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I have been writing on the different schools of economic thought through the ages. One interesting take-away from the last half-century is how much economists' attention has been drawn away from mechanical, macroeconomic explanations and towards how people actually make their economic decisions. There is, for example, a revival of the Austrian School, which stresses the subjective nature of values and economic choices; the Public Choice School, which looks at how collective decisions are made, and the consequences of that for economics; and Behavioural Economics, which attempts to bring human psychology into the study of personal choices.At the heart of the Public Choice School approach is the idea that every stage of the democratic decision process — from elections, through the legislature, to the bureaucracy that implements the laws and the judiciary that interprets them — is riddled with self-interest, leading to decisions that are irrational and often factional. And for its part, Behavioural Economics hinges around the idea that natural biases in the way human beings see and respond to events also creates some shocking irrationalities.Behavioural Economics has applied this psychological approach largely to the ways that individuals make choices. But I wondered what might be revealed if we took it into the making of collective decisions. Is there more than mere self-interest at work? Is the democratic process not riddled with other psychological biases too.To start with, one of the strongest natural biases identified by Behavioural Economic is risk aversion. It is why bad news sells newspapers; we are much more alert to and concerned about bad things than good ones, partly because bad things can be fatal to us. But this shows up in the public choice environment too. I saw an example of this in the Thatcher era, when a UK-wide private hospital company decided to bid to build and run a new NHS hospital. Department of Health bureaucrats were so keen to cover their own backs that the tender documents with all their provisos formed a metre-high stack, requiring the company's response to be even higher. And how did the bureaucrats respond to this bid to run NHS provision in a completely new way? After two months of silence, the first question they asked was what kind of cutlery would be used in the staff canteen. Can't be too careful, they say. But yes, that was too careful, and indeed the political system abounds in being too careful. We pass laws and regulations that attempt to keep people completely safe from harm. It is irrational, because the extra cost of guaranteeing that extra featherbedding is huge; and overprescriptive regulations thwart people from trying new ways of doing things that might just prove more productive, and even safer.As we make our way through the other cognitive biases identified by Behavioural Economics, we see the democratic — i.e. political — system falling for every one of them. Bounded rationality, for example: rather than consider very possible implication of every possible option, we tend to follow 'rules of thumb'. And if those work reasonably well, we tend to stick with them (what these economists call 'satisficing') even though other rules of thumb might actually work better. In Public Choice terms, Bryan Caplan showed the bounded rationality of electors: they tend to favour government solutions, for instance, over market solutions. As do politicians, of course. And for their part, bureaucrats, especially regulators, tend to assume the superiority of regulation over competition.How decisions are presented. the choice architecture, also affects personal choices. That is the whole theory behind 'nudge' — tell people the downsides of smoking, for instance, and they will probably do less of it. But it works in political decision-making too. Should we have more free trade, which could deliver better choice and lower costs? Well, international competition might also create job losses too, and you can be sure that the media focus will be on the unemployment (risk aversion). No wonder that electors and politicians opt for protectionist policies.Confirmation bias is another human quirk, where we see and judge things in terms of our own beliefs, rather than against any objective standard. Politicians are particularly prone to this error. Rent controls, for example, make it less worthwhile for property owners to rent out rooms and homes; so they evict their tenants and quit the market. That leads to calls for more tenant security. And if owners can't evict people anyone but can't make any money out of them because of the rent controls, they just let their properties fall into disrepair. Which is taken to be proof of how greedy 'landlords' are and leads to yet further controls… and so on, until the whole rented sector dries up. Rationally, we should scrap the controls and let the market allocate things. But rationalism is little use in politics.Politics abounds with another bias, the sunk costs fallacy. The high speed rail link (HS2) between London and Birmingham is costing hundreds of billions of pounds for very little difference in journey time, but so much construction has been done that politicians are embarrassed to pull the plug on the project. The same happened with Edinburgh's (three times over budget and five years late) new tram system and Scotland's (also three times over budget and five years late) replacement ferries.Politicians also make decisions on the basis of salience. What is playing in the media today — prison escapes, dangerous dogs, school truancy — is likely to shape policy far more (and more urgently) than longer term issues — like disincentives in the tax and welfare systems — that might be far more significant in their effects.The Behavioural Economics bias list goes on. Optimism bias — plenty of evidence for that in public procurement, and projects like the postwar replacement of 'slums' with 'modern' blocks that people hated even more. Or mental accounting — sticking with 1001 budgets for separate projects, rather than re-thinking spending as a whole (as Canada did in the 1990s). Or the endowment effect of over-valuing what we already have (like 'our' 'precious' NHS). I have decided to explore all this psychology of public choice in more detail. If we know exactly what foibles are producing such daft public policy, after all, we might be able to do something about it.

The Adam Smith Institute saw another big policy win this week. In 2017 we published a paper by the ASI President, Dr Madsen Pirie, entitled 'The Fifth Way.'It proposed the radical idea that local governments should be empowered to buy farmland, give it planning permission for housebuilding, and share the proceeds with the community. The government has just announced that it will implement this.It is another case of the ASI stretching the Overton Window so that ideas thought outlandish can be brought into the range of what it is possible to consider. Way back in the 1980s Madsen was quoted as saying, "We propose things which people regard as being on the edge of lunacy. The next thing you know, they're on the edge of policy." If we had a penny for every time that has been quoted, the ASI would be rich. We are not rich, alas, because we never received those pennies.It does, nonetheless, indicate one of the ASI's greatest strengths. We seem to come up with ideas that seem way beyond what is considered reasonable, and then market them in such a way that they become worthy of consideration. This has happened many, many times, and 'The Fifth Way' is only the latest.Madsen has been working on a paper that proposes radical solutions to ongoing problems in most areas of government ranging through health, education, student loans and overseas development. It's Overton window stuff and is guaranteed to blow your socks off when we publish it next month. Watch this space.

Happy birthday, Milton!The Nobel economist—and arch-monetarist—the late Milton Friedman, was born on this day in 1912. I was going to write a short biography. But there is one in both of the books that I wrote about him, and it's not difficult to find all that stuff online.So I will just say that he was a hugely likeable guy, who relished arguments both with friends and foes, as you could tell by the wide grin he always had while arguing. He would treat students just the same as professional economists, always being keen to engage with them and not talking down to them at all but taking their arguments seriously and trying to raise points they might not have considered. Madsen Pirie and I agree that, while F A Hayek was probably the wisest person we've ever met, Friedman was the sharpest—with a quick wit and instant, pithy responses to every point.So rather than go on about his achievements, let me just let him speak in his own words.[The] record of history is absolutely crystal clear, that there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system. Phil Donohue interviewThe actual outcome of almost all programs that are sold in the name of helping the poor—and not only the minimum-wage rate—is to make the poor worse off.Playboy interviewA society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.From Created Equal, the last of the Free to Choose television series (1990, Volume 5 transcript).Most of the harm that comes from drugs is because they are illegal.As quoted in If Ignorance Is Bliss, Why Aren't There More Happy People? (2009) ‬by John Mitchinson, p. 8Ask yourself what products are currently least satisfactory and have shown the least improvement over time… The shoddy products are all produced by government or government-regulated industries. The outstanding products are all produced by private enterprise with little or no government involvement.Milton & Rose Friedman, Free to Choose, Chapter 7I say thank God for government waste. If government is doing bad things, it's only the waste that prevents the harm from being greater.Interview with Richard Heffner on The Open Mind (7 December 1975)A little inflation will provide a boost at first – like a small dose of a drug for a new addict – but then it takes more and more inflation to provide the boost, just as it takes a bigger and bigger dose of a drug to give a hardened addict a high. Tyranny of the Status Quo, p.88If all we want are jobs, we can create any number – for example, have people dig holes and then fill them up again, or perform other useless tasks…. Our real objective is not just jobs but productive jobs – jobs that will mean more goods and services to consume.Milton & Rose Friedman, Free to Choose, Chapter 2Few measures that we could take would do more to promote the cause of freedom at home and abroad than complete free trade.Milton & Rose Friedman, Free to Choose, Ch 2.Governments never learn. Only people learn. Statement made in 1980, as quoted in The Cynic's Lexicon : A Dictionary Of Amoral Advice‎ (1984), by Jonathon Green, p. 77

We also guess that hasn't arrived as yet. "I am determined to create wealth for people up and down the country. It is the only way our country can progress, and my government is focused on supporting that aspiration."So says Sir Keir and jolly good, excellent in fact. Therefore, and obviously, we're going to go about increasing the incentives to do the hard work to create wealth. Lower corporation tax, reduce inheritance tax, cut capital gains tax, lower the rate of income taxation and so on. For if we desire people to put in the hard work to create wealth then we would want to increase the incentives to do that hard work then - allow people to keep more of the wealth they create. We are, aren't we?We're not? So that Blessed Day of joined up government has not, as yet, arrived then, eh? Tim Worstall

The Cato Institute has just published a new book that I (and others such as Deirdre McCloskey) have contributed to, The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy.In my chapter, I point out how, from ancient Egypt to the US and UK today, government efforts to control wages and prices have never worked. Price caps, minimum wages, limits on wage increases and all the rest have not stopped inflation, nor helped the poor. but have invariably created shortages, reductions in product quality (and 'shrinkflation') and black markets. In the end (surprise surprise), it is the poorest people who suffer most.The book debunks the official narrative about the recent surge in prices and the cost of living. No, it wasn't caused by corporate greed, or wage-price spirals, price gouging, or oil prices, or Brexit, or anything else like that. It was caused by the US Federal Reserve, the European Central Bank and the appalling Bank of England keeping interest rates down too far for too long, and printing too much money.  The authors show how minimum wage rises, which are intended to help poorer workers deal with the cost of living, simply price people out of jobs, particularly those who are young and unskilled. And even when there aren't layoffs, minimum wage bills cause employers to cut perks, insist on less flexible work schedules, and neglect the work environment. Minimum wages are a very bad way to tackle poverty. There's much more of interest in the book, including analysis of price controls in World War II, Modern Monetary Theory, water pricing, CEO pay, oil and gas price controls in the 1970s, and much else. The book has received some excellent reviews to date, from a diverse range of economists and commentators. So order your copy here!

On this day, in 1899, the Nobel economist and social theorist Friedrich Hayek was born. He was, in the words of Robert Skidelsky, "the dominant intellectual influence of the last quarter of the twentieth century".Hayek was the driving force that kept alive the spirit of personal and economic freedom that had been crushed by the Second World War and the Keynesian economic experiment that followed it. Those who think they can rationally design a better society, he argued, suffer from the 'fatal conceit' that we know far more about how society works than we really do. Governments simply could not collect and process all the information needed to run a functioning economy, because that information is dispersed, diffuse, incomplete and personal. The socialist dream would always be frustrated by reality; and as socialists struggled to control things, we would be drawn down a road to serfdom.Societies do not need to be planned in order to be rational and functional. Their rules and customs contain a 'wisdom' that has stood the test of time. A wisdom that we cannot even understand, never mind control. The price system, for example, allocates resources to their most urgent uses, with a speed and efficiency that defies any government planners. Such 'spontaneous orders' (including not just markets but language, justice and much else) were, said Hayek, products of social evolution, not rational design. Trying to replace them with some planned 'rational' alternative always ends in disappointment and chaos.Hayek influenced a generation of economists, including many others who would also win the Nobel Prize, such as Milton Friedman, George Stigler, Maurice Allais, James Buchanan, Vernon Smith, Gary Becker, Ronald Coase and Elinor Ostrom. His ideas also enthused intellectuals who in turn disseminated his ideas even more widely. Among them were Henry Hazlitt, journalist and co-founder of the Foundation for Economic Education; Ralph (later Lord) Harris and Arthur Seldon who ran the Institute of Economic Affairs; F A ("Baldy") Harper who founded the Institute for Humane Studies, and Eamonn Butler and Madsen Pirie of the Adam Smith Institute.These thinkers and activists gave Hayek's ideas a real political effect. Margaret Thatcher and Ronald Reagan owed much to his thinking, as did Mart Laar and Vaclav Klaus, who became political leaders in Eastern Europe after the fall of the Soviet system. "No person," concluded Milton Friedman, "had more of an influence on the intellectuals behind the Iron Curtain than Friedrich Hayek."Hayek remains an inspiration to lovers of individual freedom all over the world. Think tanks promote his view; student groups name themselves after him; college programmes take his name; economists and journalists cite him; his views are analysed in books, papers and blogs. Millions of ordinary people around the world owe to Hayek their enjoyment of the fruits of personal and academic freedom, even though they may not realise it; but then as Hayek pointed out, knowledge is not always obvious.Eamonn Butler is author of Friedrich Hayek: The Ideas and Influence of the Libertarian Economist (Harriman Economics Essentials).

Many people are familiar with Adam Smith's The Wealth of Nations (WoN), But Smith's ethical thinking was just as important. In fact, it was The Theory of Moral Sentiments (TMS), published 27 years earlier, on 12 April 1759, that made him famous.Just The Wealth of Nations, this book marked a complete break from the thinking of the time. Ethics had until then been widely assumed to be based on God's will (or the clerics' interpretation of it); or something that could be deduced through abstract reason; or even something that could be felt through some 'moral sense' like touch or vision. Replacing this speculative thinking by scientific method, Smith argued instead that morality stemmed from our human nature as social beings, and our natural empathy for others. By observing ourselves and others, he said, we could discover the principles of ethical behaviour. Ethics was a matter of human psychology, stemming from how we form judgements about ourselves and others, and the influence of customs, norms and culture upon it.This scientific approach to ethics was a sensation. It was very much in line with the Scottish Enlightenment, which sought to apply observation and scientific method to the study of human affairs. Old hierarchies were breaking down; industrialisation was eclipsing Scotland's feudal past; radical thinkers like Francis Hutcheson and David Hume were pushing new boundaries, and religious pluralism was creating a more active debate on virtue and morality.Smith's book explained that morality is rooted deeply in human psychology, especially the empathy we have for our fellow humans. By our nature, we understand, and even share the feelings of others. Wanting others to like us, we strive to act such that they do. Even if there is no one else around to see how we behave, we are still impelled to act honestly, says Smith, as if an 'impartial spectator' is judging us all the time, setting the standard by which we rate ourselves and others. And under this imaginary eye, every choice we make helps us appreciate that standard more clearly and act more consistently in accordance with it. It is as if an invisible hand is drawing us to act in ways that promote social harmony.TMS is mainly a descriptive account of human moral action. It examines how people actually make moral choices, and the pressures on them to do so. It also provides a guide on how we can cultivate our morality, emphasising the importance of self-reflection and self-improvement. Smith's radical scientific approach in TMS and WoN provided a foundation for the subsequent development of psychology, sociology, and economics, establishing them as distinct subjects of academic enquiry. And its suggestion that self-interested actions—wanting to be liked by others, or exchanging things we value less for others' things we value more—could produce a cooperative social and economic order, continues to have a central place in liberal thinking.All this makes the themes in The Theory of Moral Sentiments just as relevant today as they were in 1759. Through self-reflection, we can make better moral choices. Through our empathy with others, we can foster understanding and create a more peaceful society. Through an appreciation of our shared feelings and interests, we can live and work and collaborate together for the mutual benefit of the whole of humanity.

Achieving net zero carbon emissions by 2050, a plan to which all our leading political parties are committed- except Reform- will require large scale use of low carbon energy sources, including nuclear power. Various studies confirm what is obvious: that nuclear power has a significant role to play in meeting increasing world energy demand and keeping carbon emissions low. However, that means that nuclear power will have to become a much more significant part of the energy mix than it is today. The UK government reckons that the country needs to increase its nuclear power capacity to 24 gigawatts by 2050 to meet its net zero targets. That would make it about a quarter of projected electricity demand, compared to about a seventh today.Today's large-scale nuclear power plants are difficult, time-consuming and costly to build. But enterprising companies such as Rolls-Royce propose much smaller-scale plants — Small Modular Reactors or SMRs. They promise be much lower cost and much quicker to build. Even so, there is a lot of opposition to new nuclear construction (or indeed any sort of construction) from local residents; and the UK's highly restrictive planning rules don't make it any easier. (Nor, indeed, do the UK's energy regulators.)Maybe there is a solution, though: floating nuclear power plants. We site wind turbines offshore, so why not site nuclear power plants offshore too? Of course, it sounds like a cross between science fiction and fantasy, because we still have this idea that nuclear power plants need to be huge. But they don't. Nuclear energy has been used in ships of 70 years. There are today 162 nuclear-powered vessels floating on or below the surface of the sea. Nuclear energy is used to power submarines and icebreakers, allowing them to remain operational for very long periods. So no, it is neither science fiction nor fantasy, and marine engineers are actively working on the proposal. Last August, academics from King's College London delivered two workshops on floating nuclear power plants (FNPPs), in Jakarta and Manila. And the prominent marine engineer Stuart Bannantyne has also raised the same prospect in Australia. It's a good place for it, since 92% of Australians live near the coast or by rivers. But the same is true of many countries.Already, some countries have floating diesel- or gas-powered power stations in ports. The Russians were the first, in 2019, says Bannantyne. They placed a 70mw floating plant in the remote town of Vilyuchinsk. Since then the idea has spread. In November 2023, the International Atomic Energy Agency held an international conference on the idea of floating SMRs, looking to provide clean heat and power for remote coastal locations (and to replace carbon-based generators). The conference discussed all aspects of the option: licencing, regulation, safety, security and so on. Singapore, which suffers a lack of land space, is already thinking about the prospect in practical terms. A US shipping company is developing the concept of micro reactors on ships for shore-side locations. Floating reactors might even be a way to get power back to war-torn states once the shooting stops.It is unlikely that floating nuclear power plants will replace onshore generation. But for remote locations and in times of trouble — well, watch this space.Read Stuart Bannatyne's article in Spectator Australia. https://www.spectator.com.au/author/stuart-ballantyne/

Baroness (Pauline) Neville-Jones has issued a chilling warning about the 'growing' security threats and has called for the UK to spend 2.5% of GDP — even at the expense of tax cuts.It's a call to be taken seriously. She is a Conservative peer and former civil servant who chaired the Joint Intelligence Committee in the 1990s, served on the National Security Council, and was Minister for Security and Counter Terrorism in 2010-2011. She was also the first to argue that the UK needed to help Ukraine after Russia's 2014 attack on the Crimea. Ministry of Defence officials scoffed at the idea that Russia might have grander ambitions in the region. Now, the ongoing war makes that look recklessly optimistic.In addition to Ukraine, there is currently an active war in Gaza, which could even escalate to Iran and elsewhere, plus over 35 major armed conflicts in Africa (including Burkina Faso, Cameroon, the Central African Republic, the Congo, Ethiopia, Mali, Mozambique, Nigeria, Senegal, Somalia, South Sudan and Sudan. . And China is throwing its military weight around in the South China Sea, the Pacific and the Indian Ocean.Things are now striking very close to home. UK and European supply chains are being disrupted in the Red Sea and Straits of Hormuz. The UK's National Cyber Security Centre has warned that the threat to vital UK internet systems is 'enduring and significant', with a rise in aggressive state-sponsored cyber-terrorism. And other western nations face the same threats.It does indeed look like a very dangerous world. So are we doing enough about it? The international comparisons suggest not. For the first time in its history, the Russian government's 2024 budget will set military and defence spending at 6% of GDP — more than goes on social spending. At the 14th National People's Congress last month, China announced it would be raising its military budget by 7.2%. Not only does the world look very unsafe, it looks increasingly unsafe.And all this is coming at the worst possible time. Donald Trump, who looks set to re-enter the White House at the end of the year, has already announced that he would turn off US support to Ukraine, and he has hinted that the US will not even suppose NATO countries unless they start spending more on their own protection. Meanwhile, the UK (like many other European countries) is deep in debt, thanks to a string of governments (including Conservative ones) that have put tax-and-spend and costly regulation ahead of entrepreneurship and economic growth,Given the geopolitical and military threats around, that is not a great position to be in. And now, senior Conservatives like Neville-Jones are talking about strengthening defence even if it means sacrificing any growth-stimulating tax cuts. If only our governments had listened to the pro-growth, low-tax, balanced budget arguments much earlier.

Well, how do nations escape poverty? Those of us familiar with the prominent US economic historian Deirdre McClosky know the answer to that. Liberal values (what she calls 'bourgeois values'). Things like respect for individuals and their freedom of action, toleration, limited government, the rule of law, minimising the use of force, property and honouring contracts. All those things provide the compost in which the seeds of prosperity can grow.But it's a long and difficult process. And unfortunately, says the prolific German author and economist Rainer Zitelmann in his new book, we don't often help poor countries to do what it takes to acquire these values. On the contrary, we try to help them with foreign aid, which messes up what markets there are and is too often badly managed or even abused. And when the funding runs out, projects become unaffordable and are terminated, so whatever good was created by them is lost, as William Easterly and Dambisa Moyo point out. So what can poor countries do, and do better, to pull themselves out of poverty?Zitelmann takes two very different countries, Vietnam and Poland, who took very different paths to reform. Vietnam, of course, was not helped by years of destructive war, then communism sweeping down from the north. Like everywhere else, it found that collective agriculture systems, borne of communist ideology, simply didn't work. So, like China and so many others, they were eventually forced to modify it, still claiming it was collectivised, of course, but actually transferring responsibility to individual families, who had an incentive to produce more rather than work less. The limited markets for agricultural products gradually expanded, then individuals were allowed to employ up to ten other people. Internal customs barriers were eroded, and international trade opened up. Then price controls and subsidies faded, banking was reformed. The trappings of socialism remained, but it declined in economic significance.By contrast to this slow and piecemeal approach, says Zitelmann, Poland change rapidly and radically after the fall of communism. Its new finance minister, Leszek Balcerowicz realised that only 'shock therapy' would reverse decades of soviet mentality. A new law allowed people to engage in any economic activity they liked, and to employ as many others as they chose. Inflation was reined in by sound money policies. Debt was cut. Banks and other businesses were privatised. Industries were deregulated. Taxes were simpliefied, along the lines of a flat tas. That all led to a big rise in entrepreneurship. And the opening up of trade with the West brought people more and better products, and a rise in prosperity.The lesson, really, is that there is no 'right' way to make a country rich — 'to carry a state to the highest degree of opulence from the lowest barbarism,' as Adam Smith put it. But 'peace, easy taxes and a tolerable administration of justice' seem to be the essentials that you cannot do without.  Zitelmann, Rainer (2024). How Nations Escape Poverty: Vietnam, Poland, and the Origins of Prosperity. Forward by George Gilder. New York: Encounter Books.

Eighty years ago (on 10 March 1944) a short but hugely influential book was published: The Road to Serfdom. Written by the prominent economist, social theorist, and later Nobel laureate Friedrich Hayek. It sought to explain how a civilized country could fast descend into a warmongering, totalitarian dictatorship, as Germany had done.The book certainly caught the imagination of a world still at war. A US edition came out six months after the British publication, then in April 1945, Reader's Digest published a condensed version that brought it to a mass audience. But The Road to Serfdom is much more than an explanation of what had gone wrong in the country of Goethe and Beethoven those eighty years ago. It is also a stark warning to future ages of how easy it is to stumble down a road to serfdom of their own — and a warning to us today that we may already have taken fateful steps in that direction.Probably nobody in a liberal society intends to turn their country into a tyranny like Hitler's Germany, or for that matter, Stalin's Soviet Union. But Hayek's shocking thesis is that public policies that are introduced for the most noble of reasons can, and often do, create the conditions that make this fate more likely.  Then, by the time people have come to understand what is happening, it is already too late.Even more shocking is his firm belief that it is the pursuit of social democracy that is responsible for this result. Social democrats, and centrists of many varieties, promote policies that they hope will reduce inequality and boost social welfare. Such policies usually demand greater government control over the economic system, the use of taxation to redistribute wealth and income and compensate for other inequalities, and the establishment of a comprehensive welfare state to provide essentials such as housing, education, healthcare, and social benefits. But these initiatives all require the creation of new levers of political power, and at least some curbs on people's economic and social freedom. Once those two things are in place, they can potentially be exploited by politicians — not just those trying to make the policies work, but less scrupulous ones who dream of power. Moreover, these policies also give rise to perverse incentives and inefficiencies that stifle individual initiative and undermine the dynamism of markets. The resulting economic stagnation generates calls for yet more, and tougher, central planning and government intervention to correct things — which makes the rise of those unscrupulous politicians more likely. Historians may argue that this is not exactly what happened in Germany. Hitler's National Socialist German Workers' Party came to be seen as an antidote to the economic chaos of the late 1920s and early 1930s. But it did not have all the instruments of power presented to it on a tray. It had to seize power. But the fact that so many people thought that more government was the answer made it easier for it to do so.Nor did the United Kingdom, its government now furnished with all the power required to win a war, find itself too far down the road to serfdom to turn back. Rather, it found itself on a long road to economic stagnation, inflation, unemployment and decline that made British people yearn for the kind of post-war economic miracle enjoyed by the country they had so recently pummelled into defeat. Their journey down the road to road to privation was halted only in the 1980s, with Margaret Thatcher's reforms. Yet still, much of the apparatus of government intervention, planning and control remained in place, slowing any advance in a better direction. That — and its baleful result — is nowhere more obvious than in Britain's hugely government-heavy planning system for land and property, a post-war creation which the Adam Smith Institute reckons to cost the economy £66bn a year, or 3% of GDP. And much of the other apparatus of government control — in education, healthcare, housing, pensions, transport and insurance — is still there and still holding back innovation and enterprise.Today, that continuing dominance of government in so many parts of life is seriously eroding individual freedom. The government may not own utilities, transport or manufacturing operations anymore, but through law and regulation it still controls them. And as Hayek pointed out in The Road to Serfdom, if a government controls the economy, it controls freedom itself. How can critical ideas be advanced when the government controls the dominant media outlets? Or when it controls what people can and cannot say in public? How can critical ideas even arise when it sets the school curriculum and when college teachers — along with a fifth of the working population more generally — owe their living to the state? How can people find suitable accommodation when national and local government own a sixth of the land and control every aspect of how the remainder is used? Such a country is free only in name.Hayek believed that the apparatus of a state was needed to maintain freedom and deliver defence and justice, and essential public goods and services. And these are no small tasks. But he also realised the danger that government could so easily grow into the destroyer of individual freedom. That policies that start with noble intentions — sparing people from hostile views, for example — can turn into something repressive —such as the shutting down of free debate. The road to serfdom is a slippery downward slope. And we appear to be a long way down it.

Every Chancellor, like every Cabinet Office minister, dreams of cutting waste and reducing bureaucracy. It is surprising how few of them succeed at it. That is because you need to know how to do it, and few ministers do.Michael Heseltine MP did a reasonable job in the Thatcher and Major administration. Pretty soon the number of officials rose again. Francis Maude MP had a go for Cameron, but in that decade, officialdom grew by a quarter (conveniently put down to the problems of Covid and Brexit). Sir Jacob Rees-Mogg MP, Boris Johnson's efficiency minister, thought axing 90,000 civil service jobs — about a fifth of the total — was quite reasonable, but time, Boris and he all moved on before anything happened. The result is that we still have over half a million civil servants in government departments, and even more public servants running museums, infrastructure and all the rest. It's a nice earner, too: the proportion of civil servants in the 'Senior' grade has doubled in ten years. Whitehall has become a dense jungle of ministerial and non-ministerial departments, executive agencies, regulators, quangos, you name it, many of them with duplicated or overlapping functions. Ministers do not even know exactly how many civil servants there are. No wonder people complain about red tape.The only significant reform since the civil service was created in 1854 came under the Thatcher era. Her adviser, Sir Robin Ibbs, proposed to reduce Whitehall to just a few hundred elite civil servants who would make policy. But senior civil servants are rarely good managers, so those policies, ran the plan, would then be delivered by separate 'executive agencies' — or even outsourced to the private sector. A bit of that happened, though Whitehall remained very far from the 'few hundred' target. And as soon as Thatcher had gone, the mandarins started to rebuild their empires once again.Thatcher also culled a number of quangos, having learnt from an Adam Smith Institute report, Quango, Quango, Quango, that there were no fewer than 3,068 of them. But they again soon sprang back, until David Cameron cut a fifth of them. A waste-cutting minister might ask why we have quangos at all. (I've always advocated sending them home on full pay, waiting six months and seeing if we are actually missing any.) The quangos that execute policy should be turned into agencies. The advisory ones should be abolished: ministers can get advice whenever they like without maintaining permanent talking shops at public expense.We need to return to the Ibbs strategy, and at the same time cut all the duplication that goes on. A streamlined civil service would mean the Cabinet Office, which is supposed to run the whole show, could lose 90% of its staffing, according to management consultant Tim Ambler in his 2023 Adam Smith Institute book Shrinking Whitehall. The rag-bag Department for Digital, Culture, Media and Sport could also lose 90% by turning its functions into charities or industry bodies, and cutting all the overlaps. Big reductions would come from similar rationalisations at Education, the Treasury, Transport and others. So if you are looking to cut waste in government, start at the top.

Ofcom, the UK government agency that regulates the Royal Mail, has conceded that the national carrier can reduce its letter deliveries from six to possibly as few as three per week. The company was split from the Post Office and privatised a decade ago. I still have my shares in it. But in what is known as the Universal Service Obligation, it is legally obliged to deliver to anywhere in the UK for a fixed price — which, in the case of letters, is an eye-watering £1.25 for first class and 75p for second).Of course, fewer people send letters these days, preferring email for important and personal communications. So letter volumes have fallen, and the Royal Mail is hurting as a result. Ofcom says the company could save £100m-£200m by cutting deliveries to five per week, and £400-£650 by cutting them to just three per week.The British government has insisted that a six-day service should remain and that Saturday deliveries, in particular are (for some unspecified reason) "sacrosanct". And the Communication Workers Union (CWU), which represents Royal Mail staff, says the three-day delivery idea is unacceptable, would destroy Royal Mail and cost thousands of jobs.How can you privatise a company that is effectively a national monopoly of letter delivery (and, at the time, a near-monopoly in parcels delivery) only for it to get itself into debt and have to cut back its service? With a national monopoly and a national infrastructure system, you would expect it to be rolling in cash.The answer is that it hasn't really been privatised at all. Royal Mail was privatised, but it still isn't allowed to operate as a private company. Politicians insist it must charge the same to carry a postcard from Land's End to John O'Groats as it does to carry one from No.8 Acacia Avenue to No.13 Acacia Avenue. A government agency decides how much it can charge and what days and times of day it must deliver on. And the same powerful union that made the Royal Mail notoriously unreliable is still doing the same.The point of privatisation is not who owns a company. It is about setting a state-owned organization free to explore innovative ways of providing its service better, quicker, faster, and of developing new services that give consumers even greater value. When you privatise something as a monopoly, though, it has very little reason to bother itself with that.For a little while, Royal Mail relied on its lucrative parcel delivery service, Parcelforce, another near-monopoly, to keep the whole tub afloat. And yes, it is still the UK's biggest parcel carrier. But Parcelforce has had the stuffing knocked out of it by other, more nimble and innovative carriers like Hermes, DPD, Yodel, DHL and Amazon. And many customers prefer those others as being quicker and more reliable (some even nickname the Royal Mail's effort as 'Parcel-farce').There are lessons to this for the future of other state industries too. Many years ago, when we had a pro-market government, I asked the head of a US-owned international hospital provider — whose clinics and hospitals were very impressive indeed — why they didn't offer to take over and run an NHS hospital to show how it could transform the treatment and care of NHS patients. His answer was blunt: he would prefer to build a new hospital that might actually work efficiently, and hire management and staff that were steeped in the culture of customer service, rather than the gloomy culture of the NHS. And indeed, when one private company did take over an NHS hospital, though the improvements were tangible, the legacy culture eventually overwhelmed it.Since then, looking at many other state organizations has convinced me that privatising an unreformed, monopoly service is a mistake. You really have to create the conditions by which you can grow something new — something innovative, competitive and customer-focused. That was the idea of the internal market in health and education: the government still pays, so everyone can access the service, but it is provided by various independent companies or non-profits, so that customers also have the benefits of choice and competition. Of course, it wasn't long before the civil service stifled that sort of innovation by swamping the new providers with regulation. And that's a problem we have seen often, from buses to schools. But it's a problem we can solve.

In this 300th year after the birth of Adam Smith, much of the focus has been on Smith's economics, as recorded in The Wealth of Nations (1776). But Smith's ethical thinking was no less profound. Indeed, it was The Theory of Moral Sentiments (1759) that made him famous.Like The Wealth of Nations, The Theory of Moral Sentiments (TMS) was a complete break from the thinking of the time. Ethics had until then been widely assumed to be based on God's will, or the clerics' interpretation of it; or something that could be deduced through abstract reason; or even something that could be felt through some 'moral sense' like touch or vision. Smith, by contrast, argued that morality stemmed from our human nature as social beings, and our natural empathy for others. This replaced speculative thinking by scientific method. Smith maintained that by observing ourselves and others, we could discern the principles of ethical behaviour. It was a matter of psychology: how we form judgements about ourselves and others, and the influence of customs, norms and culture upon those judgements. This scientific approach was very much in line with the Scottish Enlightenment, which stemmed in part from the exchange of ideas between Scotland and England following the 1707 Act of Union, and sought to apply observation and scientific method to the study of humankind. Old hierarchies were breaking down, with industrialisation replacing Scotland's old feudal lifestyles, and with religious pluralism, leading to a more active debate on morals and virtues. New thinkers, like Francis Hutcheson and David Hume, were role models for Smith's intellectual radicalism.TMS argues that morality is rooted deeply in human psychology, especially the empathy we have for our fellow humans. By nature we understand, and even share the feelings of others. We want others to like us, and we strive to act so that they do. Even if there is no one else around to see our actions, we are still impelled to act honestly, as if an 'impartial spectator' is judging us at all time, setting the standard by which we judge ourselves and others. Every choice we have to make helps us see that standard more clearly and act according to it more consistently. All of which leads us, as if drawn by an invisible hand, to create a harmonious social order.TMS is primarily a descriptive account of human moral action. It examines how people actually make moral choices, and the pressures on them to do so. But it also provides a guide on how we can cultivate our morality, emphasising the importance of self-reflection and self-improvement.It is no exaggeration to say that TMS laid the foundations for the subsequent development of psychology, sociology and economics, helping establish them as distinct subjects of scientific enquiry. His idea that self-interested actions—wanting to be liked by others, or exchanging things we value less for others' things we value more—had a profound effect on the rise of liberal thought. Smith's approach is just as relevant today as it was in 1759. Through self-reflection, we can make better moral choices. By sharing the feelings of others, we can foster understanding between individuals and groups and create a more peaceful humanity. By understanding our shared interests we can live and work and collaborate together for the mutual benefit of us all, both in economics and in life in general.

Why do we have a bigger welfare state than is good for us?But then, before I tell you why, I'd better justify that assertion. So just take the case of my own country, the UK. Here, the government spends nearly half of everything its citizens earn—and then it borrows. And the biggest chunk of its spending goes on the three big-ticket welfare-state items: health, education and welfare (including housing). That makes the welfare state a significant cost on taxpayers. And of course high taxation is very damaging for individuals and businesses, particularly small and new businesses, while the interest payments on the government's debt raises those costs even further and reduces its scope to spend on something useful.There are also the dependency and incentive issues. With state welfare focused on the poorest, many find themselves trapped in dependency. If they try to improve their own condition, they find their benefits being reduced, often very quickly. That tapering, combined with the high taxes needed to sustain the welfare system, discourages individuals from seeking work, or moving to better-paid jobs. The result is a lower national income, and reduced labour market flexibility, leading to a fall in the productivity of the economy.State welfare is also poorly targeted and wasteful. The amount of money we spend on it could make our poorest citizens relatively rich; but much of it lingers in the pockets of those who administer the system, while much more goes to people who do not genuinely need it. Nor does it really help people out of poverty: it simply pays them cash, rather than looking at what they need in order to prosper.Moreover, state welfare crowds out more targeted and effective interventions such as private charity and philanthropy. And it suggests to taxpayers that their obligations to their fellow citizens have been dealt with for them, making them less willing to take on responsibility themselves. I could go on, but you get the picture. We all know the system is inefficient, badly targeted, bureaucratic, wasteful and often counter-productive. So why do we keep voting for it?I think the answer may lie in what economists call 'expressive choice' — as opposed to the phenomenon of 'instrumental choice'. An instrumental choice is one such as you would make in a marketplace. Perhaps you want a new coat. You go into the shops and choose one from the variety of different coats on offer. You pay your money, and your choice turns into reality—you have the new coat you wanted.Expressive choices are those such as you make in elections. The chance of your vote making an actual difference—being the single vote that decides if one candidate defeats another, or whether a referendum succeeds or fails—is miniscule. Usually, it is millions to one. So, unlike your coat transaction, you do not always get what you choose. You vote for one candidate, but another succeeds. You vote for one policy, but another is put into effect.How, then, do people respond to that? One answer is that they vote for things that make them feel good. You can vote for anything you like, because your choice is not actually going to make a difference. So, people vote for high-spending pro-welfare candidates because they see it as a way of 'helping the poor'—and indeed a way of 'helping the poor' that is absolutely costless to them (unlike the coat transaction). So why not?The trouble is that it isn't absolutely costless. The costs of all those welfare state programmes mount up, and voter-taxpayers feel the burden of it. And the inefficiencies and disincentives mount up too, which burdens them and everyone else too. I don't see any way out of this welfare ratchet in a democratic system. Perhaps we need to lay down limits on what that system is there to do, and can do and can spend. But I can't see politicians voting for that.