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If you believe what you read and hear about South Africa, you'll think the country is in horrible shape, with 42 percent unemployment, runaway crime, and 5 million people dying of AIDS. After nearly a decade of democracy, sub-Saharan Africa's crown jewel is, many pessimists warn, even more damaged than it was under the apartheid system.
But if you believe your eyes more than the press, and conversations with individual South Africans more than misleading statistics, a different picture emerges. Having spent time in South Africa in the mid-1980s and mid-1990s, I was anxious to return and see for myself just how much truth there was to these disturbing and depressing reports.
Last August I spent 10 days poking around the greater Johannesburg area, from the ravaged Central Business District to the squatter camps, from the townships to the wealthy suburbs. I talked to taxi drivers, scholars, businessmen, squatters, politicians, reporters, lobbyists, hawkers, doormen, a chief, and an ex-president. The society I observed was far from doomed. Rather, it was dynamic and growing, with healthy political debate, teeming shops and malls, and a vibrant private sector. South Africa, for all its very real troubles, is a basically free country that's improving by the day.
"What is the big difference between now and 10, 20 years ago?" I asked Lawrence Mavundla, president of the African Council of Hawkers and Informal Business (ACHIB), a nongovernmental advocacy group that writes model street commerce laws designed to influence legislation in South African cities. We were sitting in the office above his tire service business in the Central Business District of Johannesburg, under portraits of past President Nelson Mandela and current President Thabo Mbeki, who took office in June 1999 and was re-elected last April. Across the road loomed the notorious headquarters of the South African police force, out of whose 10th-story windows many unfortunates "slipped" during the apartheid years.
Mavundla smiled widely. "Now we can talk openly without fear of repercussions," he said. "The difficulty is that the officials who enjoyed enforcing apartheid are still there. These officials do not buy fruits on Friday because they know they are going to raid the hawkers."
ACHIB was founded 17 years ago by 250 street vendors as a reaction to police brutality. Today it has 110,000 members; many have built big businesses; others have gone into politics. President Mbeki's roots are firmly planted in this sector; his mother still runs a spaza shop (a small informal supermarket) where the president worked as a young boy.
Mavundla himself was fired from his position as shop steward at the East Driefontein gold mining company in 1985 after organizing a strike to protest the poor treatment of his fellow black miners. "The black mine workers were being asked to eat the insides of the cow, while the whites were getting all the meat," he said. "That was it. Whites could eat whatever they wanted, but management was deciding for us." He left his job with a mere 400 ($60) rand in his pocket. Not much, but enough to start him off selling cosmetics on streets and trains.
Today this former hawker has his fingers in several enterprises. One of them, his tire business in the Central Business District, sells mainly Goodyear products to a customer base that is now 90 percent black. "I just today employed my first white guy on wheel alignment," Mavundla said, laughing out loud at the irony of his black customers' demanding a white man to perform a technically complicated job. But, he said, "the customer is king!"
Mavundla is confident about his company's future. "Even if my price is higher than a white company's," he said, "I'll get the government contract." How does this favoritism square with his free market rhetoric? Mavundla's justification: "Certain changes must happen, and we need time. White businesses have had 10 years to change, and they haven't. However, in another decade things will have changed so much that white and black will be together in owning businesses, and there will be no such thing as a 'white' business or a 'black' business."
This persistent divide between black and white is, of course, one of apartheid's many terrible legacies. The racial tension manifests itself in many ways, some subtle, others not.
South Africa's complex, one-of-a-kind history has resulted in a country with 11 official languages and a racial mix of 75 percent black, 13 percent white, 9 percent "colored" (of mixed white and nonwhite descent), and 3 percent Indian/Asian. Its Gini coefficient -- a 0-to-1 index that measures the distribution of wealth, with 0 being absolute equality -- is an extremely disparate 0.62, meaning that the poorest 20 percent get 3 percent of the income and the richest 20 percent get 63 percent. Europe, by comparison, is just below 0.30, and even the "grossly" capitalist U.S clocks in at only 0.35.
You can see these numbers come to life just by looking around Johannesburg. It's only a 45-minute drive from the Gucci outlet in Sandton Square ("the only Gucci shop in Africa") to the squatter settlement behind Chris Hani Baragwanath Hospital in Soweto. But such makeshift camps are small, and you have to search for them, unlike in the rest of Africa and many parts of Latin America, where they are ubiquitous. According to the South African Housing Ministry, about 5 million South Africans (out of a population of 45 million or so) live in the 1,066 informal settlements spread across the country's nine provinces.
An informal settlement is one that does not conform to government town planning rules. Settlements develop spontaneously, generally on land owned by the central, provincial, or local government in urban areas, though they occasionally develop on private land as well. In the rural areas the informal settlements are generally on traditional community land currently held by the state but soon to be transferred to the communities under recently enacted legislation. Initially, no services are provided, but in time the government adds roads, electricity, and water. There is great political pressure on the current government to upgrade services in all these areas. A certain amount of tension exists between formal townships and adjacent informal settlements because the latter are seen to undermine the value of the former. This happens regardless of the race of the formal township dwellers. Many of these settlements are the consequence of migration from rural to urban areas.
A multitude of cultural influences exists side by side in South Africa. At a supermarket in the Parkmore suburb (where our car was thoughtfully observed from a 30-foot-high iron watchtower by a private, probably armed security guard), each product is available in a mix of local, British, and American brands (except for the candy, which for some reason was predominantly British).
On a Sunday morning walk around an outdoor arts and crafts fair in a local suburban park, I was struck first by how many large, loud, and unruly dogs were being walked, second by the fast food corner: Just next to the stall selling biltong (a local dried meat product similar to jerky) was a donut booth (U.S.) and a sausage roll stand (U.K.) where the meat was encased in pastry. (If you don't already enjoy them, it's best not to ask.)
On the first day of my return to South Africa following an eight-year absence, from the shadows of the monster-sized police station -- it would dwarf London's New Scotland Yard -- we drove through the declining Central Business District. "Johannesburg picked up her skirts and moved to Sandton," explained Theresa Griessel, my Afrikaans-born friend and volunteer guide for that day. Sandton, in the north of the city, has been transformed from sleepy agricultural land to a busy new cluster that is home to many of South Africa's top companies, such as Investec and Old Mutual, as well as the Johannesburg Securities Exchange.
Our destination was the high-tech Rivonia Park, which looks like something out of Florida more than out of Africa. We were greeted by 36-year-old birthday boy Mthunzai Mdwaba. Originally a lawyer, today Mdwaba heads Sourceman Technology Solutions, whose client list features many of the giants of the computer industry: Cisco, Microsoft, Oracle, Open Source, Citrix, CompTIA. Sourceman also has a division that provides computer training for 1,000 youngsters.
"You provide this education for profit?" I asked in surprise. "Yes," he replied, explaining that, compared to any state agency, "we get better placement percentages!"
Now president of the historically white Information Technology Association, Mdwaba said his goal for the country is to create "an economic rainbow nation." "The dominant theme of public life," he explained, "is transformation and black economic empowerment. Unlike [Robert] Mugabe [in Zimbabwe], we have made some good strides in returning land to the people."
Soweto, which stands for "Southwest Township," is the hugely populous black township outside Johannesburg where many of the city's workers live. Driving through the neighborhoods there, I was struck by how utterly different the homes looked. On previous visits, in 1984--�85 and 1995, I had seen nothing but overgrown matchboxes in identical military-style lines. Today it's hard to find an unimproved house "where the steel government door has not been replaced by a nice wooden one," as one white South African friend put it. "Once they own it, they go home with a tin of paint, not a bottle of brandy," he added. It is a winning advertisement for the benefits of private property and the pride of home ownership.
But much still remains to be done to encourage private property in South Africa. While whites have always been free to dispose of their land as they see fit, whether by sale, donation, or inheritance, blacks were not free to do so under apartheid. Improvements, while noticeable, are slow. For instance, those who squat on tribal land under "permission to occupy" rules are still subject to severe restrictions on their ability to transfer their rights to other people.
If land was acquired with state assistance, the right to sell is often curtailed (for fear that people will sell the land and squander the cash). Lack of access to financing is another constraint, as banks are very reluctant to get involved in the low-income housing market. And the bureaucracy has moved at a glacial pace: In 1992 the government announced that houses would be transferred to existing occupants, but the first title deeds were not issued until a full 10 years later, and 750,000 South Africans are still waiting.
More is wrong with the South African economy than lack of property rights. Despite shopping malls such as Sandton City Centre and Sandton Square, which give any-thing I've seen in Europe or North America a run for its money, evidence abounds that this is still a developing nation.
As I was told by Michael MacDonald, the white manager of Norman's Toyota car dealership, the country's dearth of public transit means an estimated 30 percent to 50 percent of the average net wages of blacks are spent paying for work commutes, which frequently take several hours a day. I was so staggered by this estimate that I asked about it wherever I went. Numerous other people confirmed the sad fact.
But while that fact makes things difficult, the trans-por-tation problems haven't destroyed initiative in South Africa. Nearly everywhere you drive -- you do not walk because it just isn't safe, and there is little public transportation -- there are roadside traders who rival in energy and inventiveness the finest hawkers anywhere in the world.
Leaving one private housing area, I was struck by the sight of two men standing in the middle of the road by the traffic lights (or "robots," as South Africans say) holding garbage bags. "Better than begging," explained Neil Emerick, a think tank analyst and my chauffeur at that moment. "When we stop it's a good time to de-trash the car and give them a couple of rand."
At another light a young man offered us "lubricated" condoms, the box clearly indicating these were a donation to the Republic of South Africa (RSA) from a First World charity. Apparently they had been taken from a clinic, and he was now "giving" them away. If we also felt like "giving" him some dollars, he wouldn't say no. But he wasn't selling them, exactly -- just making sure they were in circulation rather than languishing in the clinic's storeroom.
The entrepreneurial-minded are pouring into South Africa. My taxi driver was from Mozambique. My hotel doorman was from Zimbabwe. Another street trader was from Senegal. Fully half of the economically active black people I talked to were not from South Africa at all. Far from indicating a lack of energy on the part of South Africans, this instead indicates that there is so much room for entrepreneurial activity in South Africa that the country is providing room for all, or at least a great many, comers.
The most memorable entrepreneur I met was Patrick Makone. Tall, fit, young, and handsome, he was selling geckos and other animals made out of wire on the street. "Ah, inexpensive gifts," I thought as he approached my table and asked permission before squatting down to show them to me. They ranged in price from 20 rand ($3) to 150 ($22.50). I bought a chameleon for my 12-year-old cousin Candice and a lizard for my 14-year-old son, James. Makone's English was superb. In exchange for a further payment, I asked for his story.
He was from Zimbabwe, where he made the animals. Once he'd made as many as he could carry, he would buy a city-to-city return bus ticket from Harare to Johannesburg, costing $37.50, with a further duty of $18 at the border.
"Duty, or bribe?" I asked.
"Duty!" he said emphatically.
Once in Johannesburg, or rather its prosperous nodes, Makone walks the streets until all his products are sold, then returns to Harare to start the cycle over again. Things were very bad in Zimbabwe, he said. Bread had gone up in price fourfold in just two months. Six days later, I heard from a refugee restaurateur that it was now up eightfold.
As Makone moved on, my lunch companion, Theresa, an employment and training consultant who does contract work all over Africa, offered the following observation: "Even though we are a basket case, we are still the economic destination of choice for the rest of Africa."
South Africa's progress isn't only in big matters like economic growth and entrepreneurship. It's also reasserting itself as a major world power in international sports such as cricket and rugby. For 30 years, South African athletes were not permitted to compete internationally, meaning generations of athletes were denied the opportunity to reach the pinnacle of their profession.
Unlike in the U.S., where being blocked from international competition would have only a marginal effect on the careers of most professional athletes, South African sportsmen suffered greatly from their exclusion. The lifting of both the sporting bans ("We just beat England at cricket!") and commercial sanctions ("I can buy a Mac now!") has been a liberating experience for a country with global ambitions. South Africa has embraced its new freedoms and emerged from its isolation with an enthusiasm that is a joy to behold.
Yet the local newspapers were overwhelmingly negative: Everyone was either dead, dying, infected, unemployed, or committing a crime. "If you are not infected [with AIDS] then you are affected," goes the popular saying. Yet everywhere I looked -- and yes, I saw real problems, particularly in Soweto -- I found reason to be suspicious of the official and widely reported figures of 42 percent unemployment and 5 million people about to die of AIDS as of August 2003.
First, one must distinguish between what Statistics South Africa, the government statistical agency, calls the "expanded definition" figure of 41.8 percent unemployment (total jobless among people between the ages of 15 and 65), and the "strict definition" figure of 30.5 percent (those who are actively and unsuccessfully seeking official employment). While the expanded definition may be an internationally accepted way of measuring unemployment, it does not take into account all those South Africans working in the "informal" sector. From what I saw, a significant portion of that 42 percent is already working in the thriving underground economy, running a staggering number of black-market businesses.
The official unemployment numbers "are definitely not counting on the fact that there are millions at work in the informal businesses you see all over the place," said Eustace Davie of the Free Market Foundation, an independent South African think tank founded in 1975. One estimate puts the number of such businesses at more than 3 million. And beyond the specific enterprises, plenty of individuals are employed informally. For instance, private security personnel now outnumber police by four to one, and many security guards in the informal sector would not be picked up in the government's employment figures because they are not officially employed by anyone.
Yes, there are young men on Soweto street corners doing apparently little and perhaps nothing at all. But the official figure is hard to believe. "It does not add up," said attorney Leon Louw, the executive director of the Law Review Project, based in the Johannesburg suburb of Sandton. "Sales of cell phones, cars, and building materials are booming. There's a phone mast in even the poorest, most isolated village. If you go out on the ground, you simply cannot find the evidence to back up the scare stories. We just do not witness the scale of problems reported in the press. Subsistence agriculture is declining, but this is to be welcomed as it means people have found more productive things to do."
What of the HIV/AIDS epidemic? This is obviously a real and serious problem, but there are reasons to be skeptical of the officially promulgated number of 5 million infected. According to the Free Market Foundation's Davie, early extrapolations of the number of infected were based on tests that included a large number of pregnant women. There is a much greater likelihood of getting a false positive when the HIV test is conducted on a pregnant woman, so those early extrapolations were suspect.
While it is still impossible to give truly reliable estimates of AIDS in Africa in general and South Africa in particular, an increasing number of researchers are questioning the dire predictions. Horrific AIDS estimates, based on elaborate computer models, are being flatly refuted by actual on-the-ground testing in prisons, schools, and businesses in South Africa. For example, one widely cited computer-generated estimate projected that HIV infection was rampant at South African colleges, with one in four undergraduates expected to die within 10 years. But according to a report in the London Spectator, a physical test of 1,188 students at Rand Afrikaans University, which the computer had pegged with a 9.5 percent infection rate, revealed that the actual number was 1.1 percent.
One indomitable optimist I met was Michael Katz, introduced to me by a mutual pal in London as "South Africa's top lawyer." "When you were here in 1984, the crash was inevitable," he said forcefully. "By 1987 we were doomed....Then we had the miracle of reconciliation, and then the second miracle of President Mandela and nation building." Two miracles in one sentence. The word is used here more often than in the Vatican, I thought. "It's night-and-day better," he continued. "Access to water, electricity, and sanitation has just soared."
And the South African constitution, Katz said, is "one of the best in the world." Before ratification in 1996, "Parliament could pass any law it wanted untested against principle," he said. "Now constitutional supremacy has replaced parliamentary supremacy. We have a bill of rights. Laws can be struck down as not conforming to the constitution....We have entrenched individual rights as opposed to group rights."
But crime continues to be a serious problem. Tom Bouwer, of a group called Business Against Crime, reported that "post-1994, crime exploded, but maybe there was more transparent reporting. Also, all societies that are going through change are targeted by syndicates. And hungry people are easy recruits for crime syndicates."
The Law Review Project's Leon Louw blamed the police. "They go for soft criminals and victimless crimes," he complained. "They go for hawkers, not real criminals."
Wherever the blame might belong, private initiatives aimed at increasing safety and discouraging crime are quite visible. You cannot spend five minutes in South Africa without noticing how careful and cautious everyone is -- the locked car doors, the barred windows, the watchtowers, the 10-foot walls. Some neighborhoods block off all but one entrance road with illegal private "booms," or long pre-fabricated metal barriers that close the rest of the streets off to vehicular traffic. The chokepoint is patrolled 24 hours a day by armed guards, resulting in lower local crime but a sharp spike in vehicle traffic.
Getting inside a South African shopping mall is a bit like hopping on a plane in post-9/11 America. Of course, firearms cannot be taken into the malls, so one sees advertising for gun safes at the main entrances. There are closed-circuit television cameras, metal detectors, private guards, "24 Hour Armed Response" signs, and a pat down at the doors.
William Midgley, another prominent South African attorney, described the crime spike as a function of dynamic change. As noted, the commercial activity of the Central Business District has moved to the nodes or suburbs. Out there people once had big three-acre plots on quiet roads, Midgley noted; now the streets are clogged with traffic and business, and the land is "not secure, not maintainable." The result is a huge "densification of the use of land" involving "massive ongoing changes of use." It's all very restless, very like America...before it fell in love with development planning and containing "urban sprawl."
There is no real planning or zoning control. Big projects with expensive lawyers get permits, but for smaller ones public oversight has collapsed. Streets of bungalows have become offices. You do whatever you want. One of my hosts took me to his nice home and showed me a neighbor who was adding a new wing to his home with no permit whatsoever. The local bureaucrats "have no idea where the zoning plans are," my host explained.
"Are you freer today?" I asked John Kane-Berman, a key opinion leader and head of the South African Institute of Race Relations, a public policy organization. "In a broad political sense, yes," he replied. "But not in terms of moving around and personal safety. However, a P.C. tyranny has replaced apartheid. As an employer of 40 people, I face many new regulatory demands. Even under apartheid, I never had to break down my staff by race. Today as soon as my staff goes over 50 in total, the sex/race/disability plans I have to put in place involve forms as fat as the phone book."
Firms with more than 50 employees are required to hew to certain quotas based on race, gender, and physical disability. The "employment equity" rules have had the unsurprising effect of discouraging companies from ex-panding beyond 49 employees; instead they rely on sub-contracting. The government has reacted by reclassifying major subcontractors as employees.
In addition, there are billions of rands' worth of unclaimed, unspent "training" levies. These levies, paid by all firms, go into a general coffer administered by the state. Those firms that provide training are then allowed to claim funds from the pot. Firms pay the levies but simply cannot be bothered to reclaim them, even when they provide a great deal of training, because the paperwork involved is so vast.
These new regulations place huge burdens on the types of business the government should be encouraging. "We're just cutting and pasting wholesale large volumes of legislation from the U.K., Germany, Canada, and Australia," said Neil Emerick of the Free Market Foundation. Furthermore, Kane-Berman continued, while the governing African National Congress is focused on building stable black middle and upper classes, unemployment has doubled since 1994 because of strict labor market laws, racial regulations, and the reintroduction of foreign competition.
"Getting it right" was the theme of a think-in with President Mbeki on my last evening in South Africa, at the Little Brenthurst home of the Oppenheimer diamond dynasty. (That's little as in Robin Hood's Little John. British understatement transplanted.)
Nicky (a third generation Oppenheimer) and son Jonathan (fourth generation) addressed the two-hour gathering of the South African elite: businessmen, academics, political leaders, and the like. A year earlier, the African National Congress had made a well-intentioned but economically disastrous move to introduce a Mining Charter, which mandated that hiring in South Africa's mines be based on race, regardless of actual ability to do the job. Billions of rands exited the country, and now the Oppenheimers, at the prompting of an Mbeki emissary, were considering the question, "How does one transform an economy like ours?" By transform, South Africans mean, among other things, changing the country's economic profile from mostly whites in boardrooms and executive suites to 80 percent or more blacks in the upper echelons, in order to reflect the wider population.
The Oppenheimers told this gathering that transformation should be portrayed as an opportunity for the established economic powers rather than a threat to them. They said the goal is a bigger economic pie over all, with a bigger portion going to blacks.
The Oppenheimers' proposed carrot to entice companies to engage in transformation is a reduced corporate tax rate: Those that make a middling attempt to change their demographic profile would stay at the current rate, while those that failed totally would face tax penalties. The view of many in the room was that it's better to incentivize than regulate.
A lone pure libertarian voice called out from the audience: "Why can't we just let growth in and of itself transform the opportunities of the great majority of South Africans?" It was Brian Kantor, a former professor of economics at the University of Cape Town, who works for Investec, an international specialist banking group that started in South Africa in 1974 and now operates in 11 countries.
"Unemployment will doom us to a downward spiral -- we just don't have the time," came the answer.
Transformation has its critics. Nobody I met defended the current distribution of income. But there are many who claim that reform has helped only a handful of elite blacks while neglecting the masses. "Every white company is trying to buy a black one," the Free Market Foundation's Emerick said. That creates instant "transformation," of a sort. "There are a small group of blacks on many boards, usually the same people!"
There are the optimists of all races who have elected to stay on and tough it out. But there are still many pessimists. A great debate is raging over how to stop newly trained white doctors and dentists from skedaddling to Australia and the U.K. upon graduation without paying back one rand to the government that provided their education. "Those of us who are left are united on transforming the economy," President Mbeki told the Oppenheimer group.
What's really needed are the sort of popular Thatcherite measures that will bypass the tiny in-crowd and truly empower the tens of millions of poor people. After Britain's 1980 reforms, the number of people owning shares catapulted from 6 percent to 30 percent; South Africa, too, needs to open up ownership to the masses. The Law Review Project's Louw is very clear: "The fundamentals are in place. Apart from thousands of new statutes we call 'petty' regulation, the rhetoric is right and so is the policy. We have a good constitution that protects the people, and we have a surprisingly good Constitutional Court that upholds the rule of law. Other than the nationalization of mineral rights, capitalism is rampant and socialism completely defeated."
His colleague Eustace Davie added: "While we are subject to crime, we are all freer from government. After 20 years of no growth, and even negative growth prior to 1994, we are now going up." The annual growth rate in South Africa is estimated at 3 percent.
In the end I went with my eyes, and my training as an economist, in judging South Africa's prospects. Yes, there is crime, unemployment, and AIDS. But from my perspective on the street, in the heart of it, I don't believe the problems are as big as the reports make them out to be, or as insurmountable as the naysayers would have them seem. With a black majority that is stunning in its patience, understanding, and willingness to find a way, South Africa will not only survive but thrive.
]]>1946: Recently demobilized from Britain's Royal Air force, highly decorated fighter pilot Antony Fisher finds in the Reader's Digest a condensation of F. A. Hayek's classic critique of socialism, The Road To Serfdom. It confirms his own worries about his country's tilt toward socialism.
Traveling to London, Fisher seeks out Hayek at the London School of Economics (lse). "What can I do? Should I enter politics?" he asks. With Fisher's war record, good looks, gift for speaking, and excellent education, it is no idle question.
"No," replies Hayek. "Society's course will be changed only by a change in ideas. First you must reach the intellectuals, the teachers and writers, with reasoned argument. It will be their influence on society which will prevail, and the politicians will follow."
1949: Ralph Harris, a young researcher from the Conservative Party, gives a Saturday afternoon lecture in a small village in southeastern England. Fisher-now a farmer-is present and loves what he hears. Taking Harris aside after the meeting, he explains his ideas for an organization to make the free-market case to intellectuals. "One day," he says "when my ship comes in, I'd like to create something which will do for the non-Labour parties what the [socialist] Fabian Society did for the Labour Party."
Harris is excited. "If you get any further," he says, "I'd like to be considered as the man to run such a group."
1953-57: In 1953 Fisher starts what is to become the highly profitable Buxted Chicken Co., the first attempt at factory farming in Britain. By September 1954, it is showing a profit, and he can begin to think more about starting a free-market institute.
In November 1955, Fisher and two friends sign a trust deed establishing the Institute of Economic Affairs. Looking for someone to run the IE A, Fisher remembers Harris. They have not communicated since that first meeting in 1949. Harris is now 31 and, after seven years teaching economics at St. Andrews University in Scotland, is writing editorials at the Glasgow Herald. In June 1956, the intellectual Harris meets the businessman Fisher in London. On the promise of a starting budget of £1,000 and a part-time salary of £10 a week-the same starting salary as Buxted Chicken's general manager-Harris agrees to become the new Institute's general director on January 1, 1957.
Also in the summer of 1956, the embryonic Institute interests economist Arthur Seldon in writing a paper on pensions. A former socialist and the son of a cobbler from London's East End, Seldon had become a classical liberal while studying at the LSE. Within weeks of reaching London, Harris meets Seldon and an extraordinarily fruitful partnership begins.
1987: It is early January and cold. Some 30 years have passed since Ralph Harris-now Lord Harris of High Cross-left Scotland. Today, sitting in the offices of the IEA in London-so close you could hit a cricket ball through Parliament's windows-he reviews the list of 250 major corporations that support its work; it has a budget approaching $1 million and a staff of a dozen. For the past decade, its ideas have clearly been in the ascendancy. Some commentators have gone so far as to call the iea's cramped offices the home of the new orthodoxy.
South of London in his home in rural Kent, Arthur Seldon, now 70 but as active, creative, and productive as ever, also reviews a list. It is a list of over 300 titles he has produced and more than 500 authors he has nurtured and developed for the IEA. On his coffee table lie copies of the Institute's glossy bimonthly magazine Economic Affairs and a new book, The Unfinished Agenda: Essays on the Political Economy of Government Policy in Honour of Arthur Seldon, containing chapters by 11 internationally renowned economists including Milton Friedman, F. A. Hayek, James Buchanan, and Gordon Tullock.
Six thousand miles west, in downtown San Francisco, Antony Fisher enters the offices of the Atlas Economic Research Foundation, which he established in the 1970s to aid and encourage the formation of new institutes around the world. Now a full-time think-tank entrepreneur, he too has a list-36 institutes in 18 countries, all based on the IEA model.
On the walls of the former house where IEA has its offices hang the portraits of famous economists, most notably Hayek, Friedman, and Ludwig von Mises-but also John Maynard Keynes. And hanging there, too, is Keynes's famous statement that "the ideas of economists...are more powerful than is commonly understood." It is from here that the IEA team has steered market ideas from total heresy to partial orthodoxy-at least in certain quarters.
Looking back to his decision 30 years ago to give up a secure, well-paid job to risk his future and that of his young family in the service of an unpopular cause, Harris laughs so loudly the tape jumps. "I was mad!" he says, and one can almost believe him. "I did not calculate the risk at all! Fisher's enthusiasm and my desire to return to London and do something were sufficient."
Arthur Seldon was more careful. Becoming part-time editorial director in June 1959, he managed to hold onto his main job as an economist for a brewing-industry association until he too became full-time in July 1961. Ever since his days at the LSE in the mid-to-late '30s, Seldon had wanted a chance "to fight back." This was it.
Government planning was in its ascendancy. Market ideas were scoffed at as oldfashioned-or worse. Recalls Jack Wiseman, a University of York professor long associated with the IEA: "One day leaving the London School of Economics a fellow economist asked if I could use a lift. I said I was going to the IEA. 'Good God,' he replied, 'you aren't one of that Fascist lot, are you?' I went to the IEA-he later became Governor of the Bank of England!"
Says Harris, "We were a scorned, dismissed, heretical minority. There was a preordained path for the state to regulate, to plan, and to direct-as in war, so in peace. If you questioned it, it was like swearing in church. At times this overwhelming consensus intimidated us, and we sometimes held back. We often felt like mischievous, naughty little boys."
It was not at all clear at first exactly what the new institute would do in the face of such widespread, deep-set hostility. The strategic choices Harris and Fisher faced were limited. British laws governing charitable institutions, as well as Hayek's advice and their own distaste for the political process, ruled out any kind of lobbying and direct involvement with public policy.
One possibility was a broad-based populist organization. Founder Antony Fisher, who admired the popularizing work done by Leonard Read's Foundation for Economic Education (FEE) in the United States, favored this approach and would regularly send Harris heavily marked copies of fee publications. Although Harris liked much of what he read there, he felt they were not scholarly enough for the job in the U.K.
While Fisher and Harris were debating, Arthur Seldon resolved the question. In the summer of 1957, he handed in the manuscript entitled Pensions in a Free Society, which was to become one of the first IEA publications. It was well-reasoned, thorough, nonpolemical, and of interest to scholars and specialists-but also easily accessible to lay audiences.
Seldon himself believed that market ideas, through education and persuasion, would out-flank the politicians by first winning over the intellectuals and journalists, whom Hayek had once dubbed "second-hand dealers in ideas." To this day he uses a military analogy. The IEA would be the artillery firing the shells (ideas). Some would land on target (the intellectuals), while others might miss. But the Institute would never be the infantry engaged in short-term, face-to-face grappling with the enemy. Rather, its artillery barrage would clear the way for others to do the work of the infantry later on. The IEA would show why matters had gone wrong and set out broad principles, while others would argue precisely how matters should be put right. Fisher, whatever his personal preferences, stepped back and let Harris and Seldon run things.
The IEA has from the beginning concentrated on publishing papers and pamphlets for an intellectual audience, works whose sole concern-in the words of the lEA's first brochure-would be "economic truth" unswayed by current "political considerations." The goal of these efforts, the IEA said, was a society in which people would understand free-market economics "together with an understanding of the moral foundations which govern the acquisition and holding of property, the right of the individual to have access to free competitive markets and the necessity of a secure and honest monetary system."
An early problem was finding outside authors willing to put pen to paper for the fledgling Institute. "We were old hat, oldfashioned," comments Seldon, "and Ralph and I had to work on everything." After Seldon's Pensions appeared, they collaborated on books about consumer credit and advertising. The latter proved good advertising of its own. When left-wing economist Nikolas Kaldor criticized the book, recalls Seldon, "This criticism made a very favorable impression in the corporate world. Companies began asking 'How can we help?' to which we would say, 'Send us a check!'"
From the start, Harris and Seldon were adamant that they would always be independent of their financial contributors. This meant not only never seeking nor accepting taxpayers' money but also making sure all donations were "without strings." Seldon remembers warning potential corporate donors, "We shan't say what you want."
Slowly but surely the IEA began to find an audience. From the start, its books were well reviewed, not by economists but by journalists in the financial and general news press. The reviewers liked them, says Harris, because "they were not polemical but well-researched and documented. Facts and figures-not theory-won us acclaim in the early days and led to meetings with editors and journalists."
But by the early '60s, economists began to accept the presence of the maverick IEA, and a few even began to suggest titles of papers they might contribute. Founder Antony Fisher wanted to see "an IEA paper on every topic that might be discussed." The result was the Hobart Papers, named after the Institute's new address in Hobart Place.
At the time, it was doubtful that the Hobart Papers would find an audience, recalled Norman Macrae of The Economist in 1984. "I remember writing a polite review of Hobart Paper 1 in early 1960, but saying privately that the venture would probably go bust, and that only a fool would write Hobart Paper 2," he wrote in a pamphlet marking the 100th Hobart Paper. "This last proved true prophecy, because I proceeded to write Hobart Paper 2 myself."
The object of Macrae's skepticism-the first Hobart Paper-was Basil Yamey's Resale Price Maintenance and Shoppers' Choice (1960). Fisher himself had balked at the publication of this work. He thought the topic-why manufacturers shouldn't be allowed to require all retailers to sell products at the same price-overwhelmingly dull and unimportant and Yamey's treatment to be far too scholarly. He feared nobody would read it. "I can remember saying to Ralph, who sent me the draft, that it was so dull, couldn't I have 'more fun for my money,' " Fisher says. But Harris and Seldon prevailed.
Yamey's paper was an instant success, going through four editions in five years. One reason, according to Macrae, is that "it contained the newsworthy-though underestimated-figure that Britons were paying £180 million more a year on price maintained goods than they would have done in a freely competitive market."
In fact, this was one of the rare occasions when an IEA publication had an immediate impact directly on policy rather than on the atmosphere or environment of ideas. Edward Heath, a young, rising politician and president of the Board of Trade, seized on the price-maintenance issue and piloted legislation through Parliament in the face of a great deal of hostility, especially from small shopkeepers. At the height of this hostility, he had lunch at the IEA with Yamey, Harris, Seldon, and Fisher. Pointing directly at Yamey, he complained, "You are the cause of all my trouble!"
Throughout the '60s the IEA grew, adding several new series of titles. The model, later to be adopted around the world, became clear: a flow of well-written, scholarly but accessible studies in applied market economics, released to the press and sold to universities, high schools, and the general public.
Of equal importance was the lEA's emergence as a focal point, a haven, and a meeting place for a growing but still small group of market advocates. "I remember in the '60s," recalls Fisher, "at one of our poultry industry black-tie dinners, a speaker, a Socialist farmer, made a joke at my expense. He said that Antony Fisher was employing the last two economists who believed in free markets."
But there were more than two, and through the IEA, an informal network of people from academia, the media, the professions, and the business world developed. It was somewhat formalized in the late '60s with the introduction of the monthly Hobart Lunch, where newly published IEA authors would speak briefly about their work. But the network has in many ways remained an unintended, unplanned, and informal consequence of the growth of the Institute.
In the early days, both Harris and Seldon had pitched in on all fronts. But as they achieved some measure of success, a division of labor emerged: Harris would raise money, while Seldon concentrated on his authors and their products. Their personalities, says Milton Friedman today, "fitted together like hand in glove."
Harris is the PR man, bubbling and bursting with new ideas and suggestions, a salesman able to peddle the ideas and products of the Institute in any forum. Seldon, introverted by contrast, is, in Friedman's words, "a perfectionist when it comes to writing, editing and publishing, and an enormously hard worker who over the years is more responsible than any other single person for the consistently high quality of IEA publications." Says Harris, "If I'm dressing the window, it is Arthur who is stuffing good things on the shelves."
In the first half of the 70s, those shelves began to include an international element. To "classical" political economy a la Acjam Smith, Seldon added publications by Hayek, leader of the Austrian school of economics; Friedman, leader of the Chicago school; and
Buchanan and Tullock, leaders of the publicchoice, or Virginia, school. Although their approaches differed, Seldon saw them as "all reinforcing each other and the work of the IEA."
Of these three schools-all foreign and new to most Britons-Friedman's writings on monetary policy clearly had the greatest immediate impact, coming as they did at a time of high inflation. "At the last General Election," wrote influential Conservative intellectual Jock Bruce-Gardyne in a 1978 article on the IEA, "I was confronted by a young working farmer who intervened in an argument over incomes policy at a village election meeting to say that this was all nonsense: we were suffering from inflation because we had failed to control the money supply. He had seen Prof. Friedman on television, as had many millions of others, and been deeply impressed. It was the IEA which had brought the 'wizard of Chicago' to this country for the occasion." Over the long-term, however, the Austrian view of the market as a process and the Virginia economics of politics are arguably having an even greater influence, as they slowly but steadily permeate British thought.
The early '70s also saw the first sign that the Institute's work was having an effect on policy. Edward Heath won a come-from-behind victory over socialist Prime Minister Harold Wilson in the 1970 general election-and won on a market platform. But market enthusiasts' high hopes were dashed within 18 months. Heath made a series of critical U-turns and began to inflate the currency, bail out faltering industries, control prices and wages, and generally expand the role of government.
In retrospect, however, the 1970s must be viewed as the iea's finest hour. Leading an established, maturing, and increasingly well-known organization, Harris and Seldon launched a barrage of timely, high-quality work. Inflation, recession, and the clear failure of big government were the background as Seldon's shells began to reach their targets, littering the landscape with shattered collectivist concepts and exploded myths, blowing apart the postwar consensus.
In 1975, the Sunday Telegraph called the IEA "the centre of useful economic activity." The London Times in 1976 said it had become the source of "a good deal of the most influential economic thinking." And in 1977, the Financial Times wrote that it was the organization to have most influenced "public economic understanding." Warned Labour Weekly: "They are the new orthodoxy and the Labour Government is by no means immune from them."
In this intellectual atmosphere, dominated by the iea's micro-studies and macrocritiques, the opposition Conservative Party began a radical reexamination of its roots. With Margaret Thatcher as its new leader, the result was another victorious promarket election platform in 1979. This time, however, the platform didn't collapse.
Thatcher wrote to Fisher crediting the IEA with "creating the climate of opinion which made our victory possible" and rewarded Harris with a seat in the House of Lords. Impishly, Harris took it not as a Conservative but rather as an independent, or "cross-bencher." Within two years, he had established an all-party group of lords called the Repeal Group, dedicated to getting rid of legislation. Close IEA colleagues openly worry he is now concentrating on the infantry and neglecting the artillery. "He's spending too much time across the road," grumbles Seldon.
But Thatcher, he says, "has done far more than we ever expected." He points to the reform of trade-union legislation, the denationalization of many industries, the sale of over a million public-housing units, the spread of privatization in local government, the cuts in top tax rates, and the abolition of exchange controls, price and wage controls, and dividend and credit controls.
Success in the Thatcher years has had its own problems. One is the common accusation that Conservative rhetoric has become so "lEA-ish" that Harris and Seldon must be, in Harris's words, the "puppet masters." However, they have rightly been careful to keep their distance and to point out that government actions diverge from and conflict with their market analysis in many important respects. "The government keeps sidling up to us," notes Harris, "but we keep digging a trench between them and us, and we keep on with our message."
He and Seldon are also quick to point to many failures and enduring problems. "We have made no progress at all on the welfare front-health, social security, education, and much of housing. That whole sector seems to be so far wholly immune to intellectual criticism," says Harris. He believes, however, that "you can show people that a 'free' good is a pig in the poke, a swindle. In the long run we cannot lose on welfare. Education and health keep costing more and more but they can't buy off the trouble. So much emotion is tied up in all of this that it will be a bitter, bloody battle-but it will yield."
Even so, there will always be a need for the IEA "because there will always be backsliding and counterproposals from the other side. There will always be tension and a job for market liberals to do."
After 30 years, Harris and Seldon can see their work permeating all of Britain's political parties and much of academia. "Even the Labour Party," says Seldon, who believes it will never regain power, "has accepted that here is a body of work with which it has to deal." He feels that the Conservative Party is still divided between those who think "the government should run all sorts of things" and those who have accepted and embraced markets. Where this latter group has not implemented market reforms "it is for reasons they should have foreseen, such as bureaucratic and special-interest opposition," Seldon says. In the future, he sees alternating governments of Whiggish Conservatives and the Social Democratic / Liberal Party Alliance. And within the latter, this old liberal smiles and says, "Our ideas are percolating very nicely."
The fundamental change has been one of atmosphere. "Markets are no longer old-fashioned," says Seldon, "and people in the media now ask the right questions such as, 'why is (natural) gas being privatized without the deregulation to make it competitive?' That change is far more basic than the fact that Mrs. Thatcher has done a few things."
What is on the iea's list for the near future? Seldon lists five major targets for bombardment: transport, where he wants to see studies of railroad denationalization; fuel, specifically proposals to denationalize the coal mines; health and education, which account for a high proportion of both government expenditures and employees; and, finally, local government, which he views as "inefficient, mismanaged and corrupt."
"If we tackle these five," he says, "we will be much nearer to lower taxes, more choice, the decentralization of power, and smaller government."
To what can one attribute the success of the Institute? First, there is the continuity of its work: "their hewing to a straight line of principle, without seeking to compromise in order to court short-run popularity," as Milton Friedman put it to me recently. But the Institute has not been a narrow, dogmatic church. Virginians, Austrians, Chicagoites, and market economists of no particular school (and even critics and skeptics who agonize over possible hygiene problems if garbage collection is privatized) all rub shoulders under the Institute's aegis. The iea's success, says Chicago economist George Stigler, is "due in good part to its enlistment of many competent scholars without regard for some rigid orthodoxy."
Second, there is the continuity of its staff-not just of the principals, Harris and Seldon, but of their team as a whole: their assistant Joan Culverwell (January 1959 until recently); publications manager Michael Solly (May 1959 to date); John Wood (in various capacities throughout); and librarian Ken Smith (1969 to date).
Third, there has been the hand-in-glove Harris-Seldon partnership itself. Looking, as one newspaper has described them, "more like a pair of country solicitors than seasoned revolutionaries," their hallmarks have been politeness and courtesy, energy and enthusiasm, and optimism and fun.
Fourth, there is the Institute's location in the national capital of a small, highly centralized society. "We should have to imagine New York, Boston, Washington, Chicago, New Orleans, Los Angeles, San Francisco rolled into one to create some United States analogue to London," James Buchanan and Gordon Tullock once wrote in explaining the iea's success.
Finally, the IEA has not fallen into the Fabian Society trap of dealing with only one party. Harris comes from a strongly Conservative background but now sits in the House of Lords as an independent. Seldon was initially socialist and then with the Liberal Party; some years ago he calculated that 20 percent of "his" authors had broadly left-of-center sympathies. His strategic placing of the Institute has clearly been of critical importance.
As the IEA enters its fourth decade, it is conducting a major reappraisal of its past successes and failures, its current position, and its future. After 20 years on the wrong side of the wall, the past decade has seen the institution and its authors come in from the cold. Thatcher's Britain has been a little heady for market economists. So much so, claims Hayek's biographer, William W. Bartley III, of the Hoover Institution, that there is a tendency to overrate politicians' commitment to and understanding of markets. The danger is that this will lull the Institute into thinking its battle is won and therefore lure it into more immediate policy work. The Fabian Society made such a mistake in 1945, and the vacuum it left made the iea's task easier.
The debate within and around the Institute is critical-not just for the lEA's sake and not just for the sake of Britain's still floundering economy. The Institute serves not only as an intellectual center in the U.K. but also as a role model for fledglings in the worldwide network of such institutes.
At a Hobart Lunch I attended in May, Harris asked the assembled guests for their views on what the Institute's future strategy should be. Three positions emerged, neatly capsulizing the choices confronting the Institute.
The first is that the battle for market ideas has been won, so the Institute should concentrate on directly influencing policy by issuing position papers, giving evidence to parliamentary committees, and so on, a la the Heritage Foundation in the United States. In Seldon's military analogy, this would be to join the infantry.
The second position is that the battle might be won, but the perpetual war of ideas continues. Consequently, say advocates of this position, the IEA must keep to its proven formula of providing a steady stream of independent, scholarly, and timely analysis; it must keep on firing its shells and blowing up the enemy.
The third group agrees with the second but also argues for closer and wider links with academia. Economists may be moving toward a better understanding of markets, but hostility from historians, sociologists, and other scholars threatens to undermine the success of market ideas. The IEA should therefore reach out to people in these fields. To advocates of this position, the most important work will always be with the first and second-hand dealers in ideas-the scholars, intellectuals, and journalists-and never in immediate policy circles.
Whoever wins the strategy debate, the future of the IEA will depend on its people. The team that has made it successful is now retiring. At age 70, Seldon is no longer editorial director but editorial consultant. Harris is soon to step aside. Joan Culverwell has retired. And the ubiquitous John Wood will also step down soon. A colleague of Harris's at Cambridge in the '40s, a close friend and advisor in the '50s and '60s, the iea's deputy director in the '70s, he is today acting editorial director during the search for a replacement for Seldon. Wood and Culverwell, says Milton Friedman, have "provided the underlying cement that has held the Institute together."
What road the Institute takes over the next 30 years will depend on the leadership it must find and the strategic direction it takes. Among the close to 50 people I talked with in appraising the IEA, there was a clear streak of pessimism. "While one may have a deep attachment to the IEA," commented one London attorney, "it's probably best to let it die-it's run its natural course." Many noted a dilution in its sense of mission and a failure to recruit and hold the next generation of leadership.
And yet, who would have predicted that a chicken farmer and two economists could hatch the radical changes they have? Whatever its future, the IEA has exceeded the wildest expectations of its founders.
John Blundell is executive vice-president of the Institute for Humane Studies at George Mason University.
]]>It was the fall of 1976. I was part of a small group entertaining the leader of Britain's Conservative Party, Margaret Thatcher, at dinner in a private room at the Cafe Royal in London's West End.
After dinner the conversation moved from economic freedom to matters of personal freedom. It was a natural development, since the host for the evening, an aspiring Member of Parliament (MP), believed that economic and personal freedoms are inseparable and indivisible. And he perceived that the "libertarian " right of the Conservative Party was supporting economic freedom while either ignoring or being openly hostile to questions of personal freedom.
He began to explore this matter with Thatcher and illustrated his theme by advocating the legalization of marijuana. Thatcher was completely and utterly appalled. Sensing he was on rocky ground, our host moved away from the philosophical case to a more practical approach. Marijuana, he claimed, was freely available, so why not recognize reality? He knew at least one person who sold the substance.
"My personal detective is sitting outside that door," said Thatcher. "Call him in and give him this dealer's name and address. "
Our host changed the subject, and Thatcher let the matter drop. The detective was never called in, Thatcher went on to become prime minister, our host's aspirations to a seat in Parliament were fulfilled-and the dope dealer is probably still in business.
I met Thatcher many times over a period of 10 years from her days as education secretary and later shadow environment secretary to her time as leader of the opposition and later prime minister. My view of her has been shaped by those many glimpses of her political development.
Opinions on Margaret Thatcher among America n conservatives and libertarians tend to fall into one of two groups. Either she is viewed as the best thivg since sliced bread, a crusading antistatist who is creating a new climate of freedom and free enterprise, or she is a typical politician, knee-deep in broken promises, who has failed to cut taxes, reduce expenditures, dismantle the state, and restore freedom. But I must say from my personal knowledge and observation that neither view is correct.
It's now been five years since Thatcher was first elected prime minister and it seems an appropriate time to assess her personal philosophy, promises, and progress. But before that can be attempted it is necessary to understand the decades leading up to her election as Conservative leader in 1975 and her election as prime minister in 1979 and 1983.
During World War II, the level of government control of the British economy exceeded that of National Socialist Germany. Sixty percent of all production went to the state; five and a half million men and women were in the military; 40 percent of the working civilian population-and there was zero unemployment-was involved in war production; rationed goods absorbed over a third of after-tax income; and a worker could not change jobs without a government permit. So many people were involved in so many ways that it was known as the "people's war."
On top of this large-scale collectivism, the 1944 Beveridge Report on social security proposed state support "from the cradle to the grave." Memories of the depression that had followed World War I were very much alive. In 1918 the troops had been promised a return to "a land fit for heroes," not unemployment; and this second time around people were not about to be "cheated." Strong central control of all aspects of the economy was perceived to have pulled the country through six years of war; now, so people thought, a strong state could turn the "people's war" into the "people's peace."
Influenced by Friedrich Hayek's free-market classic The Road to Serfdom, Winston Churchill based his 1945 election campaign against the Labour Party on a vehemently antisocialist platform. Socialism, he said, is "inseparably interwoven with totalitarianism." To implement a socialist program, one would have to "fall back on a form of Gestapo."
Yet throughout most of the war, the Labour leaders had been in Churchill's coalition cabinet, running the country while he ran the war. There had been no "Gestapo," his charge made no sense, and Labour romped to power.
The new government of Clement Attlee kept the war-time controls and sent John Maynard Keynes to America to secure new loans. It nationalized the Bank of England, road transport, the railways and independent domestic airlines, iron and steel, and the fuel and power industries. The Beveridge Report was implemented with three major welfare bills passing through Parliament. Just as World War I had earlier served as a training ground for those who later administered the New Deal in America and the corporatist policies of the British government of that time, World War II led to the establishment of the welfare state and strong government control of the economy in the United Kingdom.
During the six years from 1939 to 1945, Keynesian doctrines of government management of the economy had completely conquered British academia and opinion-forming circles. Hayek now believes that in 1939 he still had a good chance of defeating such views, but by 1945 the war had reduced his chances to all but zero. War-socialism had ensured the Keynesian victory.
However, huge shortages rapidly emerged. Bread was suddenly rationed for the first time. Two months after coal was nationalized, there was no coal. Newspapers were limited to four pages. For five hours every day there was no electricity. Many ration levels were reduced. And it became a criminal offense to turn on a fire in summer.
Despite such moves, Labour hung on to power in the 1950 elections. It was not until 1951 that it was ousted. Labour promised more of the same, including nationalization of cement, insurance, and sugar. The Conservatives ("Tories"), Labourites said, would bring unemployment, whereas Labour would guarantee "a fair share at a fair price" for everyone.
The Tories' 1951 campaign was helped not only by the failure of Labour's programs but also by a strongly ideological antinationalization campaign run by Tate and Lyle, Britain's biggest sugar manufacturers and refiners. It used "Mr. Cube"-a cartoon cube of sugar to which were added arms, legs, and a smile-to impart its free-enterprise message. Churchill himself talked of "bonfires of controls" that would "set the people free." But many of the newer, younger MPs first elected in 1945 and 1950 had other ideas. One such was the 1947 Industrial Charter, which paid lip service to lower taxes and reduced controls but proposed wage fixing, accepted much of Labour's nationalization, and advocated a strong dose of central direction of the economy to engineer full employment.
The Tory party had accepted the creation of Labour's welfare state and the mixed economy, with many industries exclusively in state hands, as well as a strong role for central government in economic management. There was only a vestigial adherence to the free market, hence Hayek's 1944 dedication of The Road to Serfdom "to the socialists of all parties."
For 28 years, from 1951 to 1979, this social-democratic Keynesian consensus reigned supreme and did not even begin to crumble until the 1970s. As a leading British journalist and commentator, John O'Sullivan, recently stated, "It was a case of Tweedledee and Tweedledumber." The differences between the right of the Labour Party and the left of the Conservative Party were so small that a new word, Butskellism, was coined to describe this middle-ground consensus. It came from the names of R. A. Butler, a senior Conservative cabinet member, author of the Industrial Charter, and leader of the Conservative left, and Hugh Gaitskell, the leader of the Labour right and the man who replaced Attlee as Labour leader.
Under the Conservatives, government expenditures as a percentage of gross national product moved past the 30 percent mark and up to the mid-40 percent level. A critical moment came in January 1958 when the cabinet's "taxing ministers" tried to stand up to the "spending ministers." They wanted to control the money supply, reduce public expenditure, and cut taxes. They lost and resigned. Such was the consensus view of the time that Prime Minister Harold Macmillan was able to dismiss the whole affair as "a little local difficulty."
Beneath the surface, however, significant changes were rumbling. The Labour Party had always had its radical left wing, a fact the Tories exploited with election slogans such as "Socialism Leads to Communism." So the Labour Party leadership kept radical-left infiltration to a trickle through the 1950s and 1960s. But the trickle turned into a tsunami in the early 1970s. Leftists moved into Labour's local constituency party organizations, gained control, either waited for the sitting MP to retire or refused to reselect him, and then put their own person in place.
The result has been an increasing percentage of leftist Labour MPs with every recent election. This shift is, of course, reflected in the Labour leadership, as well. After a succession of right-wing leaders-Attlee, Gaitskell, Wilson, and Callaghan-the leadership of the party, and thus the position of de facto prime minister in waiting, has passed to the left in the form of Michael Foot and more recently Neil Kinnock.
Changes were also taking place within the Tory party. In the mid-'50s a young independent businessman, Antony Fisher, went to see Professor Hayek to tell him that he wanted to get into Parliament and promote Hayekian, free-market policies. Hayek very wisely suggested he forget about a political career and instead found an institute to promote market-oriented alternatives to the prevailing views. Fisher took the advice and in 1957 established the Institute of Economic Affairs (IEA) in London.
The task was immense. Even the leader of the Conservative Party and prime minister at the time, Harold Macmillan, described laissez-faire as a "cold old doctrine" against which he reacted "violently and instinctively."
For many years, the IEA was a lone voice for the marketplace, but it produced a steady stream of high-quality scholarly and policy papers. Gradually a nucleus of academics, businessmen, journalists, young people, and others began to form around it, spreading its message throughout opinion-forming circles. Throughout the 1960s and 1970s the impact of the IEA's work on the climate of opinion became increasingly apparent. The names of economists F. A. Hayek, Milton Friedman, and other scholars began to appear in the press, in motions at Tory party conferences, and elsewhere.
In 1970 the Conservatives came back to power, this time on a platform of ending subsidies to "lame duck" industries, lowering taxes, and imposing fiscal responsibility. This was the famous Selsdon Park manifesto, so called because it was drafted by the shadow cabinet during a weekend retreat to the Selsdon Park Hotel. Unfortunately, it was rapidly abandoned. Subsidies to faltering industries not only continued but increased, denationalization was limited to a handful of pubs and a travel agency, Rolls Royce was nationalized, and the money supply was exploded in an effort to reflate, or "dash for growth," as Conservative Prime Minister Edward Heath was to say.
But Heath began to face growing ideological criticism within his own ranks. The Selsdon Group was formed to fight to preserve the spirit of the 1970 manifesto, and when Heath-following in Richard Nixon's footsteps-introduced price and wage controls, he had to overcome a barrage of opinion both in certain newspapers and within his own party.
Heath's downfall, however, came from his all-embracing attempt to legislate on trade-union matters. Special courts were established, trade unionists were imprisoned for strikes and other industrial action prohibited by the National Industrial Relations Court, and an acrimonious fight over pay developed with the National Union of Mineworkers. Heath went to the country on the platform "Who rules: The unions or the government?" and he lost. Within nine months, he lost again when a second election was called to solidify Labour gains.
The results were many and varied. First, the middle-of-the-road social-democratic -- consensus was smashed. A union had taken on the government and thrown it out. The new, more left-wing Labour administration was in power as a direct result of this controversy. Unlike previous periods when the Labour Party was in power-1945-1951 and 1964-1970- it was no longer in partnership with the trade unions as a major part of the broader Labour movement; rather, the party was the pawn of the unions. Reg Prentice, a member of that Labour cabinet who later joined the Conservative Party, tells how lawyers retained by the Trades Union Congress drafted whole acts of Parliament that were presented to the cabinet on a "take it or leave it at your peril" basis.
Second, the middle class and the small-business communities were not merely alarmed but scared stiff by this display of union power. Organizations were formed overnight, attracting tens of thousands of members and joining in the fray. One, the Freedom Association, began taking trade-union abuses and other matters to court. For example, it was successful in having the closed shop virtually outlawed in Britain by the European Court of Human Rights.
New small-business groups such as the National Federation of Self-Employed began to campaign and lobby, taking for the most part a rigorous free-market policy stand. The Adam Smith Institute, inspired by the United States-based Heritage Foundation, was established and began to lobby actively for free-market policies.
Sir Keith Joseph, the most senior member of the Heath cabinet who was not considered a Heathite, and his close friend Margaret Thatcher founded the Center for Policy Studies (CPS) in 1974. It was "to study economic and social policies" with a commitment to "extend the liberty of the subject." Its view has always been that "the market is vital to prosperity" and that "freedom reflects a concept of society as organic and largely spontaneous." Although it acknowledged that the post-World War II bipartisan approach to a highly controlled economy had been very damaging, it explicitly stopped short of laissez-faire.
Third, the two election defeats of 1974 meant that Heath, who had also lost in 1966, now had a l-to-3 win-loss record. In early 1975, new rules for electing the leader of the Conservative Party were brought forward. Margaret Thatcher proceeded to fight and win the leadership on a clear platform: a commitment to individual freedom and private enterprise, the maintenance of law and order, the wide distribution of private property, and a belief in hard work, thrift, reward for effort with lower taxes, and a "duty and responsibility to care for others." As a former member of Heath's cabinet, she accepted some of the blame for the policy U-turns of 1970-1974 but, unlike Heath, seemed prepared to learn from them. Instead of merely promising to halt the country on its slide towards socialism, she promised to reverse direction.
Her election in 1979 was the final nail in the coffin of the old social-democratic Keynesian consensus. The ideas of the Institute of Economic Affairs and other market-oriented groups had permeated to many parts of the Conservative Party, the media, and other opinion-molding groups. Free-market economists Hayek and Friedman, both Nobel Laureates by now, had become all but household names. Labour leaders received prominent coverage for attacking Thatcher for being "in the grips of a mad Austrian economist." Even the Sun, Rupert Murdoch's racy tabloid newspaper more famous for its bare bosoms than its intellectual content, ran a headline, "Who the Heck Is Hayek?"
Sir Geoffrey Howe, the new Chancellor of the Exchequer, commented that Hayek's Road to Serfdom was the most influential book he had ever read. Sir Keith Joseph, the new secretary of state for industry, spoke weekly on campuses across the country quoting both of the Nobel Laureates. And Mrs. Thatcher listed Hayek's Constitution of Liberty and Adam Smith's Wealth of Nations among the three books to have most influenced her political philosophy.
The "winter of discontent" immediately preceding the election, a winter that had seen unions causing unprecedented levels of disruption, put her in an enviable position. The British public at large was heartily sick of such excesses. Many who had voted Labour in the past because "they can work with the unions and the Tories can't" now realized that not even a socialist administration living in the pockets of the union bosses could guarantee industrial peace.
The new administration Thatcher formed had to reflect a broad cross-section of opinion within her party, and the Conservative Party is a broad church. People hostile to her politically and personally were included in the cabinet. Experience and success (coupled with the petulance of left-wing Conservatives and their lack of ideas and organization) has allowed her to change the composition of the cabinet significantly in her favor. "Wets"-those who want to return to the middle-of-the-road consensus of the 1950s and 1960s-have been dropped or moved sideways to noneconomic positions. In their place, she has promoted "Drys"-supporters of sound money, balanced budgets, and the free market.
Important as such changes have been, the past five years of Thatcher cabinets have also seen two more changes of major long-run importance. First, prior to her victory in 1979, every postwar British cabinet had been made up exclusively or overwhelmingly of men and women who had participated either as civilians or in the military during World War II. If they had not been fighting soldiers, seamen, and airmen, they were at least functionaries of the Ministry of War Production or majors in an army supply division or some such. They had had firsthand experience of being small cogs in a big centralized war effort, and their propensity was almost invariably to want to be big cogs in a centralized peace effort. Since 1979, that has changed. A majority of Thatcher appointees were simply too young to have been involved in World War II. A new, unencumbered generation has come to the fore.
Second, the dominance in the cabinet of Eton and Harrow and Oxford and Cambridge is very much on the wane. A Thatcher appointee is just as likely to have attended a local government-run high school (as she did) as a private school. And while a Thatcher appointee will probably have attended Oxford or Cambridge, he or she would have gained admittance (again, as she did) purely on merit. She is in fact an arch meritocrat who identifies closely with people whose careers in some way parallel her own-working-or lower-middle-class background, local high school, Oxbridge or the equivalent, and a "real" job. The result, reflected throughout the Conservative members of Parliament, is a more independent, harder-nosed breed of politician.
How much did Thatcher's first administration achieve? On the positive side, one can -point to some deregulation, denationalization, the start of privatization of local government services, the sale of public housing, a tough attitude toward the European Economic Community, cuts in top tax rates and in the size of the civil service, and a surprising degree of mastery of the trade unions. On the negative side, however, are her early failure to bring spending and borrowing down and the substantial increases in welfare and defense spending.
Exchange controls, price and wage controls, dividend controls, and credit controls-all were swept away. Heads of nationalized industries were told to put their houses in order, and many have done so. Once in order, they have been brought to the market and sold off (for examples of this, see my article "Margaret Goes to Market," Reason, Feb. 1982). State monopolies such as the ones on the supply of gas and electricity and on scheduled bus service were broken.
The concept of privatization of local government services moved from total obscurity to a trend and almost to a fashionable craze, in part because of the work of the Adam Smith Institute. Tenants in all public housing were given a right to buy such properties at discounts ranging from one-third to one-half off the estimated market valuation. This opportunity transferred over half a million housing units from the public to the private sector, is continuing to move such units, and is having a remarkable effect on the outlook of a new class of property owners.
While the British government under Thatcher has remained committed to membership in the European Economic Community (EEC), it has done so in such a way as to placate the overwhelming majority of British people who are very unhappy with British membership in the EEC. The Thatcher government has consistently negotiated the level of British contributions down and has taken a reasonably tough attitude on the thousands of pages of regulatory nonsense issued from EEC headquarters in Brussels. Thatcher herself has made it quite clear that she wants to see the Community move much closer to the ideals of the Treaty of Rome that created the EEC-free trade and the free movement of goods, services, labor, and capital.
Thatcher's government has slashed the top marginal tax rates. On investment income, the rate came down from 98 to 75 percent and on earned income from 83 to 60 percent. The basic rate of income tax was cut from 33 to 30 percent. The number of civil servants was also cut by 14 percent over a five-year period.
Her mastery of the unions stems from a number of factors. One must look to the unions themselves-their growing unpopularity, declining membership, and hostility to technological progress. But important also have been record levels of unemployment and Thatcher's overall strategy of eschewing an all-embracing approach and legislating against specific abuses.
Perhaps her greatest success, though, has been the way she has picked a few basic points and hectored and nagged all sections of the population to such an extent that once-unfashionable views are now accepted as truths. Take as an example the question of deficit spending to fuel growth and douse unemployment.
For close to 10 years she has subjected such ideas to constant abuse, using plain, simple language and analogies from the home and business. The result was that in last year's general election, Labour Party promises to reflate, institute new public works programs, and so on, never stood a chance.
What can we expect over the four years that remain of her second administration?
More legislation to control unions, more denationalization of state-owned industries, more privatization of local government services, and more sales of public housing are all quite clearly in the cards. Curbs on increases in local property taxes and the removal of a whole tier of local government are also reasonably certain. There is even a good chance that minimum-wage legislation will be scrapped and that some of the monopolies in the professions will be tackled. Among the best possibilities are the opticians' monopoly on selling glasses, the solicitors' monopoly on transferring deeds on houses, and the monopoly enjoyed by barristers- who rank higher than solicitors-on "rights of audience," or representing clients in higher courts.
Spending and tax cuts, however, are a lot less certain. The cabinet is much "dryer" than before, but battles between many of the spending ministers and taxing ministers continue. The absolutely firm commitment to keep the deficit down-as a percentage of GNP, it is now the lowest of any Western nation-coupled with an apparently equal commitment to increase defense and social-welfare spending gives little leeway for maneuver. In recent months Thatcher has repeatedly stated that tax cuts can come only after real growth in the economy-the very opposite of supply-side theory adopted by the Reagan administration.
One highly beneficial effect of this equation, though, is the impetus it gives to the sale of state-owned companies and other assets. The list of such companies and assets already sold is impressive, as is their performance since being sold. But the list of those being prepared for the market is doubly impressive. Indeed, so much is destined for sale that nationalized industry chiefs are almost bickering in public over who should be allowed to go first.
Although the Conservative Party received a slightly smaller percentage of the vote in 1983 than it did in 1979, it has 397 seats in Parliament, its best situation in 50 years. In contrast, the Labour Party won a mere 27.6 percent of the 1983 vote and only 209 seats in Parliament, its worst situation in 50 years. With Labour's current leadership, policies, and ever-left ward drift, it is essentially a dying party. The huge population shifts from the old inner cities to the suburbs and growth areas have eroded Labour's prime base of support.
More and more of the sons and daughters of traditional die-hard Labour supporters have moved out, possibly taking white-collar rather than blue-collar jobs as British industry becomes more service-oriented. Such offspring are also far more likely to be homeowners and supportive of anybody but the Labour Party.
The new young left-wing Labour "turks" seem to base their policies on a motto of "if it's unpopular, let's support it." Their opposition to the monarchy, the House of Lords, private enterprise, and home ownership, coupled with their support for the Irish Republican Army (IRA), trade-union privileges, increased redistribution of wealth, and so on, can only be interpreted as a manic determination to dig their own political graves.
Unless the right of the Labour Party regains control, the Labour Party will not be returned to power for the foreseeable future. And even if the party were to change dramatically, it would take a massive shift in public opinion to bring it back.
It was the leftward shift of the Labour Party that gave rise to the breakaway Social Democratic Party (SDP) that has joined the Liberal Party to form the Alliance. The SDP was formed by Labour leaders who left their party and took with them over 20 Labour MPs and one Tory. Their popularity rocketed in the second year of the first Thatcher administration; at one point, 55 percent of voters polled said they would vote Alliance. However, it plummeted equally quickly in late 1981 and early 1982, and in the 1983 general election only six SDP candidates were elected to Parliament.
With the 17 Liberal MPs elected in 1983, the Alliance has 23 members in Parliament. However, this total seriously misrepresents the Alliance's level of support. Over the United Kingdom as a whole, Labour's 27.6 percent of the vote gave it 209 seats whereas the Alliance's 25.4 percent gave it only 23 seats.
The problem for the Alliance is Britain's "first-past-the-post" voting system, in which the party that gets more votes than any other within a specific constituency wins, and all other parties within the constituency are unrepresented. This system naturally favors parties whose support is concentrated in specific constituencies sufficiently to outdo its competitors. And although the Alliance has broad general support across the country, it has neither the concentrated pockets of support nor quite the overall level of support needed to take off.
With the Labour Party apparently dying, though, the Alliance could emerge as a serious threat to Thatcher. Should that happen and the Alliance forms a government at some point in the 1990s, it will not necessarily herald a return to the policies of the 1950s and 1960s. The work of the free-market IEA and others at the scholarly level and in opinion-forming circles, coupled with the aspirations of the voters and by then perhaps 10 or even 15 years of Margaret Thatcher, will have moved the center of British politics a significant distance toward the free market and a more limited role for government.
Margaret Thatcher herself is in many ways the exception that proves the rule-a very bright, very honest, and highly principled politician. Certainly she compromises; but because she is honest, she tells you when she is compromising and explains why she is doing so. She never leaves you in any doubt about where she stands. After decades of political leaders mouthing meaningless generalities, shifting and sliding hither and thither, covering up old tracks, this is refreshing, and it has struck a chord.
Her views are very much those of a person who has risen by sheer dint of effort, native wit, and intelligence. Unlike many of her predecessors, she did not enter politics from a wealthy or titled background with the reforming zeal of the meddler. Rather, her background was modest and strongly Methodist. Thrift, hard work, achievement, caring for others in the community yourself through private acts of charity, saving rather than borrowing, studying, using your initiative and independence-all these were strong parts of her childhood that are clearly visible today in her personal qualities and political philosophy.
Her goal is a country where the line between state and private activity is clearly drawn and pushed some way back. She sees many legitimate roles for government-defense, providing a safety net through social spending, law and order, and so on-but her list of such roles is shorter than most.
How far has Britain under Margaret Thatcher moved toward the ideal of the free society? Those who say "a lot" and those who say "not at all" are both wrong. The leftist infiltration and near destruction of the Labour Party, the quarter of a century of scholarly and intellectual groundwork by Ralph Harris and Arthur Seldon of the IEA, and in Margaret Thatcher the emergence of a leader who shares at least some of their ideas and has stuck to them, all add up to a clean break from the postwar consensus and a few steps down the road to freedom.
Unfortunately, these steps are almost solely in the economic realm. On social issues and civil liberties, Thatcher is a populist authoritarian, as her views on marijuana indicate. At this writing, her government supports a bill to ban "video nasties," recordings that depict violent acts. When an MP proposed an amendment-eventually unsuccessful-to ban soft-core pornography (hard-core porn already is banned), Thatcher let it be known that she supported the move. She has favored restoration of the death penalty, and a recent survey of freedom in Britain, Civil Liberties 1984, pointed out that her government's abuses of civil liberties in Northern Ireland have been condemned by Amnesty International and other independent human-rights organizations.
The survey also charged that press freedom has not fared well under Thatcher. She has been happy to leave the notorious Official Secrets Act intact. Also, her government was behind the 1981 Contempt of Court Act, which gives courts the power to punish for contempt anyone who publishes the names of witnesses in a court case contrary to the judge's instruction, as well as the power to postpone the publication of court proceedings when the court deems it "necessary to avoid prejudice to those or later proceedings."
Very few economic liberals in Britain are also social liberals. Pioneering legislation to legalize or decriminalize victimless crimes and to strengthen civil liberties has originated mainly in the Liberal and Labour parties.
It is easy both to overestimate the significance of Thatcher's progress on the economic front and to underestimate the tremendous scholarly, intellectual, and political fight it has taken to move this small amount. Spending on health and personal social services, for example, has risen 13.4 percent in real terms since Margaret Thatcher became prime minister (only partially attributable to a rise in unemployment). Indeed, both the overall tax burden and the level of state expenditures have risen sharply.
And there are many other areas of government incursion that she has as yet quite simply failed to tackle, even areas where intellectually she agrees there should be no role for government. Still, there is a good and growing list of achievements, and it is a much, much longer list than anybody could have predicted with any degree of confidence five years ago.
Demolition of decades of government intervention is a marathon task, and Margaret Thatcher is interested only in running a half-marathon. She's about a mile into her race, in good shape, and, on some issues at least, running in the right direction.
John Blundell is director of public affairs at the Institute for Humane Studies in California. This article is based on a talk first delivered to the Free Marin Supper Club.
]]>Good evening. I'd like to hire one of your cars for a wedding."
"Certainly, sir. Can I have your address and so forth, and I'll give you a quote."
"Well, I live in Dartford, and I-"
"Sorry, sir, we can't do any jobs in Dartford!" "But my daughter Linda has her heart set on having one of your lovely Rolls Royces for the big day!"
"Well, if you lived anywhere else, sir, we could help, but not in Dartford, sir."
"This is ridiculous-what do you have against us in Dartford? If you're worried about being paid, we'll let you have the relevant amount in advance."
"No, sir. It's nothing personal, and I've nothing against Dartford. We used to have a lot of good jobs down that way.
"It's like this, sir. Some time ago, Parliament passed a bill giving local councils the power to make very strict rules about private hire (car rental) firms. Now, in this area, only Dartford has chosen to bring in such rules.
"First, Dartford authorities told me that if I wanted to do any jobs in their borough, my drivers would all have to take a medical. Now, we only have three cars, but I use about 20 part-time drivers in a year. At £10 per man for the medical, that's 200 quid!
"Next, they said that my cars would have to be inspected by one of their mechanics, and could they all be driven to their garage? Well, sir, all my cars are Rollers and the warranty on the engines says that only Rolls Royce-trained mechanics can touch them-or the warranty's no good. Do you think that Dartford has a Rolls-trained mechanic?
"But the real killer was the next one. The council decided that no car more than five years old would be allowed to do private hire work. Well, sir, as you know, all our cars are veteran and vintage white Rolls Royces...."
The conversation continued for some time. Eventually, the proprietor said to his would-be client, "If your Linda's so keen to have one of my cars, I'll come and do the job myself-for free. The regulations only cover jobs that are 'for hire and reward,' so it'll be okay if I don't charge."
His offer was gratefully accepted, and a few months later he did indeed do the job at no cost to the bride's parents. However, the story of his kindness in the face of such bureaucratic nonsense had spread, and on the big day the national press turned up to cover the "free ride." "Rolls Bride Cuts Red Tape" was just one of the subsequent headlines, and the press reports detailed precisely why the car-rental proprietor could not charge for the job.
Naturally Dartford's council took quite a beating, and it retaliated. A few days after the wedding (in late 1978), Dartford legal officers began a court case against the car-rental proprietor, claiming that his actions had generated substantial publicity for his firm and that this publicity was so valuable that it constituted "for hire and reward."
The case eventually fizzled out. And by listening to solicitors and others who know how to interpret and advise on the regulations, the proprietor learned to avoid such future legal confrontations. He was told that as long as a job starts outside the borough and is one continuous job, with no breaks to pop off and do another quick job elsewhere, then he may accept weddings in Dartford. Consequently, when contacted by potential clients in that area, he now starts off by saying: "Yes, we can do it. But I'm afraid you'll have to bring the groom to the borough boundary and drop him off a few yards this side of it!" So if you are ever in Britain's Dartford area one Saturday and see a groom getting into an old white Rolls Royce a few yards before a sign that reads, "Welcome to Dartford," you'll understand what's going on.
As a private economist from 1976 to 1982, with Britain's National Federation of Self Employed and Small Businesses (NFSE) as my main client, I saw dozens of cases-like the one above-of government interference with small businesses. And from my observations in the United States, there are few major differences between the position of small businesses here and in the United Kingdom.
Founded in 1974, NFSE-Britain's equivalent of, in the United States, the National Federation of Independent Businesses-grew almost overnight to its present membership level of about 50,000. Though the organization was established just as Labour swept back into power-and much of its spectacular growth can be attributed to a fear of socialism-its creation was prompted by a proposal of the outgoing Conservative government, Edward Heath's, to introduce an extra 8 percent tax on the earnings of the self-employed.
For the most part, the federation takes a fairly principled position. Its membership overwhelmingly favors competition, free entry to the marketplace, and denationalization and opposes subsidies, tariffs, high taxes, marketing boards, and bureaucracy. Occasionally the federation is beguiled into an interventionist position-more through naivete than a conscious decision-but such lapses usually are promptly rectified.
From its earliest days, NFSE not only acted as a pressure group but also as a troubleshooter sorting out members' problems. This latter role was adopted somewhat reluctantly- after all, what were self-employed accountants and solicitors in business for? Partly, of course, to sort out problems. Nonetheless, cases keep flooding in from members.
While I worked for NFSE, hardly a month passed when I didn't see some small business victimized by government meddling. Planning regulations, licensing laws, value-added tax, wages councils, employment-protection laws-all these created a continuous stream of cases that, if they had not caused so much worry, aggravation, and expense-not to mention several suicides-would have been a great source of mirth. The following few tales further illustrate the personal and economic havoc governments end up inflicting upon small-business proprietors when they get into the business of regulating business.
Bill Bedward is a former Guards officer and Dunkirk veteran. In 1964 he opened a restaurant on the outskirts of Bournemouth, Hampshire. It was a family business; his wife helped, as did his son.
In 1973, Britain's Conservative government introduced the value-added tax, and Bill duly registered with the tax authorities as required. Despite the complexities of the VAT-which is a tax assessed on each mark-up of a good at the various stages of production or distribution-Bill managed for several years to comply with all the requirements.
In 1977, however, vat inspectors began to inspect his premises, both overtly and covertly. One group of inspectors began calling officially to go through Bill's records, while a second group started coming regularly to eat at Bill's restaurant, without identifying themselves.
After a few months' work, the VAT inspectors claimed that Bill had underpaid his VAT by £8,000 (about $40,000 by today's standards), a considerable sum of money for a small business. Slowly but surely Bill's professional advisers began to chip away at this claim, managing to bring the figure down to £4,000, and eventually to £1,500 (about $7,500 today). But the vat officials refused to go any lower.
Knowing that he was innocent of tax evasion, Bill decided to appeal to the VAT Tribunal in London. Not only was he moved by his belief in his own case and by the money in question; he was further motivated by the attitude of the VAT officials. At one interview, for example, Bill had asked, "Are you calling me a thief?" only to be told, "Yes!" And on another occasion, officers attempting to work out the mark-up on every menu item asked such petty questions as this: "How many prawns do you put in a vol-au-vent?"
At the two-day tribunal, Bill was once faced not just with the three official members and their clerk but also with a team of six VAT officers. One by one, Bill knocked down the remaining VAT claims on his business.
Typical of these was the claim that Bill's records showed a high percentage of wastage on steak (the value of which Bill was permitted to deduct from his vat liability). However, Bill pointed out that he bought untrimmed steaks, which he then trimmed himself. The vat officers had assumed that he bought trimmed meat, despite Bill's inviting them to witness a meat delivery and his trimming, an invitation that the officers had refused. Indeed, it was not until during the tribunal hearing itself that Bill was given a chance to demonstrate his steak trimming.
Another demonstration followed. Bill served carrots with many meals. The officers had determined that an average portion of carrots weighed 5 ounces-Bill concurred. From this point, however, their claims diverged. The VAT men claimed that since a can of carrots weighed 19 ounces, Bill should get at least three portions from each can. This, they said, would mean a mark-up of 428 percent. Bill claimed he only got two portions out of each can, working out to 230 percent mark-up. Fortunately, Bill had come well prepared and defiantly produced a can of carrots.
Lord Grantchester, the Tribunal's chairman, halted the proceedings to send a VAT officer out to buy a can opener and scales. On his return, the scales were set up, the can opened, and the carrots weighed.
On the face of it the VAT men had a good case: the contents did indeed weigh 19 ounces. But the officers had forgotten to account for the preservative solution-as the tribunal witnessed, the carrots weighed 10 ounces (Bill's two 5-ounce portions) and the solution 9 ounces.
In his report, Lord Grantchester found for Bill on all counts. He went on to award full costs to Bill, costs that the VAT lawyer opposed most strenuously.
Victorious, Bill returned to Bournemouth to pick up the reins at his restaurant, The Crooked Beam. That night he collapsed and was immediately admitted to the hospital. A year of investigations, slanders, claims, worry, and aggravation had taken an inevitable toll.
Some weeks later I took Bill to see his M.P., David Atkinson, at the House of Commons, to ensure that the matter was pursued further. Bill was still shaky, the lines on his face so deep that John Wayne would have looked like a fresh-faced baby in comparison.
"It doesn't matter to VAT officials," he said, "if costs are awarded against them, because it is not their own money. But if I had lost the appeal, it would have bankrupted me. I want to make sure this sort of nightmare does not happen to anyone else."
Bill was stronger than many, and he survived. Others did not. Each year, during such investigations, there were a few suicides.
There was the pub owner who had a dispute with the tax authorities over the correct percentage of beer wastage to use in figuring his tax accounts. He was found in his beer cellar, gassed, with a plastic bag over his head.
There was the antique dealer in North Wales who, during a tax investigation, blew his head off with a 12-bore shotgun. At the inquest the coroner called him "Mr. Honesty."
And there was the elderly businessman who had fled to London from Nazi Germany. One night when he was sitting down to dinner with his children and grandchildren, vat officers raided his home. While the place was ransacked, the family was separated and held for hours, not even allowed to visit the bathroom alone. After the vat officers left, the family went to bed. The old man stayed up, and in the early hours he hung himself. A few days later, several hundred self-employed businessmen demonstrated outside the main London vat office, on Shaftesbury Avenue. Some of the vat staff responded by leaning out of the windows and making obscene gestures.
In the late 1960s, Harold Wilson's Labour government attempted to move employees from the growing service industries into the declining manufacturing industries. To this end it introduced a new tax, the Selective Employment Tax (set). All service-industry employers were to pay the tax on every employee every week. Wilson's reasoning was that it would make the service industries shed laborers, who would then move to manufacturing.
The SET had a peculiar effect on the building industry. Until the SET was passed, construction workers tended to be "on the cards"; that is, they were employees. Since the new tax did not apply to self-employed people, however, many contractors told their men to "come back Monday on the lump"-that is, as self-employed workers receiving lump-sum payments (leaving it to the now self-employed workers to pay their own taxes, rather than having them withheld). This device, while not strictly legal under contract law, enabled the contractors to avoid millions of pounds in tax.
Many of these newly self-employed men, however, did not realize the implications of their change in status. All they knew was that they had more cash in their pockets every Friday night down at the pub. So after a year or so had passed, a number of them began to get into trouble with the Inland Revenue, Britain's version of the IRS. Some disappeared back to their native Ireland, and some began to use false names and addresses.
The Heath government eventually abolished the SET in the early '70s, but by then self-employment had already become the norm for many building workers. The Revenue fretted over losing out from unpaid taxes and in the mid '70s persuaded the Labour government to act. A draconian scheme was introduced: All "reputable" self-employed builders who were up to date with their taxes were to be issued with photoidentity cards, known as 714s. Contractors were to make no payments without such a card being produced. If a self- employed laborer couldn't show a card, the contractor had to deduct 35 percent of the worker's pay and forward it to the Revenue. Naturally, a worker not up-to-date with his tax would not receive a card.
When Adrian Alderslade, a young builder from Gosport, Hampshire, applied for a 714, he had a beard. He had his photo taken, filled out the papers, and sent them off. A few months later he was called to his local tax office to pick up his card. At some time during those few months, however, Adrian had shaved off his beard. The Revenue officer consequently refused to issue the card and suggested Adrian reapply with a new photo.
"How long will you keep the card here before you send it back?" asked Adrian.
"It will be returned at the end of the month, in two weeks time," replied the taxman.
"Okay," said Adrian, "I'll call back on the last day of the month."
He returned home, stopped shaving, and two weeks later went back to the tax office sporting a beard. The Revenue issued the card; Adrian then went home and shaved off his beard!
For many small businessmen the value-added tax is, in theory at least, simple. But the administration and paperwork can be a different matter.
Take a typical vat-registered trader. In the first quarter of '83 he sells, say, £20,000 worth of goods. At a VAT rate of 10 percent he would collect 2,000 in tax. In the same quarter he has bought £5,000 in supplies, on which he has paid £500 in vat. At the end of the quarter he deducts the VAT he has paid (£500) from the VAT he has collected (£2,000) and sends in the balance (£1,500). It seems simple.
To accommodate for the peculiar circumstances of certain industries, however, various special schemes were devised. One of these is for second-hand dealers who buy items from the public and sell them to the public.
Joe Corbitt of Newcastle Upon Tyne was a coin dealer and typical of such traders. A regular trader would charge £10 VAT on an item selling for £100. However, Joe was on the "margin" scheme. If he bought a coin for £90 and sold it for £100 he charged VAT only on the margin, that is to say, 10 percent of £10 (£100-£90) or £1.
To run the scheme, Joe had to keep a huge 13-column register. When he bought a coin, he filled in the first six columns: the item number, a description, name and address of seller, the date, and the price. When he sold it, he filled in the next seven columns with similar details as well as the margin and the VAT due.
To begin with, everything went well. Joe had a number of inspection visits and passed with flying colors. Then one day in 1977 a new inspector called. He noticed that sometimes Joe had not filled in every single column, and he took him to task for this. Joe was apologetic, but he made two points in his own defense. First, all the columns relating to money and tax were perfect. Second, the only gaps that occurred were ones relating to details such as the vendor's name and address.
"People walk in off the street," he said. "They ask me to buy items from them, but when I say I need their names and addresses for tax purposes, they often refuse. What am I to do? Turn away business?"
The VAT man wasn't satisfied. He decided that wherever a gap occurred, then that item should be disqualified from the margin scheme. The potential effect of this on Joe's tax bill was enormous. Remember, if he bought an item for £90 and sold it for £100, he charged £1 in tax. What the VAT man was asking for, though, was £10 in tax, £9 of which Joe had not collected and would have to pay from his own pocket.
Joe was not happy. "I'll appeal," he said.
"You can't," said the vat man. "My decision as to whether or not to accept your paperwork is final."
But Joe did appeal, and after a two-day hearing, his local tribunal decided that it had the authority to look at his paperwork and to decide whether or not it was acceptable. Before the tribunal had a chance to do so, however, the VAT lawyers halted the proceedings and appealed the question of the tribunal's authority to the High Court.
With NFSE funds, the fight continued. The High Court said the VAT man had the final word and there was no appeal, but a few months later the Appeal Court overturned this decision. Eventually, in 1980, the case came to the House of Lords, Britain's highest court, which in turn overruled the Appeal Court and found for the VAT men.
Joe lost, but his efforts were not entirely in vain. The obvious injustice of the situation had attracted much press and parliamentary attention. And within the year, Parliament amended the VAT legislation to give more authority on VAT matters to local tribunals and less to VAT officers. So while small-business owners are still subject to the VAT, there is likely to be less injustice in its administration.
The NFSE's files bulge with hundreds of such cases on a bewildering number of topics. Some additional examples:
David Prigmore, a demolition contractor, lives near Bedford. Before he can do a day's work, he must have 16 different licenses, registrations, certificates, or permits. The first five are required because he operates a lorry and the next four because he is in the building industry. Since he extends credit, he needs two credit licenses. Then there are his VAT registration, national insurance card, business-name registration, and two types of planning permits (one for his yard and office and one for each job he tackles). Total: four certificates, five registrations, and seven licenses-none of which has anything to do with his ability to demolish or dismantle dangerous structures!
Barrie Tinker owned a tiny cafe on Bodmin Moor. Over a single year it had lost £3,369, so in the spring of 1981 Barrie decided to close it down. His sole employee, Jean Webber, was very upset. She liked her job, and in a remote area like Bodmin, with already high unemployment, she would be unemployed for the foreseeable future. However, she had an idea. Prime Minister Thatcher and Mr. Tebbit, the Employment Secretary, were forever telling people to "price yourself into a job." So Jean went to Mr. Tinker and offered to take a wage cut sufficient to allow the business to stay open. He agreed to her plan, not realizing that it was illegal. Under legislation first introduced by Winston Churchill in the early '20s, about 20 "wages councils" had been established to set minimum terms and conditions for some 2.5 million employees in industries dominated by small firms with little or no trade-union presence.
Jean and Barrie's agreement was discovered by the authorities, and Barrie was prosecuted by the Wages Inspectorate. Fortunately, however, he appeared before sympathetic magistrates who imposed the minimum possible fine and ordered him to pay Jean the legal minimum wage for only one week (thereby, in essence, leaving any future arrangements entirely up to Barrie and Jean).
Then there was the Liverpool pub owner, James Shinner, who ran The Sportsman. In this case, the VAT men caused their mischief by using a method of determining Shinner's turnover that is both inaccurate and all-too-common in the case of pubs and restaurants. As with Bill Bedward above, they started by making secret visits. Their main concern was the lunches he served as a sideline. Two meals were available: chicken and chips, or scampi and chips, both with peas.
From their visits, the VAT officers determined that 60 percent of the patrons ordered chicken and 40 percent scampi. They also discovered by lunching at The Sportsman several times that there were 30 chips in a typical portion, that a typical chip was 2½ by ¼ by ¼ inches, and that a typical portion of peas numbered 70. They knew the prices of the respective dishes and, from the accounts, the total tonnage of potatoes and amount of peas purchased in a year.
All they needed to do now was to work out the weight of a typical portion of chips. With this, they could calculate the total number of such servings and, from this figure, the turnover of the food side of the business. They could then presumably double check by dividing the total number of peas purchased by 70!
Returning from the pub one day, the VAT officers purchased a bag of potatoes and a potato peeler. In their office they cut 30 chips of the appropriate size, weighed them, and got busy with the calculators.
Let me illustrate. Say the portion of chips prepared by the VAT officers weighed 4 ounces and the pub had bought one ton of potatoes. The calculators showed 8,960 portions; 5,376 (60 percent) with chicken and 3,584 (40 percent) with scampi. If the chicken dish cost £1 and the scampi £1.50, then the turnover must equal £10,742.
On the basis of this exercise, the tax authorities asked Shinner for an extra £746.93 in VAT. Shinner appealed and took his case to the VAT tribunal. The tribunal selected 30 of his chips at random and found that they weighed not 4 ounces but 8 ounces. The VAT officers' whole case against Shinner had been built up like a pyramid on one figure. Fortunately, the cornerstone was rotten and the whole structure came tumbling down.
Many, if not the vast majority, of the problems Britain's small-business owners face are caused by government interference. The same could probably be said of American proprietors of small businesses. Such interference is of itself bad enough; but matters are made even worse by the fact that the politicians and bureaucrats who enact and enforce the regulations are, for the most part, completely and utterly ignorant of what it is like to operate a small business and ignorant of the sort of people who do so.
In the United Kingdom, small businesses are run, on the whole, by people who are very good at doing one thing, say plumbing or book binding, but are not necessarily competent to deal with paperwork and handle complex rules and regulations. Educational statistics show them to have far less formal education than their employed counterparts. They may be very bright and very good at their jobs, but that is not the same thing necessarily as being good at filling in forms, keeping spotless records, and so on. An illiterate employed bricklayer can go through life without any trouble from the authorities, but an illiterate self-employed bricklayer soon ends up in trouble.
On some issues, British small-business regulations seem to be more draconian than those in the United States, and on others the American laws seem more damaging. Product liability is certainly more of a problem in the United States. Martyn Hopper, chief lobbyist in Sacramento for the National Federation of Independent Businesses (NFIB), tells, for example, about a lady who put her wet cat in a microwave oven to dry it. The cat exploded, the lady sued, and the microwave manufacturer lost! On the other hand, British employment laws on matters such as redundancy payments and unfair-dismissal compensation are more excessive than anything I can find in the States.
The American small-business community seems better organized to defend itself and to promote the conditions necessary for enterprise. Take the NFIB. Its level of funding, its sophisticated lobbying and propaganda, and the extent and impact of its work exceed those of its UK counterpart, the NFSE, by a long way. The sole area where the NFIB is perhaps not as advanced is that of legal protection for its members. For several years now, the NFSE has insured every single one of its members for professional costs in fighting VAT and Inland Revenue investigations and employment, health, and safety cases.
As in America, Britain's self-employed and small-business proprietors are often depicted as tax-fiddling, slave-driving, consumer-swindling, profit-raking scrooges. That politicians and bureaucrats do not live with the same degree of ignominy is an unfortunate circumstance-on both sides of the Atlantic.
John Blundell is director of public affairs at the Institute for Humane Studies in Menlo Park, California.