Trust the people: Whitehall really doesn’t know best
THE GOVERNMENT is relaxed about people cashing in their pension schemes to buy a Lamborghini. But the left-leaning liberal commentariat is certainly not. Abuse has been heaped onto George Osborne’s Budget measure of removing the requirement for people to buy an annuity. The main thrust of the attacks is that individuals may act irresponsibly, by taking financial decisions that are not in their best interests.
This is certainly true. People do make mistakes. Conservatives in the 1940s criticised the then Labour government for using the infamous phrase “the gentleman in Whitehall knows best”. Yet despite its antiquity (and disputes over what was exactly said), the concept is still very much alive and kicking. This view of the world lies at the heart of the criticisms of Osborne’s innovation. But does the state itself have a better track record when it comes to questions of finance? The answer is plain. An entire issue of this newspaper could be filled with its shocking decisions. So just a few recent examples will suffice.
The issue of Gordon Brown’s disastrous sale of half the UK’s gold reserves over the period between 1999 and 2002 was raised last week at Prime Minister’s questions. Our gold was sold at an average price of $275 an ounce, and of course the price now stands at some $1,300. Hindsight can make geniuses of us all. But the ineptitude of the process itself was breathtaking. The large sale was announced in advance, on 7 May 1999. This public declaration of a large increase in supply coming on to the market was sufficient to drive the price down 10 per cent by the time the first tranche was auctioned two months later.
The Private Finance Initiative (PFI) is placing major strains on the finances of the NHS. The concept was first introduced under John Major, but Brown really loved it. PFIs allowed ministers to secure large sums to invest in popular projects, such as new schools and hospitals, without paying money up front. But the insane financing structure places a debt on the taxpayer roughly double the value of the infrastructure which the framework helped to build.
Not everything is Brown’s fault. In the 2010 Strategic Defence Review, the current government announced that it would adopt the aircraft carrier version of the American F35 fighter, rather than the jump jet favoured by the previous Labour administration. But the costs of adapting the design for use on carriers spiralled out of control and, two years later, it was abandoned and the jump jet reinstated.
But who can forget the Brown boast that he had “abolished boom and bust”? The Treasury, and the thousands of officials in regulatory bodies such as the Financial Services Authority, thought they were so clever that they had designed a system in which recessions would never happen. The cost of the subsequent crisis can be reckoned not in the billions of pounds, but the trillions.
Friedrich Hayek won the Nobel Prize for his work on the inherent limits to knowledge of economic systems. Individuals, governments, and central banks all face these limits. Osborne is right to trust the people.
Paul Ormerod is an economist at Volterra Partners, a visiting professor at the UCL Centre for Decision Making Uncertainty, and author of Why Most Things Fail: Economics, Evolution and Extinction.