A Liberal Approach to the State: A Twenty‑First Century Concept of the State’s Role

Historically, liberals viewed the state with caution and perhaps even indifference. Classical Liberals (like me), argued for a state which is restricted by a codified constitution, separation of powers and respect for the rule of law. Ultimately, the state is there to serve the interest of individuals, not to control them. However, this concept of the state is restricted to a somewhat archaic way of thinking that emerged out of the enlightenment period of the 17^th and 18^th century, most notably from thinkers such as John Locke.

However, over three hundred years later and with the incredible advancement of technology (we are now living through the fourth industrial revolution), it’s no longer quite clear what role the state should play in civil life. Allow me to articulate a concept which builds on the idea of upholding the right of the individual but which also proposes a concept known as the ‘facilitator state’ which allows it to play a critical role in assisting the performance of the free market at its optimum level.

The state in the last century

Over the last hundred or so years, the debate surrounding the state primarily revolved around the demarcation mark between the public vs private sector i.e. what the state should do versus what the private sector should do. Those on the left (social democrats, democratic socialists etc.) argue for a larger state, where the state plays a larger role in the economy, such as nationalising utilities, transport (in particular railways) and housing, to name but a few.

Those on the right (classical liberals, conservatives etc.) argue for a smaller, lightly regulated state that allows the free market to run the majority of the economy: as unleashed by the Thatcher privatisation reforms of the 1980s. The problem with this however, is that it led directly to the 2008 financial crash. Subsequently the impact of an unrestricted free market on the economy has increasingly been questioned.

Furthermore, given this reality, some have argued that we are effectively in an age of “corporate capitalism” (the dominance of hierarchical and bureaucratic corporations). Others have called for a more proactive state and the nationalisation of key sectors of the economy and other government intervention to correct market failures, in order to avert another market crash, which could be even worse than the one of 2008.

The liberal position

As liberals (whether classical or indeed modern), I believe we should be strong proponents of the free-market, but we should acknowledge that free-market excess is a real and present threat which can not only concentrate wealth in the hands of a few, causing wealth inequality. For example, the ‘big-six’ energy suppliers in the UK, supply about ninety two percent of British households with electricity, but can also turn certain goods into commodities in ways that erode their social value. The Tory government’s ‘Free Schools’ policy, for instance, turned education into a vehicle for market profit rather than preserving it as a public good for the benefit of all, at taxpayers’ expense.

I would argue that the debate on whether we should have the state run certain sectors of the economy, versus allowing the free market to do so, fails to take into account the following: the free-market still relies heavily on the state in some respect regardless of whether it runs the national railway service, supplies the local residents with housing or indeed provides electricity to millions up and down the country.

In addition, the free market cannot exist without the state because regulation at some level remains essential. If it wasn’t for regulation, we would still have children chimney sweeps. As such rather than have a sharp dichotomy between state and free market, the state should facilitate the necessary conditions for a fair and free market to flourish in order to assist in the efficient allocation scarce resources, to foster competition and maximise consumer choice.

Allow me to now outline the concept of ‘The Facilitator State’ and what this might mean in terms of allowing it to enable the free market to run at its optimum, without the cronyism or indeed hand-in-glove type arrangements we have seen between big government and big business in recent years.

Furthermore, the facilitator state should not further encroach into people’s civil liberties or indulge in the unnecessary renationalisation of key industries that are able to run profitably while being regulated as was seen in the 1960s and 1970s. Rather it should lay the conditions for which the free market – in particular small and medium sized enterprises, sole-traders and indeed entrepreneurs, but also larger corporations – are able to harness the fruits of the free market, most notably through voluntary exchange.

Limiting monopoly power

A monopoly exists when there is a market structure where a single company or entity is the exclusive supplier of a particular good or service, facing no viable competition. The monopolist has significant power to set prices and control supply, as consumers have no alternatives – this in effect distorts the principles of the free-market.

Furthermore, removing monopolies will enable other smaller firms to compete in the marketplace, and will prevent the concentration of power and capital in the hands of one or indeed a few large corporations, creating an oligopoly.

The state can take steps to prevent monopolistic power and thus allow the free market to run at its optimum by strengthening anti-trust laws, as originally instituted in the USA. A law in the UK similar to the US ‘Sherman Anti-Trust Act’, would be a welcome vehicle to break up large dominant corporations into smaller companies – most notably ‘the big six’ energy firms, as previously cited.

Furthermore, a strengthened Competition and Markets Authority here in the UK, could intervene by investigating and penalising firms that breach competition law and preventing the creation of monopolies.

Deregulation

Despite having previously cited regulation as a necessary part of any given free market, running in tandem with state to prevent abuse e.g. in labour exploitation, there is a case to be made that that UK regulation and indeed red tape is preventing new competitors from entering the free market. Moreover, it is not a question of whether we need regulation or not – the case is clear, for reasons already set out – however, getting rid of unnecessary regulation which prevents the free market from operating at its optimum is essential to allow the market to run its course, without the burden of the state.

One such negative example of red tape, the removal of which would have a substantial impact on the housing market, is the 1947 Town and Country Planning Act. Replacing this with a “rules-based” or zoning system would reduce delays, allow for faster house development and crucially allow for smaller house developers to enter the market, which in turn would tackle the domination of the housing market by larger housing developers, as is currently the case.

Tax Reductions

The final role I believe the state can play in allowing the free market to run at its best is by incentivising risk taking in the form of tax cuts. Tax cuts allow individuals and corporations to reduce their tax burden on investments and thus incentivise them to invest in new projects and start new businesses. Furthermore, tax reductions also stimulate economic growth (this is based on the idea that lowering the cost of capital encourages businesses to expand) as well improving international competitiveness (lowering corporation tax rates can make a country more attractive to foreign direct investment).

An example of a tax cut which would incentivise risk taking and allow for the free market to run as its most favourable, is to cut corporation tax for small and medium sized enterprises from the current rate of 25% to 15%. This would allow smaller companies to enter the market and to compete against larger more dominant firms. Furthermore, helping smaller businesses will not only aide in boosting entrepreneurship (something that is clearly lacking in the UK in comparison to our counterparts in the OECD) but also encourage the growth of smaller enterprises.

I hope I have been able to outline some convincing arguments for rethinking the role of the state in the 21^st century. This is crucial in not only returning to some of the original thinking that was borne out the Enlightenment of the 17^th and 18^th centuries, but also in building on that thinking with regard to the role of the state, by advancing the notion of the facilitator state which enhances rather than impedes the role of the free market to work at its most effective – something that all liberals should be championing!

Kayed Al-Haddad is spokesperson for The Liberal Party for Economics, Fiscal Policy and Monetary Policy.