment
But the Institutions that Merryn is so keen on don't work for free. They often cost a fortune to run, for all the obvious reasons, few of which are good, and indeed are a significant part of a business' costs.This is why parts of Italy are quite happy to be run by the Mafia because it's cheaper AND more effective than Merryn's beloved institutions.I'm astonished at how naive people are about how and why government and its regulatory offshoots work. It sure ain't for the good of the people.
(28 June 2012, 08:26AM) Complain about this comment
Dicky Jim, you have made Merryn's point eloquently and pithily. Southern Italy - ineffective institutions, run by mafia, poor; Northern Italy - effective institutions, not run by Mafia, rich. And as both you and she say, those institutions have to be paid for.And where on earth do you get the idea that being run by the mafia is cheap? Do you think those gentlemen provide their protection and extortion services for free?
(28 June 2012, 09:43AM) Complain about this comment
Not sure the state is of such a size or totalitarian in outlook that it needs to smear someone as a moaner and ‘encouraging’ exile for merely stating a fact Luke, not yet anyway!I’m not even sure that it would even be a good idea; risking upsetting my new hosts with misunderstood use of either Google translated Farsi or Arabic, given that simple postings in my Mother tongue can be so easily misinterpreted. We’ll need all those countries you mentioned onside once Ms Lagarde calls upon each of them to cobble together an emergency loan to assist the UK in the ‘unexpected’ difficulties it finds itself now that the cloak of fiscal prudence you speak of proved to be no more substantive than the Emperor’s new clothes Hans wrote about.
(28 June 2012, 09:44AM) Complain about this comment
I suppose there’s always the Jim Leaviss solution rather than the IMF option, outlined in Bond Vigilante’s article from the 11th April, but I’m sure he meant that as a humorous interlude rather than something a politician should seriously consider, he even went as far as inserting a caveat warning of such.Bloated Government leads to waste, incompetence and corruption, resorting to misquoting Keynesian spending as justification for its largesse, perfectly highlighted by the latest NHS PFI story where taxpayers money (along with the other two sources of state funding), leaks away to foreign tax havens via offshore clever money and gives selective staff six figure salaries for sub average performance the opportunity of funding bolt holes abroad rather than boosting the velocity of money circulating within the UK population at the lower end of the scale where Keynesian inspired spending has best effect.
If that’s what you think I’m ‘moaning’ about then you’re right I am, maybe I’d think differently if I was a beneficiary on the inside of the state’s largesse rather than one on the outside, I’d like to think I wouldn’t but nothing surprises me anymore. Actually that’s not true, I read Tim Black’s article in Spiked-online the other day and was surprised to find that they blamed George Osborne for Jimmy Carr’s tax avoidance!Apologies for spreading my reply across three posts, but your unexpected suggestion seemed somewhat over the top given what I’d initially said, requiring more than a 1000 character response.
(28 June 2012, 11:10AM) Complain about this comment
Romford Dave @14, not sure why you found my suggestion unexpected. Not an entirely serious suggestion, just trying to illustrate the fact that those states with small government are not necessarily places anyone would choose to live. I don't know what the ideal size of the state is, or even if there is an ideal size. As for being a "beneficiary on the inside of the state’s largesse", I have never worked for the public sector, am not a pensioner, have no children receiving Family Allowance, and have not been to a doctor or hospital for over 20 years - my (current) receipt of state largesse is limited to say the least. I have however had the benefit of a reasonably functioning state in which to go about my business.
(28 June 2012, 11:16AM) Complain about this comment
Romford Dave @ 12. I think you're point is that European high tax/large state countries may have to be bailed out by the rest of the world. Greece, yes, Portugal maybe. But Spain had low debt and relatively low share of govt spending prior to the 2008 crisis, as did Ireland. Germany and the Nordics who are doing the baling out are the ones with high taxes/large states. If you want to have a rant against the Euro, and the damage it has caused, be my guest.
(28 June 2012, 11:23AM) Complain about this comment
Romford Dave @ 13. We're all against bloated and inefficient govt. And I suspect there may be some size at which it tends to become more likely. And I also think you have a point about Keynsian boosting might be better targeted.But I'm afraid PFI is an example that cuts both ways. The problem is that the private sector WAS involved. Looks like it would have been better if the govt had just built and run the hospitals itself.
(28 June 2012, 12:20PM) Complain about this comment
#15 Luke. Not sure about the ideal size for government, probably under a 40% share but north of 30%. The ideal size for a country has beenn gauged. Particularly witha view to democracy functioning properly,each citizen feeling valued and having influence and limiting corruption. It is a population of between 4 and 10 million ( Denmark, Sweden, Austria etc fit the bill) and a minimum income per head of £15,000.In post #7 you missed soon to be independent Jersey and the Caymans.
(28 June 2012, 03:19PM) Complain about this comment
Luke to clarify : -My comment regarding beneficial insiders wasn't specifically aimed at individuals, it was aimed at the whole raft of vested interests unfairly feeding off the public purse.The UK was only country I mentioned requiring possible IMF assistance.As for the Euro, it was destined to fail because of an unwillingness to take the steps they are being forced to take now, I don't see it as the fault of the Euro per se but of those who pushed for it without outlining the downside.I think of the Euro as the worlds most expensive alarm clock where someone set the wake up call a decade late for a very important date.
(28 June 2012, 03:43PM) Complain about this comment
Boris, thank you for the nugget on the size of the state - I wonder though if small countries are more likely to be invaded?I don't know the tax take in Jersey and the Caymans - they weren't on teh list I was using http://en.m.wikipedia.org/wiki/Government_spending#section_3.As for their desirability as places to live, see above on the problem with small islands.
(28 June 2012, 05:10PM) Complain about this comment
#20 Luke .Absolutely not. Small states are much safer. Nobody invades tiddlers ,especially the tax haven ones. In his recent study of the Decline of Violence, Stephen Pinker shows how it is the Greta powers and super powers who get all fighty. Over the past 250 years by far the majority of big conflicts (those that kill over 10,000 people) had either the UK , USA, Germany, France, China, Russia or Japan taking part ,or indeed all of them at once.Ireland does'n't often go to war ,nor does Norway, but the USA is prolific in its warmongering.
(28 June 2012, 08:39PM) Complain about this comment
Boris, I stand corrected.
(28 June 2012, 09:45PM) Complain about this comment
How can anybody believe the optimum size for a country is one with a population between 4 & 10 million? Perhaps a country is small because relatively few people want to live there? Shock. Horror. A bit like Scotland, perhaps - more parasitical than paradisiacal.Wake up, Boris. There is a good reason why lilliputians don't often go to war - they get battered in the blink of an eye.
(28 June 2012, 10:13PM) Complain about this comment
#23 Neutron. These are not my ideas. I am repeating the work of well respected academics like Mr Pinker. 4 to 10 million pertains to the best size for democracy to work well.For individuals to feel they have influence.The UK for instance is no longer a democracy in the truist sense. You get too bogged down in economic efficiency like a time and motion accountant. The political scientist Jack Levy looked at all wars since 1485,when modern states emerged. Great powers were involved in over 75% of them.
(28 June 2012, 10:37PM) Complain about this comment
@ 24 Boris. You raise a very valid point that the governments of smaller nations have little choice but to represent their people better. I must admit I have become very cynical of governments generally as I have got older. Too many of them practice the politics of fear on their populations and we are all, to some degree, influenced by the propaganda we have been fed. What larger states have to worry about is that a backlash from their huge populations would be unstoppable and, with bigger, more powerful countries, the stakes are higher. I don't think its an accident that the rioters last summer were given stiffer sentences than if the crime the committed had been done in isolation. It was important to present what they did as crimes and not civil unrest.
(29 June 2012, 08:19AM) Complain about this comment
#25 Ellen. I think the argument is not so much that a small population forces the Governments hand to be fairer, but that there are fewer intervening levels between citizen and Government. In a small nation like Denmark each individual feels closer to power as there are fewer tiers in the administration. People can go straight to the top. There is no need for parish councils, district councils, county councils ,regional assemblies,state governments and various quangos. It seems possible even to phone the PM if necessary.
(02 July 2012, 09:43AM) Complain about this comment
#26 Boris - the small country of Denmark has five regions and 98 municipalities. Does that signal a closer link to the State Government than that found in the UK? On a practical note, I can't see the good folk in Copenhagen calling the PM to complain their rubbish bin hasn't been emptied, can you? WRT to article itself, I fully agree we must protect the State - my concern is not with the need for the State, it is with the ever growing size of the State. The bigger it gets the more it feeds on itself, ultimately eclisping the productive wealth generating private sector, at which point as history shows time and time again, the State is doomed.
(02 July 2012, 11:23AM) Complain about this comment
It's about the weight of the argument.You really need a small efficient state to achieve that. Simple laws, taxation, explicit porperty rights. What we have now has gone way too far. As such now we have to protect ourselves, especially if we are not the ones who are rich enough... Don't you think so?
(02 July 2012, 08:38PM) Complain about this comment
#27 Steve. I said "it seems possible...." .I did not say people do. It is rather a function of the smallness that people feel more influential and valued. Of course they don't phone the PM, they just feel like if they wanted to ,they could. Denmark has the same population as the westcountry of England. It'd be like popping over to Exeter to County Hall. Do you seriously think democracy operates better in the hugely disparate UK?Those nations with the smallaest state apparatus have the worst infrastructure and fewest producers of wealth.
(03 July 2012, 05:37AM) Complain about this comment
Boris - can you back up your assertion that "Those nations with the smallaest state apparatus have the worst infrastructure and fewest producers of wealth". Without wishing to get into a socialist discussion over the treatment of the poor etc, didn't this country do rather well economically under the small State regime in Victorian times?
(03 July 2012, 08:26AM) Complain about this comment
#30. Steve. If it really needs spelling out. Liberia, Malawi, Congo, Haiti, Somalia. These are extremes with 0% tax. But stats like, there are more Malawian nurses working in Manchester alone than there are in Malawi. Beyond these desperate third world places there are the likes of Bolivia, Bulgaria, Yemen, Bangladesh, Papua New Guinea, Nicaragua ,all have low tax, small state infrastructures .None are renknowned for entrepreneurship or production largesse.
(03 July 2012, 11:49AM) Complain about this comment
Sorry Boris, at the risk of being deleted by the moderator, that's a very silly argument and doesn't merit a reasoned reply.
(03 July 2012, 12:41PM) Complain about this comment
How come we protect government jobs while at the same time offer social support? I say change the employment law so that government can more readily downsize. At the same time up social support. If we can change social support so we encourage work rather than discourage, so much the better. And: Bill Gates never did anything interesting in his life. Comparing him to Edison is a joke. (This rant is possibly off point but...) Bill's claim to fame is to sucker Intel out of royalties for distributing his operating system, which was second rate, and still is.
(03 July 2012, 06:00PM) Complain about this comment
#32 Steve. You're on safe ground with the moderator calling me "silly". What a pity it is beneath you to put up a reasoned argument. You mention the UK being better off economically in Victorian times. The wondrous Victorian system (sans welfare state) can proudly claim a life expectancy of 45, endemic cholera and dysentery, illiteracy, disabilities galore,malnutrition and widespread poverty so evil that millions took the risk of emigrating to the wildernesses of North America and Australia. A few lucky factory owners got very rich but the Government ran a huge national debt on a par with today. Needless to say I disagree .
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