The private origins of public institutions

Welfare before the state

This is the first draft of the introduction to a pamphlet I hope to have published soon titled ‘Galloping Horses – The private origins of public institutions’

Public policy and the microeconomic theory which underpins it is replete with justifications for state provision of a wide range of services. Under the general heading of ‘market failure’ concepts such as asymmetric information, externalities or public goods are all seen to be solved in modern mainstream microeconomics by some degree of state intervention.

The message is that state provision of these public institutions is a necessity if they are to be provided at all. Obviously, the flipside is that no more state provision of these services means the services will cease altogether.

This concern has animated much of the opposition to the Conservative Party’s ‘Big Society’ agenda. Along with the predictable opposition from producer interests, much of the concern with the Big Society stems from the notion that if the state doesn’t provide these services they won’t get provided at all. The influence of the market failure paradigm runs deep.

Away from the models of economic textbooks we see that this is not, in fact, the case. We see, all around us every day, the results of human action taken in the private sphere to increase our welfare. And just as often as we see this private human action working to reduce our welfare, we see some state action doing the same.

Indeed, the idea that human action can, in fact, provide the services which mainstream public policy microeconomics and market failure theorists say it can’t is seen in the very fabric of some of our most hallowed and cherished public institutions who’s continued attachment to government, microeconomics tells us, is so vital to their continuance.

This pamphlet will take a critical look at some of the key concepts of market failure concepts. It will then look at three public institutions in three very different sectors; unemployment insurance, the National Health Service and the London Underground. The standard theory tells us that these could not exist without government but we will see that their existence actually predates state control and that the state did not create these public institutions, it simply took over what human action in the private sphere had already built. Or, as EG West wrote of the state intervention in education, “it jumped into the saddle of a horse that was already galloping”

Finally, we will look at the theory of the evolution of money developed by the nineteenth century Austrian economist Carl Menger and apply it to the evolution of public institutions more widely. It will help us to explain what the standard theory cannot; how unemployment insurance, healthcare and underground railways can be provided without the state.

For exactly 100 years, since the National Insurance Act of 1911 elbowed many perfectly good private arrangements for insurance against unemployment, injury and old age out of the way, the trend of British public policy has been that the state steps in and people step out. Reversing that trend is the goal of the Big Society. It is a large concept dealing with deep issues of psychology, sociology, history and economics. It has proved difficult to communicate which is one reason why it has proved so difficult to get off the ground. This pamphlet aims to go some way to redressing that.


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