In 2008, Western governments borrowed and spent billions bailing out banks to avoid the collapse of the global financial system. Since then, many of these governments have introduced austerity measures to reduce government debt. However, concern that cuts to welfare spending and public services disproportionately hit poorer households has caused many citizens to question whether austerity is really necessary or an opportunity to push forward a right-wing ideological agenda (often called ‘neoliberalism’).
Neoliberalism can be described as the view that the State should retreat from economic and social life and have only a minimal impact on people’s lives, individuals should be free to judge what is best for them, businesses should be freed from the ‘red tape’ of bureaucracy and free markets adopted as the most efficient way to sort out the economy. The Austrian economist, Hayek, was a major influence on this position. Having seen fascism rise out of the German socialist movement, Hayek (1945) argued that pursuing a socialist agenda - which, for example, seeks to use tax and benefits to reduce inequality - may deliver freedom from economic want but inevitably means the loss of much more valuable basic freedoms, such as liberty, because it involves the State taking too much power to itself.
So at the heart of debate about public spending is a more fundamental question: what is the State for? A good starting point to address this question is Max Weber (2004), who claimed the State is essentially there to protect its citizens from anarchy and violence. That can be interpreted as the State protecting people and, in modern societies that means their property and the economy as well. It could be argued that one of the biggest things the State protects is the ‘social contract’ – the unwritten agreement between citizens and between generations, including those yet to be born, and the view that all citizens have responsibility towards each other. Expanded ideas about how much State protection should encompass account for the growth of public spending in many Western European countries to around 40 to 45 per cent of GDP.
Neoliberals would claim that the role of the State is to protect property in its narrowest sense and to ensure the functioning of free and efficient markets. However, the claims made for market efficiency are contestable. For example, markets often depend on government expenditure alongside private investment. Many of the world’s medicines have been invented through partnerships between government and business. Former Open University economics professor Mariana Mazzucato (2013) suggests that most of the technology in smart phones started, not with private business, but with the government (mainly through research for the defence industry). The private sector has a role to play in innovation, but often takes a short-term view, focusing on a quick return to shareholders, and will not embrace risks, which government is better equipped to take.
Moreover, markets are not good at providing public goods – things that anyone can benefit from without paying, such as a safe, clean environment. Climate change has been referred to as the biggest public goods problem of our age (Stern, 2006). The infrastructure that we all live within is very much based on fossil fuels – an infrastructure of oil rigs, refineries, pipelines, petrol stations, motor vehicles. To tackle climate change, we need a very different infrastructure based on clean energy, such as wind, solar and tidal. In 30 years’ time, many businesses will no doubt be involved in the business of climate change mitigation, but for now the market signals are weak and businesses are either not responding to climate change, or not responding quickly enough. Large scale government expenditure is required now if we are to fulfil this part of our social contract to the generations yet to be born.
There is also evidence (Piketty, 2013) that market-based economies deliver increasing inequality. Wilkinson and Pickett (2009) have shown that inequality is not just bad for those who have least in society; it also correlates with all manner of social ills, such as drug abuse, imprisonment and ill health. Government spending on welfare and public services, such as health and education, are means by which inequality can be reduced and deliver benefits to the whole of society. This is not to deny that government debt needs to be reduced, but there are two sides to a government budget: expenditure and taxation. There is a strong case for public expenditure when it is spent on goods and services that are in the public interest and strengthen the social contract, but it has to be properly supported by taxation. Paying taxes needs to be seen as an honourable thing to do. Perhaps the last word is best left to US Democratic Senator Elizabeth Warren (2011):
’There is nobody in this country who got rich on his own. Nobody. You built a factory out there. Good for you… but you moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for…You built a factory and it turned into something terrific…Keep a big hunk of it, but part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along .’
Select below to reveal the references
Hayek, F. (1945) The road to serfdom (condensed version) [online]
https://mises.org/sites/default/files/Road%20to%20serfdom.pdf (Accessed 30 September 2015).
Mazzucato, M, (2013) Government – investor, risk-taker, innovator [online]
ge=en (Accessed 30 September 2015).
Owen, D. & Strong, T. (eds) (2004) Max Weber: The vocation lectures, London, Hackett.
Stern, N. (2006) Review on the Economics of Climate Change. Final report [online]
df (Accessed 30 September 2015).
Warren, E. (2011) Elizabeth Warren on debt crisis, fair taxation [online]
Wilkinson, R. and Pickett, K. (2009) The spirit level: why equality is better for everyone London,
Penguin. (See also How economic inequality harms society at
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