Growth will come from the bottom up

Today the Prime Minister announced a New Enterprise Allowance to give grants, loans and mentoring to unemployed people trying to start up new businesses. While the focus on the problems facing potential entrepreneurs is creditable, this particular measure provides further evidence that the coalition’s approach to business so far has missed the point. It is less intervention, not more, that is necessary to encourage growth.

Entrepreneurs and investors have the best information about their particular area of business and have strong incentives to allocate resources efficiently. In contrast, government officials, however well meaning, may lack what Hayek termed ‘the knowledge of the particular circumstances of time and place’ available to genuine market participants. Moreover, they are typically incentivised to expand their budgets, even if this involves wasteful expenditure. It is unsurprising that so many attempts to pick winners have proved disastrous – and on a small scale this is what the government is advocating with this new scheme. 

Numerous times over the last month I have heard the question posed – where are the private sector jobs needed to employ those made redundant from the public sector going to come from? This should be one of the central concerns of the government in 2011. But so far its answer to this question is not looking very different to Peter Mandelson’s industrial activism, with its ‘centres of excellence’, ‘technology hubs’ and ‘green technology grants’. Setting a target of 40,000 new businesses over the next two years is yet another example of this approach. It may be that the expansion of existing small businesses drives growth. Alternatively, it could be through the development of multinationals or by the establishment of lots of new tiny companies. But the precise mix cannot and should not be predicted. Taxpayer support for favoured types of business will only ensure that resources are misallocated to ventures that otherwise would not be viable.

Government ‘enterprise’ schemes are distractions from the major barriers to entrepreneurial activity – namely high taxes and excessive regulation. The focus should be on removing these obstacles to growth rather than introducing new layers of state intervention. In some areas reducing regulation is difficult as a significant proportion is determined at the EU level. Nevertheless, a great deal can be achieved domestically, for example by simplifying the tax code, freeing up planning regulation, minimising health and safety rules, and abolishing or at the very least regionalising the minimum wage.

In the last month I have heard both Nigel Lawson and Allister Heath answer in frustration when asked the question “where will the jobs come from?” that they do not know and that that is the point. In market economies growth comes from the bottom up. Policies based on the idea that government officials can predict, forecast and control entrepreneurial activity are doomed to failure.

I wholeheartedly agree. The idea that government ought to be responsible for managing the economy is at the root of all of the economic problems we face and is one of the most pernicious evils of twentieth century economics. To the list of the things government can do to create jobs would be educational reform (freeing education from the dead hand of state interference) and welfare reform.
Regionalising the minimum wage would definitely be welcome but I would personally rather see it abolished altogether. It certainly frustrated my attempts to enter the job market and exacerbates the horrible situation where one is desperate for work but lacks the necessary experience to convince an employer to take the huge risk associated with employing you (which is in turn aggravated by employment law).

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