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The Social Balance - The Mixed Economy.

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The Social Balance The Mixed Economy We have looked at the inherent limitations and defects of the unregulated market mechanism of the extreme laissez-faire capitalist economy. Such an economy had a high potential for achieving freedom and efficiency but at the cost of considerable inequality. Moreover, in the absence of government intervention the freedom includes freedom to starve and the efficiency is only imperfectly realised - for example, no allowance is made for divergencies between social and private cost. At the opposite extreme, the socialist command economy has a potential for reducing inequality, but at the cost of loss of freedom and inefficiency, and, in practice, the potential for quality is not necessarily realised. Thus, the course of wisdom would point to some sort of mixture of the two. There is a sense in which all economies are mixed economies because neither the capitalist laissez-faire economy not the socialist command economy exists in their pure form. But some economies approximate fairly closely to the extremes and it seems most useful to restrict the term 'mixed economy' to those where the private and the public sectors are both substantial and neither is overpowered or undermined by the other. The development of the public sector in the United Kingdom during the nineteenth and twentieth centuries was a move from an economy approximating to the capitalist laissez-faire model to a mixed economy with a large public sector alongside a private sector. To an important extent the public sector expanded in attempts to make good the deficiencies of the unregulated market system. Now we examine the issue of the ideal relationship between the size of the public and the size of the private sectors. Professor J .K. Galbraith1 has coined the term' the social balance' which he defines as 'a satisfactory relationship between the supply of privately- produced goods and services and those of the state'. Thus we are concerned with the question 'Where does the social balance lie?' ...read more.


But the bureaucrat will normally work within a narrow field; he develops an expertise in that field, often generating a sense of dedication, and will naturally tend to equate that dedication with the public interest. Hence the most dedicated bureaucrats describe their objectives as increasing the budget for services (such as defence, education or housing) which they provide. Moreover, even though a bureaucrat may accept that some of the finds he uses might, in principle, be 'better' used elsewhere, he may have no confidence that, if he forgoes them, they will be spent in this better way. At the same time, bureaux are likely to be less concerned with economising than profit-making organisations. If a bureaucrat reduces costs by 5% he may have that much more to spend on other items. If the head of a profit-making organisation, which previously had a 5% difference between receipts and costs, saves 5% on costs, profits rise 100%. Moreover the bureaucrat does not face the economising pressure exercised by competition, but in a tight situation the very survival of the profit-making organisation may depend on such economies. In short, there are powerful reasons for believing that the public sector will tend to expand because the natural inclination of bureaucrats is to increase their budgets, while at the same time they do not face the market pressures making for economy in the use of resources. 6. The proclivities of ministers. The same attitudes to public spending which characterise bureaucrats can be found amongst the political heads of the spending departments and for similar reasons. A minister is highly unlikely to make his political reputation by cutting the expenditure of his department. He will fight hard in Cabinet for his departmental proposals for new expenditure programmes and if he accepts expenditure cuts he will be thought weak. Moreover, like the dedicated bureaucrat, a conscientious minister is immersed in the work of his department and is likely to equate spending on his service with the national interest. ...read more.


Not all people fall neatly into one or other of these categories, but there is nonetheless a fundamental difference of philosophy, and those who incline to individualist values will perceive the social balance in a smaller public sector than those who incline to collectivist values. Summary and Conclusions How large should the public sector be? Where does the social balance lie? Professor Galbraith has argued that the public sector has an inherent tendency to lag because of the influence of advertising and emulation on demand for private goods. On the other hand a variety of influences, including the increasing proportion of public expenditure yielding direct rather than diffuse benefits, the inherent characteristics of bureaucrats and minister, and certain institutional features in the United Kingdom, create a bias in the opposite direction. To specify a percentage of public expenditure to GNP as constituting the social balance, or even as a limit to the mixed economy, is not really satisfactory. Much depends on the nature of the expenditure, the extent of regulation and the efficiency of the public sector. In the final analysis perceptions of the social balance are strongly influenced by personal value judgements. 1 J.K. Galbraith, The Affluent Society, 1968 2 "utility" means "satisfaction" 3 "park" here means a caravan park or campsite 4 the 'executive' is the Civil Service 5 GNP = Total Expenditure of the UK or the total value of national output in a year. 6 Since this time the introduction of cash limits and of monthly returns has improved Treasury control. 7 Rates were a tax on property similar to Council Tax but based on the "rentable value" of a house rather than is market price. 8 The Redcliffe-Maude Report 9 The Layfield Commission 10 Now Lord Jenkins of Hillhead, writing in The Times 11 i.e. one in which different points of view are expressed freely without fear of reprisals. 12 Diseconomies of scale occur where with the increasing size of production, the cost of each item produced rises. The opposite is Economies of Scale. 1 ...read more.

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