Advertisement
Merryn's Blog

Why we have to protect the state if we want to get rich

The state may well be much too big and much too expensive, but it is vital to everyone's prosperity – including the rich.

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.

Advertisement - Article continues below

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".

Advertisement
Advertisement - Article continues below

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.

Advertisement - Article continues below

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.

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.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

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".

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Five ways to boost the economy
UK Economy

Five ways to boost the economy

Boris Johnson is making a bonfire of planning red tape. Here Matthew Lynn proposes some more rules for the flames.
9 Aug 2020
UK house prices hit a new record high – can it last?
House prices

UK house prices hit a new record high – can it last?

Despite the pandemic, UK house prices have hit a new high. John Stepek looks at what’s driving the surge in prices, and what it means for house prices…
7 Aug 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Should you take advantage of the UK’s new breed of domestic holidaymakers?
Buy to let

Should you take advantage of the UK’s new breed of domestic holidaymakers?

With Britons choosing to holiday in the UK this year, the owners of the country’s holiday cottages are cleaning up. Should you buy in, too? Merryn? So…
10 Aug 2020
The pound has been trending higher against the dollar – will it last?
Sponsored

The pound has been trending higher against the dollar – will it last?

Sterling has been rising against the dollar. Dominic Frisby sets his trend lines in the charts to see where the pound is heading next.
10 Aug 2020