The chancellor’s statist budget is unwise; it restricts the efficient allocation of labour and prioritises centralised investment over individual entrepreneurship, argues Simon Gordon.

Philip Hammond’s tax hike on the self-employed, projected to raise £145 million p.a. by 2021/22, has provoked so much criticism it may be abandoned. By contrast, his announcement of £270 million for research on “disruptive technologies” has passed unremarked. Yet they are two sides of the same statist coin.

Whether or not the rise in national insurance contributions is fair, it seems economically unwise. Self-employment has become more common for a very good reason: it’s an efficient way to allocate labour. Independent contractors facilitate a much more flexible labour market, which is much more responsive to immediate demand.

As the digital revolution allows more work to be done remotely, traditional employment could even become obsolete over the next century. Rather than an aberration that needs to be brought in line with traditional work patterns, self-employment may become the norm. It is a facet of entrepreneurship in a competitive market.

But does this government believe in individual entrepreneurship? Certainly, the Chancellor claimed as much on Wednesday, in spite of the NICS increase. But the wider outlook of this government muddies the waters.

Theresa May is, after all, committed to an industrial strategy. In the Autumn Statement, Philip Hammond announced a £23 billion fund for infrastructure and innovation – from which the new £270 million for research into disruptive technologies originates. George Osborne made the Northern Powerhouse a flagship project.

The enthusiasm for the government to act as an investor in new technology is one of the curious features of the mainstream right. Politicians who would baulk at the state setting prices, awarding monopolies, or controlling the means of production appear to support state-led entrepreneurship.

Yet is investment really a case apart?

The theory behind publicly subsidised investment in technology must be that the state can invest resources better than individuals would, were the resources simply returned to them in the form of lower taxes.

In counter-argument, it is sometimes objected that governments tend to create losers rather than pick winners, because officials have no direct incentive to see investments succeed, while recipients of subsidy become dependent on the state. In other words, the problem surrounds the lack of profit motive.

But the deeper case for scepticism about investment by the state is not about motive, but about information. Simply put, concentrating investment in the hands of officials entails less informed investment decisions.

Every economic act concerns how best to use finite resources. To understand how to use a resource best is to understand its value. In the market, the economic value of a resource is expressed in a price. So the basic question is: can the state price resources better than individual economic actors in the market?

This question is not predicated on the idea that the market prices resources perfectly – i.e. at the market-clearing (equilibrium) price. On the contrary, in fact.

For decades, Austrian-school economists have been at pains to point out that, at any given moment, the market is in a state of disequilibrium. That is what makes entrepreneurship possible. “An act of discovery in which resources are deployed to achieve an objective,” writes the contemporary economist Israel Kirzner, “represents the realisation that, before the discovery, the relevant resources had been undervalued.”

The problem of the state as entrepreneur is, at base, just the problem of socialist calculation. In a competitive market, the possible economic opportunities are discovered by billions of different economic actors, each operating with unique knowledge and facing unique circumstances. The state cannot possibly harness the same knowledge.

To quote Hayek: “It is the main merit of real competition that through its use is made of knowledge divided between many persons which, if it were to be used in a centrally directed economy, would all have to enter the single plan.”

The juxtaposition of the NI rise for the self-employed and the disruptive technologies fund – albeit both relatively small-ticket items – is striking because it demonstrates the opportunity cost. Rather than fund social care increases via tax rises, the Chancellor might have redistributed some of his infrastructure and innovation pot. Instead, he has prioritised centralised investment over individual entrepreneurship.

The politics of that choice don’t look good. Ditto the economics.

 

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