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

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.

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”.