Economists and the British Welfare State from New Liberalism to the New Right
George Peden
(University of Stirling)
I take as my starting point Keith Tribe’s account of liberalism and neoliberalism in
Britain (Tribe 2009). Tribe’s essay appears in an international volume on the making
of neoliberal thought, with particular reference to the Mont Pèlerin Society, which
was founded in 1947 as reaction against socialism and planning. He defines
neoliberalism as a belief in impersonal market forces as the best way to secure
personal liberty and welfare. His archetypal neoliberals are Friedrich Hayek and
Lionel Robbins, but other members of the Mont Pèlerin Society who had an impact on
British neoliberalism include James M. Buchanan and Sir Alan Walters. I wish to
build upon the rather limited remarks that Tribe makes about economists and the
British welfare state. In the time I have available I shall concentrate on the points
where he and I differ, so let me say now that I admire his scholarship and I agree with
most of what he has written.
Perhaps I should define the terms in the title of my paper. By ‘economists’ I
mean professional economists who at some time held an academic appointment, and
not simply bureaucrats or financial journalists who had studied economics. I use the
term ‘welfare state’ to include (1) income support for the old, the sick, the
unemployed or the low waged; (2) the National Health Service; (3) public education;
and (4) local authority housing. I also include (5) employment policy in so far as it
was regarded as a necessary support for social insurance. By ‘new liberalism’ I refer
to the form of liberalism that looked to active intervention by the state to solve social
2
problems, particularly during the period of Liberal governments before the First
World War, but including the Beveridge Report of 1942. By ‘New Right’ I mean the
Conservative political movement which adopted neoliberal economic ideas in the
1970s.
My paper is divided into three sections. First I look at the liberals whom
Hayek associated with collectivism in the 1940s, William Beveridge and J. M.
housingKeynes. I ask how different their economic principles were from his.
Second, I ask why the New Right critique of the welfare state was so slow to
develop in Britain and did not achieve much influence before the 1970s.
Third, I offer a few brief observations on the impact of the New Right on the
welfare state in the 1980s.
I
William Beveridge was the author of a famous report in 1942 that set out proposals
for universal social insurance and family allowances. The report stated that the
abolition of poverty would also require a national health service, better education and
housing, and measures to prevent a return to the high unemployment of the inter-war
period (Beveridge 1942). Beveridge was not an economist, but he was a recognised
expert on unemployment. He had made his name in 1909 by publishing a study of the
labour market entitled Unemployment: a Problem of Industry, and in the course of a
career spent partly in the Civil Service and partly in university administration he
served as chairman of the Unemployment Insurance Statutory Committee from 1934
to 1944. He did not feel it necessary to have a professional economist on the
committee which helped him to produce the first draft of his report. However, he did
ask Keynes for advice on the financial aspects of his proposals. Keynes, then an
3
adviser to the Chancellor of the Exchequer, and Robbins, then head of the Cabinet
Office’s Economic Section, had a series of meetings with Beveridge and persuaded
him to reduce the immediate cost of his original proposals by phasing in old-age
pensions and by being less generous with cash payments to parents, known as family
allowances. But otherwise, Keynes was supportive, describing the Beveridge report
as ‘a fine document’ (Keynes 1980, pp. 220-55, at 252).
The congruence of Keynes’s and Beveridge’s views on social insurance is not
surprising. Both had developed their political ideas during the period of new
liberalism before the First World War. Here, if I may, I depart from Tribe’s treatment
of new liberalism, which he says displaced classical liberalism by the later 19th
century (Tribe 2009, p. 69). I agree that new liberalism had a different philosophical
basis from classical liberalism, with a more organic and less individualistic view of
society. Whereas John Stuart Mill believed that every departure from laissez-faire
was a certain evil, unless required by some great good, new liberals believed that the
state should be used to cure social evils that were beyond the control of the individual.
However, new liberals retained a belief in the value of the free market and the virtue
of self help. For example, the system of national insurance against interruption of
earnings on account of sickness or unemployment, which was introduced in 1911,
provided cash benefits that were below the wages of the poorest workers. Insured
workers who were sick or unemployed were thus encouraged to return to the labour
market as soon as possible. Subsistence payments could be obtained only by applying
to the Poor Law guardians or, in the inter-war period, to the Unemployment
Assistance Board; such payments being means-tested and subject to evidence that the
applicant was genuinely seeking work. National insurance was a system of
compulsory, but subsidised, thrift, with wage earners, employers and taxpayers all
4
making contributions to national health and unemployment insurance funds. Only
wage earners were insured; thus a sick worker would receive a cash benefit and free
medical treatment designed to enable him or her to return to work, but he or she
would have to pay medical bills for family dependents, unless they were covered by
private insurance. New liberals believed as much as classical liberals or neoliberals
that self help and thrift were necessary characteristics of freedom (Peden 1991, pp.
15-16, 18-22, 26-32).
Beveridge and Keynes shared these ideas. Nevertheless, Beveridge’s
proposals went further than new liberals of the Edwardian period had thought
necessary. Beveridge recommended that an enlarged social insurance fund should
cover salary earners as well as wage earners against all interruptions of earnings,
including old age as well as sickness and unemployment. Previously the middle
classes had been excluded from national insurance, on the grounds that they did not
need state-subsidised insurance. He also believed that insurance benefits should be
raised to subsistence level, although to encourage self help he suggested that the value
of benefits should be below the poverty line used by social investigators in York in
1936. Beveridge’s proposals were based on pre-war social surveys that showed that
most poverty was a result of a loss of earnings through old age, unemployment or
sickness, and could be cured by social insurance. However, he also recognised that
up to a quarter of poverty was due to earnings being inadequate to maintain children.
He therefore recommended that parents should receive subsistence allowances for
their second and subsequent children. At a time when there was concern over a fall in
the birth-rate, family allowances were widely regarded as desirable, and an element of
self help was retained by making parents fully responsible for the cost of the first
child.
5
Hayek has very little to say about social services in The Road to Serfdom. He
thought that there was no reason why the state should not guarantee a given minimum
standard of living to all its citizens, or help to organise a comprehensive system of
social insurance against the common hazards of life, such as sickness, against which
few individuals could make adequate private provision. His only condition was that
the measures taken did not make the labour market less competitive. Otherwise there
was no incompatibility between social insurance and the preservation of individual
freedom (Hayek 1944, pp. 89-90). There was nothing in the system of social
insurance proposed by Beveridge and supported by Keynes that was contrary to
Hayek’s principles.
Hayek was much more concerned with the vogue for economic planning, and
he was opposed to measures that would interfere with the labour market by
guaranteeing particular groups of workers their current relative position compared
with others. He saw that people might easily be persuaded to protect or subsidise
particular groups of producers, for example in agriculture. The principal economic
purpose of The Road to Serfdom was to defend the price system as the best system of
allocating resources against socialists who claimed that rational utilisation of
resources required central direction (Hayek 1944, 26-31, 36, 79, 89, 165). Beveridge
stated in his report that the social insurance fund he was recommending would be
actuarially sound only if unemployment was much lower than it had been in the interwar period. The question arose, therefore, whether it was possible to maintain high
and stable employment without abandoning economic liberalism.
The government’s employment policy was published in 1944 in a white paper
which drew upon Keynes’s General Theory. The white paper contained proposals for
stabilising investment, partly by using monetary policy and tax credits to influence the
6
timing of private investment, and partly by offsetting variations in private investment
with variations in public capital expenditure. Likewise there were proposals for
maintaining consumer expenditure, partly by tax credits and partly by varying social
insurance contributions, with higher contributions in periods of high employment and
lower contributions when demand fell (Employment Policy 1944, pp. 20-4). The
person who did most of the drafting of these sections of the paper was a young
economist, James Meade, a convinced follower of Keynes and a future Nobel prizewinner. However, Meade was working under the supervision of the head of the
Economic Section, Robbins. Robbins had played a major part in developing a
distinctive liberal school of economics at the LSE before the war, and in 1947 he
drafted the Mont Pèlerin Society’s statement of its neoliberal aims (Tribe 2009, pp.
77-81, 87). We may assume, therefore, that in 1944 he did not wish to subvert the
price system. We should not be surprised, therefore, to find that there was nothing in
the white paper that was contrary to a continuation of the free market: indeed it
referred to businessmen being guided in investment decisions by whether prices were
likely to go up or down. The white paper explained that the policy of managing
aggregate demand would work only if wages and prices were reasonably stable, but
went on to say that there must always be room for adjustment of wages on account of
changes in industry (Employment Policy 1944, p. 17). There was no mention of state
controls on prices or wages. Keynes supported Robbins in ensuring that employment
policy would preserve the liberty and initiative of the individual in economic life
(Keynes 1980, p. 369).
Keynes’s own views on profits and planning in economic policy are brought
out in his comments to Hayek about the Road to Serfdom, which he described as ‘a
grand book’. Keynes thought that Hayek might have been even more robust in his
7
defence of the profit motive and private enterprise against socialist teaching. On the
other hand, Keynes was much less fearful than Hayek was of planning by the state
and its agents. Keynes thought that a middle way was possible between laissez-faire
and a planned economy. He believed that ‘moderate planning’ would be safe
provided that it took place in a community where most people shared Hayek’s moral
position. Indeed, Keynes seems to have regarded planning designed to stabilise
aggregate demand as an antidote to socialism (Keynes 1980, pp. 385-8). Hayek,
however, feared that state intervention would develop over time in ways that would
restrict individual freedom: on the title page of The Road to Serfdom he quoted David
Hume’s remark, ‘It is seldom that liberty of any kind is lost all at once’.
To conclude this section of my paper: Beveridge, Keynes, Robbins and Hayek
shared a good deal of common ground. They agreed that the state had a role to play
in organising social insurance, and that social insurance should not discourage
workers from entering the labour market. They also agreed that employment policy
should not reduce competition in the economy. Where there was scope for
disagreement was in how the principles of the Beveridge Report and the white paper
on employment policy were to be implemented.
II
Tribe explains the muted criticism of the welfare state by British neoliberal
economists down to the mid-1960s by saying that on the whole they were supporters
of the Conservative governments that were in power from 1951 to 1964. Both
Robbins and his predecessor as head of the Economic Section, John Jewkes, were
critical of the Labour government’s continued use of wartime economic controls in
1945-51, but thereafter free market criticism tended to come from the margins of, if
8
not outside, the academy (Tribe 2009, p. 86-8). I agree with Tribe up to a point.
None of the principal New Right research centres − the Institute of Economic Affairs
(IEA), formed in 1957, the Centre for Policy Studies (1974) or the Adam Smith
Institute (1978) – is located in a university. However, in this connection I would
perhaps put more weight than he appears to do on the Department of Economics at the
University of St Andrews, where Professor James Nisbet, kept the spirit of Adam
Smith alive. Nisbet was a Glasgow graduate in political economy and law who had
come top of the Civil Service examination but had preferred to pursue an academic
career, first at Glasgow and then St Andrews. In 1929 he published a book, A Case
for Laissez-faire, partly in response to Keynes’s famous essay, ‘The end of laissezfaire’, published three years earlier (Nisbet 1929; Keynes 1972, pp. 272-94). Nisbet
was at St Andrews for 35 years before he retired in 1970 and, according to Sir Alec
Cairncross, he ‘turned out laissez-faire economists by the dozen’. Sir Alan Peacock
was one of Nisbet’s students, but found his lectures confusing and is uncertain how
much his students got from them. On the other hand, Ralph Harris, one of the most
important members of the IEA, was a lecturer in Nisbet’s department for a time.
Nisbet encouraged his students to read IEA pamphlets and by the time that Madsen
Pirie, one of the founders of the Adam Smith Institute, was a postgraduate at St
Andrews (1970-74), St Andrews’ reputation as a place to study free market
economics had been established (Tribe 1997, pp. 41, 195). I realise that this workshop
is concerned with Cambridge and the LSE, but the New Right was not wholly a
product of the LSE.
That said, there are, I think, two reasons, in addition to their political
sympathies, why neoliberal economists were slow to develop a critique of the welfare
state. The first reason was the direction that academic research took in the wake of
9
the Keynesian revolution: macroeconomics attracted most attention. The allocation of
resources within the welfare state did not seem to be a promising field for theoretical
research. Peacock and Jack Wiseman demonstrated that war had a ratchet effect on
public expenditure, by increasing the public’s tolerance of higher taxation, and by
revealing health problems for the social services to deal with (Peacock and Wiseman
1961). However, it was only with the development of public choice theory by
Buchanan and Gordon Tullock in the 1960s and 1970s that public finance returned to
the forefront of economic research. Public choice theory went beyond neoliberals’
assertion that markets were more efficient than public services to an analysis of why
normally government intervention was inherently inferior to the market. In particular,
Buchanan and Tullock argued that free provision of welfare services would lead
rational consumers individually and collectively to demand more of welfare services
than they would be willing as taxpayers to finance (Buchanan and Tullock 1981).
The other reason for an early lack of neoliberal criticism was that it took time
for the welfare state’s deficiencies to become apparent. I propose now to look briefly
in turn at income support, health services, education, housing, and employment policy.
The Beveridge Report was less influential on the system of income support
than is often assumed. The economist who provided the most telling arguments
against its full implementation was Hubert Henderson, who, like Beveridge and
Keynes, was a liberal. Henderson had studied economics at Cambridge before the
First World War and held a lectureship in economics there from 1919 to 1923, when
he became editor of the Nation and Athenaeum, a journal that supported the Liberal
party. Henderson co-authored a pamphlet with Keynes in 1929 in support of the
Liberal party’s programme of public works to cure unemployment. The two men
drifted apart in the 1930s, and consequently Keynesians have been apt to underrate
10
Henderson. In his time, however, Henderson was a formidable figure. He was a
fellow of All Souls College, Oxford, from 1934 and was appointed Drummond
Professor of Political Economy at the University of Oxford in 1944. Like Keynes, he
was an economic adviser in the Treasury during the war. Henderson was a renowned
debater, and he brought his critical powers to bear on Beveridge’s proposals even
before they were published in 1942. Beveridge hoped that universal social insurance
with flat-rate, subsistence benefits would restrict means testing to a small number of
people who failed to pay national insurance contributions and who would therefore
continue to rely on means-tested national assistance benefits. Henderson, however,
pointed out that the scheme would be an unnecessarily expensive way of abolishing
poverty, since people with substantial savings and unearned income would qualify for
benefits. Treasury officials were impressed by his arguments, and tried
unsuccessfully to have the Beveridge scheme restricted to the existing, largely
industrial working-class, insured labour force. The Treasury found another way in
which to economise on Beveridge’s plan: all social classes would be covered, but the
principle of subsistence benefits was rejected in the government’s white paper on
social insurance in 1944. All that was promised was ‘reasonable insurance against
want’, and the level of benefits after the war was so low that claimants without
savings or other sources of income had to apply for means-tested national assistance
to supplement their insurance benefits (Henderson 1955, pp. 191-208; Peden 2000, pp.
348-50).
Henderson’s influence on the Treasury outlasted his early death in 1952. Even
in 1964 a Treasury official could refer to Henderson’s ‘famous Treasury paper’ on the
Beveridge Report when commenting on the wastefulness of universal social insurance
(Clarke 1964). An IEA study group including Colin Clark, Ralph Harris and Alan
11
Peacock, came to broadly similar conclusions to Henderson in 1967, but, unlike the
Treasury, they seem to have been unaware of his paper (Alexander et al 1967). In the
context of the theme of our workshop I find it difficult to categorise Henderson as a
new liberal or as a neoliberal. His criticism of the Beveridge Report can be read as a
defence of the limited social services that the new liberals had introduced before 1914,
and like a good Treasury man he deplored the rising cost of the welfare state,
especially the health service, after 1945. He certainly was not a Keynesian with
regard to employment policy. On the other hand, his opposition to the notion that the
price system alone could cure the economic maladjustments following the war
suggests that he was not a neoliberal either (Henderson 1955, pp. 192, 316-25, 339-40,
342-56, 413-24).
The National Health Service (NHS) that Beveridge had declared to be
necessary as part of his plan to abolish poverty was brought into being in 1948 by a
socialist Minister of Health, Aneurin Bevan. Bevan was keen to ensure that the
National Health Service would offer the best standards of treatment, and agreed to
allow the treatment of private patients in NHS hospitals and by general practitioners
in order to attract the best physicians into the service. On the other hand, Bevan
regarded free treatment for NHS patients as a matter of principal, and resigned from
the government when, at the behest of the Treasury, prescription charges were
introduced in 1951 to control demand for medicine, spectacles and dentures. With the
exception of prescription charges and below-cost charges for dental treatment, the
NHS remained free at the point of use. The Treasury continued to be concerned about
the cost to the taxpayer being determined by demand by patients, but an economic
analysis by the National Institute of Economic and Social Research showed that the
cost of the NHS was lower, as a percentage of national income, in 1953/4 than it had
12
been in 1949/50. An inquiry chaired by the left-wing Cambridge economist, Claude
Guillebaud, reported in 1956 that the weight of evidence taken from representatives
from different parts of the NHS was against any reorganisation of the service. The
Treasury had to be content with economising on hospital building in the 1950s, but
this only led to a requirement for an expensive hospital building programme in the
1960s (Peden 2000, pp. 423-5, 505-6). Moreover, the march of medical science was
increasing the number and expense of treatments available through the NHS, and in
the absence of any effective control of demand through a price system, queues
developed. However, it was not until 1965 that the IEA published a pamphlet by
Buchanan which applied public choice theory to show that public provision would
never match the sum of individual demands for free health care (Buchanan 1965).
Neoliberal discontent with the public provision of education was also slow to
materialise. The 1944 Education Act for England and Wales was bipartisan,
introduced by a Conservative minister, R. A. Butler, and left private schools or stateaided grammar schools untouched. The Act provided for free education in local
authority secondary schools to be selective, with examinations taken at age 11 or 12
determining which pupils would study academic subjects that would prepare them for
white collar jobs, and which pupils would study practical subjects which would
prepare them to be manual workers. Thus access to education was determined by the
ability of parents to pay fees for private education, or the ability of pupils to pass
examinations. The standard of local authority schools, which about 90 per cent of
pupils attended, varied a great deal and in the early 1960s the IEA commissioned a
study by Peacock and Wiseman of the organisation and finance of education, which
opened a debate on vouchers as means of giving parents greater choice as to which
school to send their children (Peacock and Wiseman 1964; Peacock 2010, pp. 166-
13
99 ). Unsurprisingly, the IEA came down firmly in favour of vouchers (Maynard
1975).
Discontent with university education was slower to develop. The increase in
student numbers after the war was modest, and in 1962 university entrants represented
only 4 per cent of their age group. The chairman of a government committee on
higher education in 1961-63 was none other than the neoliberal Robbins, but in the
context of proposals for university expansion he saw no need to resort to the price
system. Robbins retained the existing system whereby universities were largely
financed by the taxpayer through grants administered by the independent University
Grants Committee (UGC). He decided against student loans on the grounds that it
was a bad thing for young people to emerge from education loaded with debt, and
students continued to have their fees paid by local authorities and to receive meanstested maintenance grants funded by the taxpayer. He recognised that public funding
exposed the universities to the danger of political pressures, but he believed that the
UGC system could strike a balance between the academic freedom of the universities
on the one hand, and co-ordinated allocation of resources on the other (Higher
Education 1963). Peacock and Wiseman were more sceptical, rightly anticipating
from recent experience that governments would be unwilling to raise from taxation
the full cost of university expansion (Peacock and Wiseman 1964). Robbins himself
came to regret that he had not recommended a system of student loans (Robbins 1980,
pp. 35-6). University expansion was under-funded in terms of existing standards, such
as student: staff ratios, and was accompanied by a good deal of student unrest.
Although universities were theoretically independent institutions, they were
increasingly treated as if they were part of the public sector. So far, however, only
14
one private university college has been set up in Britain, the University of
Buckingham, which was founded in 1976.
Housing policy underwent a number of changes after 1945. There was a
severe shortage of houses at the end of the war, partly on account of war damage but
mainly because house building had virtually ceased for five years. The Labour
government’s solution was to use controls over materials to give local authority
housing priority over private builders, so much so that 85 per cent of houses
completed between 1948 and 1951 were for the public sector. As Cairncross, who
was an economist in Whitehall at the time, later pointed out, Labour’s housing
programme was an example of poor economic planning, many more houses being
started than could be completed with the available labour and materials, leading to
delays (Cairncross 1985, pp. 451-2, 457). Moreover, Bevan, the minister responsible
for housing in England and Wales, insisted that local authority houses should be of a
high standard, a policy that limited the number built with the available resources of
labour and materials. Policy changed under the Conservatives after 1951, with private
builders being allowed to compete with local authorities for labour and materials, and
with local authorities being encouraged to mass produce lower quality flats. By the
1960s many working-class people were buying their own houses and Peacock, then an
economic adviser to the small Liberal party, suggested that home ownership should be
encouraged by local authorities selling houses and flats to their tenants (Peacock
1962). It is perhaps worth interjecting at this point that Peacock does not consider
himself a neoliberal, and that at the time he hoped to prove that Hayek was wrong to
think that the welfare state was a threat to liberty (Peacock 2010, p. 140). It was not
until 1968 that the IEA published the results of a review of the local authority sector
of the housing market which claimed that local authority bureaucracies were often
15
inefficient and unresponsive to tenants’ preferences. The IEA recommended the sale
of houses to tenants or private landlords at market prices (Gray 1968). However, the
incoming Conservative government of Edward Heath did not adopt this policy in
1970.
Employment policy followed a similar pattern to social policy as regards
vulnerability to neoliberal criticism. During the long post-war boom there was ample
demand in the economy, and national unemployment rates were low. Consequently
Keynesian fiscal policy aimed at budget surpluses on current expenditure to keep
inflation down, although the size of the budget surplus was reduced at times when
unemployment threatened to rise. It was only after 1973, when the Conservative
Chancellor of the Exchequer, Anthony Barber, reflated the economy to prevent
unemployment rising above 1 million, that the budget moved into deficit. It is true
that the budget figures excluded borrowing by local authorities and public
corporations, and did not correspond to the modern concept of the public sector
borrowing requirement (PSBR), which was introduced in Britain in 1976. Even
retrospective figures for the PSBR, however, show that it was almost always within
the range of 2 to 4 per cent of GDP before 1974. It is not surprising therefore that the
IEA’s attack on Keynesian budgetary profligacy came only in 1978, and was based on
mistaken ideas about what had traditionally constituted a balanced budget (Buchanan
et al 1978; Clarke 1998; Matthews 1968).
Even with central government’s current expenditure matched by taxation,
public expenditure’s share of GDP increased from 37 per cent in 1955 to 42.9 per cent
in 1973. Social services more than accounted for the increase, their share rising 7.3
percentage points from 13.9 per cent of GDP in 1955 to 21.2 in 1973 (Middleton 1996,
p. 98). The resignation of a Chancellor of the Exchequer, Peter Thorneycroft, in 1958
16
in protest against the Cabinet’s refusal to place a ceiling on public expenditure
appeared in retrospect to be a proto-monetarist protest against Keynesianism.
However, the economists whose ideas informed Thorneycroft and his junior ministers,
Enoch Powell and Nigel Birch, were not Milton Friedman or any member of the
Chicago school, but Robbins and Dennis Robertson, neither of whom could be
described as a monetarist, as that term came to be understood in the 1970s and 1980s.
Robbins and Robertson advised Thorneycroft that, if inflation was to be avoided, the
government must rely less upon short-term debt in the form of Treasury bills to
finance its expenditure, and the Bank of England rather reluctantly accepted
Robbins’s suggestion that commercial banks should deposit funds with the Bank,
which it would lend to the Treasury. The idea of monetary targets, however, lay in
the future. Nor did Thorneycroft, Robbins or Robertson represent official thinking
within the Treasury, which was guided by the Keynesian head of the Economic
Section, the Oxford economist Sir Robert Hall. Hall, like all Keynesians by that date,
believed that the key to securing stable prices when the economy was at full
employment was not deflation by government but moderation on the part of the trade
unions in making wage demands (Green 2000; Peden 2000, pp. 483-93).
The problem of cost-push inflation had exercised Keynesian economists since
the 1940s, and both Labour and Conservative governments sought the co-operation of
the Trades Union Congress in securing voluntary wage restraint. It was not until 1972
that Edward Heath attempted to impose a statutory prices and incomes policy, only to
provoke a coal miners’ strike and bring down his government in 1974 (Jones 1987).
The time was thus opportune for a new theory, put forward by the Oxford economists
Robert Bacon and Walter Eltis in 1975-76, linking public expenditure, industrial
decline and demands for higher wages. According to Bacon and Eltis, rapidly rising
17
public expenditure diverted profits and savings from private investment, reducing
British firms’ ability to compete in international markets; moreover, as public
expenditure increased as a proportion of GDP, the combined incomes of public and
private sector workers increased more rapidly than the output of marketable goods,
resulting in higher prices and demands for higher wages (Bacon and Eltis 1976). The
Bacon and Eltis thesis was far from receiving universal acceptance from the
predominantly Keynesian economics profession, but was adopted by the New Right.
Bacon and Eltis’s arguments were not dependent upon acceptance of monetarist
theories, but were compatible with them. As is well known, the IEA helped to
propagate monetarist and neoliberal critiques of Keynesian macroeconomic policy
and by the latter part of the 1970s the experience of stagflation had prepared the way
for a paradigm shift in economic thought. It is worth noting, however, that Robbins
was a good deal more cautious than monetarists as regards abandoning incomes
policies or imposing a sudden reduction in the increase of the money supply (Robbins
1974; Friedman 1970; Hayek 1975; Walters 1978).
What is striking is how slow the New Right was to criticise microeconomic
aspects of employment policy. Under the Distribution of Industry Act of 1945 the
government had powers to encourage firms to move to areas of high unemployment,
both by financial assistance or by withholding permission to build factories in areas of
high unemployment. These powers were not much used until the decline of older
industries, such as coal mining, shipbuilding and textiles, from the late 1950s.
Inevitably commercial decisions became entangled with social and political issues.
For example, in 1958 the Conservative government put pressure on the firm of
Colvilles to build a steel mill at inland site where there was higher than average
unemployment, rather than on the coast, where transport costs of imported ore would
18
be cheaper. The company’s chairman rightly predicted that the investment would be a
financial disaster but gave way when granted a government loan facility (Payne 1979,
pp. 374-83, 393-405, 424). In the late 1960s the Labour government was preserving
shipbuilding jobs by granting financial assistance to firms in return for reorganisation
of the structure of the industry. The Conservative government came to power in 1970
declaring that it would not subsidise what it called ‘lame ducks’, but ended up not
only giving financial assistance to shipbuilding but also nationalising the major aeroengine firm, Rolls Royce, when it was on the brink of bankruptcy. This kind of
employment policy was precisely the kind of privilege for particular groups of
workers that Hayek had denounced in The Road to Serfdom, but it took the Centre for
Policy Studies (CPS), which Margaret Thatcher and Sir Keith Joseph had founded in
1974, until 1979 to condemn it. Curiously, the CPS critique of subsidies to preserve
jobs makes no mention of Hayek (Burton 1979).
To conclude this section, neoliberalism was slow to mount an effective attack
on the welfare state partly, as Tribe suggests, because of the Conservative instincts of
the New Right; partly because of most economists’ lack of professional interest in the
social services prior to the development of public choice theory; and partly because
experience of the various aspects of the welfare state, including employment policy,
was on the whole satisfactory until the late 1960s.
III
My third section will be brief because I agree with Tribe that the Thatcher
government left much unfinished business from a New Right perspective, and I wish
only to offer a few observations on why neoliberalism did not have a greater impact
19
on the welfare state between 1979 and 1990. I shall begin with general observations
and then look at specific aspects of social policy. First, although Thatcher was
convinced of the merits of the New Right project, and had intellectual support from
her colleague Sir Keith Joseph and three neoliberal think tanks, some members of her
Cabinet regarded the welfare state from the perspective of traditional ‘one nation’
Conservatism. Second, prior to 1979 the IEA’s ideas had been regarded in Whitehall
as being outside the mainstream of conventional wisdom and, although IEA
publications became prescribed reading when Thatcher came to power, ministers and
officials were guided by what they regarded as practical politics (Croham 1981).
Third, although the Thatcher government abandoned Keynesian employment policy,
it could not ignore the consequences for social security of a doubling of
unemployment in its first two years in office, with rising unemployment thereafter
down to 1986.
By the 1980s it was widely accepted, on the left as well as on the right of
politics, that the social security system had become too complex, with high
administrative costs and poor take-up of many means-tested benefits. The
Conservative Secretary of State for Social Services, Norman Fowler, called for the
most comprehensive review since the Beveridge Report, and the outcome was the
Social Security Act of 1986. Benefits were rationalised with the result that real
incomes of the childless unemployed declined, sharpening the incentive to seek work,
especially as income tax had been reduced. On the other hand, there were net real
gains for low-income families, reflecting the government’s concern to target benefits
more accurately according to need (Dilnot and Webb 1989; Johnson and Stark 1989).
While these changes were in line with New Right ideas, they also had the support of,
and indeed were drafted by, Whitehall officials.
20
The NHS was a target for New Right reformers, who saw it as subject to
bureaucratic sclerosis, dominated by the interests of the medical professions, and poor
value for money. Efforts were made to introduce business principles and methods
into hospital management; laundry and cleaning were put out to competitive tender;
and from 1990 general practitioners were given the right to hold budgets with which
to buy hospital care for their patients. Prescription and dental charges were raised
steeply and more people took out private health insurance. Even so, at the end of the
decade 90 per cent of the population relied exclusively on the NHS for their health
care, and the allocation of resources continued to be predominantly by queues rather
than by price. The NHS was simply too popular with the electorate for the New Right
to push reform as far as it would have liked (Allsop 1989; Green 1988).
It proved to be even harder to introduce New Right ideas into education. As
Secretary of State for Education, Keith Joseph was interested in the IEA’s ideas for
school vouchers. However, having attended private schools, he and his junior
ministers were ignorant of local authority schools, and they were persuaded by
officials in the Department of Education that such schools would not be able to
manage a system of vouchers and the idea was abandoned in 1983 (Timmins 1995, pp.
419-20). To the IEA this decision was an example of public choice theory in action:
the concentrated, articulate producer interests of the teachers’ unions and bureaucrats
were stronger than the dispersed, consumer interests of parents (Seldon 1986).
In contrast, New Right ideas had a major impact on local authority housing.
The Housing Act of 1980 encouraged local authority tenants to become owneroccupiers. Over 1 million houses had been sold, on very favourable terms, to sitting
tenants by 1989. Local authority building was curbed to 35 per cent of the 1978 level
by 1982 and to less than 20 per cent by 1987, while private building increased. As a
21
result of these changes the proportion of owner-occupiers among householders rose
from just over half in 1979 to two-thirds ten years later (Peden 1991, pp. 235-7).
To sum up this section, the impact of New Right ideas on the welfare state in
the 1980s was mixed, but certainly not insignificant. A new agenda for social reform
had been set, but, as one would expect from public choice theory, the providers of
welfare services resisted exposure to the rigours of the free market.
IV
In conclusion, differences between Tribe and me in our accounts of neoliberalism and
the welfare state arise chiefly from our approaches to the history of economic thought.
Tribe is primarily interested in the development of British neoliberalism; my focus is
on the interaction between economics and policy. Tribe rightly distinguishes between
the philosophical bases of classical liberalism, new liberalism and neoliberalism;
while recognising these differences, I draw attention to their common recognition of
the need for some form of social security, combined with encouragement of self help
in a free market. Beveridge, Keynes and Hayek seem to have differed little on social
insurance, although Keynes and Hayek certainly had different views on how far the
state could be trusted with economic planning in employment policy. Beveridge’s
influence on the welfare state has been exaggerated. The welfare state incorporated
socialist as well as new liberal ideas, and over time it evolved in ways that made it
increasingly objectionable to neoliberals. The experience of how producer interests
captured the welfare state provided material for public choice theory, and by the mid1960s that theory was available to underpin the New Right’s arguments. Indeed the
New Right was eclectic in its use of economic theory, drawing upon Hayek, Robbins,
22
Buchanan and Tullock, Friedman, and Bacon and Eltis, to justify its rejection of
welfare and employment policies that Conservative as well as Labour governments
had followed down to the 1970s.
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