Simon Wren-Lewis — The imaginary world of small state people

In many ways the bipolar view harks back to a bygone age, where - at least in Europe - there actually was a large constituency on the left that wanted a large state as a matter of principle. In the UK that constituency lost all its influence with Margaret Thatcher and New Labour, and it has also lost its influence in the rest of Europe. However this decline in the influence of big state people on the left was matched by a rise to power on the right of those who want a small state as a matter of principle. George Osborne’s plan for the UK over the next few years is the apotheosis of this neoliberal view.

I think I’m like the majority of people in not having any fixed ideological position about whether the state should be large or small. The state is clearly good at doing some things, and bad at doing others. In between there is a large and diverse set of activities which may or may not be better achieved through state direction or control, and they really need to be looked at item by item on their merits.

The issue is not big government versus small government, but bad government versus good government. Good government is welfare-enhancing. The size of the government is not directly correlated with welfare. Effectiveness and efficiency of government is. Private organization may be more efficient than government as a rule, but there are exceptions to that rule. This is especially the case with imperfect competition.

Effectiveness is however more important than efficiency, since effectiveness is about setting goals and achieving objectives, whereas efficiency relates to the means for achieving goals. Means serve goals. Not all socially significant goals are profitable for private enterprise, and some goals would go unmet unless the public directed government to address them at the risk of some efficiency.

Mainly Macro
The imaginary world of small state people
Simon Wren-Lewis | Professor of Economics, Oxford University