It's about how wealth is distributed

Tweet

 

One of the old chestnuts trotted out by the PM in his ‘conference’ speech this morning was that it is the private sector which provides the nation’s wealth. It’s one of those ‘truths’ which many believe but which is, in reality, complete nonsense. The problem is that people who argue that are defining ‘wealth’ in a limited way.

If we define ‘wealth’ as the accumulated value owned by individuals, then there is, indeed, no doubt that that ‘wealth’ has been obtained through the profit-making activities of the private sector. But there are two important caveats to that statement. The first is that increasing private profit does not in itself lead to an increase in the total wealth of a society. In many ways, profit simply redistributes existing wealth from the poorer to the richer. An increase in private wealth, if squirreled away or taken offshore can actually have the effect of reducing the total amount of wealth in a given economy. The second is that one of the biggest customers of the private sector is the public sector itself; without public sector spend, the capacity for making ‘profit’ would be greatly reduced.

The alternative definition of ‘wealth’, and the one preferred by economists, is measured by GDP (or more usually these days GVA), which is ultimately simply a measure of how much money is in the economy and how fast it changes hands. It is a measure which is ‘blind’ to the question of whether the economic activity producing the GDP occurs in the private sector or in the public sector; it really doesn’t matter. There are sufficient historical precedents to demonstrate that GDP (and therefore overall wealth) can and does increase, even if all economic activity is carried out by state agencies and nationalised companies, enough in itself to disprove the PM’s point.

Whether the two alternatives increase wealth with equal efficiency in the use of resources is a rather different question. Whilst there is no obvious or necessary reason why state-run enterprises should be less efficient or profitable than private enterprises, we know from experience in the UK and elsewhere that, in practice, it has generally been the case that they are. There are a number of reasons for that (not least of them being the inclination of politicians and civil servants to attempt to micromanage), but that is a question for another time. The point is, though, that Johnson did not argue that case at all; he argued in black-and-white terms that the public sector does not create wealth.

Whether from ignorance or ideology, the PM clearly identifies ‘wealth’ with that which is owned by wealthy people. They would be his cronies and donors – the sort of people who have been getting contracts from the public sector without even having to go through any sort of competitive tender since his government came to power. It is an ideological position which leads directly to the transfer of assets and resources from those held in common by the state to those held by a few private individuals. It may or may not be an approach which increases the total amount of wealth in an economy, but it is definitely an approach which makes some people wealthier, by transferring such wealth as does exist from the many to the few. In that regard, he is more of a traditional Conservative than some are giving him credit for.