We have looked at the inherent limitations and defects of the unregulated market mechanism of the extreme laissez-faire capitalist economy. Such an economy had a high potential for achieving freedom and efficiency but at the cost of considerable inequality. Moreover, in the absence of government intervention the freedom includes freedom to starve and the efficiency is only imperfectly realised – for example, no allowance is made for divergencies between social and private cost.
At the opposite extreme, the socialist command economy has a potential for reducing inequality, but at the cost of loss of freedom and inefficiency, and, in practice, the potential for quality is not necessarily realised. Thus, the course of wisdom would point to some sort of mixture of the two. There is a sense in which all economies are mixed economies because neither the capitalist laissez-faire economy not the socialist command economy exists in their pure form.
But some economies approximate fairly closely to the extremes and it seems most useful to restrict the term ‘mixed economy’ to those where the private and the public sectors are both substantial and neither is overpowered or undermined by the other. The development of the public sector in the United Kingdom during the nineteenth and twentieth centuries was a move from an economy approximating to the capitalist laissez-faire model to a mixed economy with a large public sector alongside a private sector.
To an important extent the public sector expanded in attempts to make good the deficiencies of the unregulated market system. Now we examine the issue of the ideal relationship between the size of the public and the size of the private sectors. Professor J . K. Galbraith1 has coined the term’ the social balance’ which he defines as ‘a satisfactory relationship between the supply of privately- produced goods and services and those of the state’. Thus we are concerned with the question ‘Where does the social balance lie? ‘ It is possible to answer this question in abstract terms.
For instance we can say that the social balance is achieved with that combination of private and public sectors at which social utility2 is maximised. We might loosely interpret this, in a democracy, as being that combination of public and private sectors of the economy which is in accordance with the wishes of the majority of the community, assuming all its members to be perfectly knowledgeable, perfectly rational and imbued with a desire to further the common good. In practice this kind of statement does not take us very far.
It seems better to start by taking the, United Kingdom economy, which is our particular interest, and to point to certain biases in the system which affect the size of the public sector and have an important bearing on the social balance. The Bias Against the Public Sector ‘Private opulence and public squalor’. This was the famous anti-thesis in which J . K. Galbraith epitomized the social imbalance which he saw between the public and private sectors of consumer-oriented western economies. In his own inimitable prose he paints the contrast:
The family which takes its mauve and cerise, air-conditioned, power-steered, and power-braked car out for a tour passes through cities that are badly paved, made hideous by litter, blighted buildings, billboards, and posts for wires that long since should have been put underground. They pass on into a countryside that has been rendered largely invisible by commercial art. They picnic on exquisitely packaged food from a portable icebox by a polluted stream and go on to spend the night as a park3 which is a menace to public health and morals.
Just before dozing off on an air-mattress, beneath a nylon tent, amid the stench of decaying refuse, they may reflect vaguely on the curious unevenness of their blessings. Is this, indeed, the American genius? In Professor Galbraith’s view the social balance fails to be attained because the consumer-voter does not face an independent choice between public and private goods. He is subject to the forces of advertising and emulation (keeping up with the Jones’s) by which production creates its own demand. But advertising operates exclusively, and emulation mainly, on behalf of privately-produced goods and services.
Thus publicly-provided goods have an inherent tendency to lag behind. Although Professor Galbraith’s illustration is drawn from the USA, it is clear from the nature of his explanation of the tendency of the public sector to lag behind the private that this generalisation is intended to apply to all western mixed economies. Leaving out of account the nationalised industries (which do advertise), public expenditure rose in the twentieth century from 12% of GNP in 1910 to 38% in 1961 with a further peace- time rise since then which has brought the figure to 50% by 1975.
If we include state spending on financial assets the 1975 figure would be 55%. Whilst these figures do not disprove Galbraith’s generalisation – the public sector might still have lagged behind what was desirable – they certainly call it into question. Indeed, there are strong reasons for arguing that any effect which advertising and emulation exert in favour – private sector growth has been swamped by a variety of other influences in recent years, some affecting all western mixed economies, others applying only or particularly to the United Kingdom.
Some reasons for the growth of the public sector may be taken as a genuine reflection of widespread views within the community. For example, evidence of the growth of expenditure on education and health services in other countries supports the view that whether the provision is public or private, these services are ‘income elastic’ – that as a community’s income increases, so it wishes to spend and increasing proportion of income on these services.
In Britain, because they have come to be predominantly supplies by the state, growing public expenditure on these services can be regarded as reflecting the wishes of an increasingly affluent electorate. In other respects, however, the public sector may have grown not as a reflection of the rational views of well-informed electors, but from a complex of factors which have obscured or distorted the real choice for the citizen. The next section lists such influences but the list is tentative and a little speculative and it is not possible to assign a weight to the various influences.
Further, one must add the caveat that not only are these factors inter-related, but often a widely-held argument for increased public spending may be linked with an institutional feature generating public spending. Thus, state expenditure to increase public sector employment in times of unemployment may be widely desired, but it is the nature of the public sector that this additional labour is often not released from public employment when unemployment has fallen and the private sector is seeking skilled manpower.