Samuel Brittan: The spectre of intrusive regulation

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When Friedrich Hayek published his still controversial Road to Serfdom in 1944 his main target was the belief, deriving ultimately from German and Soviet propagandists, that because a centrally-directed economy had seemed to work so well in time of war, it should be continued in peacetime. Hayek believed that this was not only an economic error but a threat to wider personal freedoms. Today, no country, with the possible exception of Cuba, tries to run a centrally-directed war economy.

As the rest of the 20th century rolled on, Hayek and others spied a new danger. This was that public expenditure would take over from state ownership and state direction as the threat to freedom. But beneath the comings and goings of the electoral and business cycles, the upward creep of public expenditure has ground to a halt at little above 40 per cent of Gross Domestic Product in Britain, somewhat less in the US and somewhat more in the eurozone. At around this level taxation meets a resistance point. Although some economic liberals are unhappy with the extent of state provision of public services, there is no longer the inexorable forward march that alarmed even political moderates, such as Roy Jenkins and Denis Healey, in the 1970s.

There is now a third danger. This is the upward creep of regulation. Here is a threat to business enterprise and the realisation of anything like the so-called "Lisbon agenda" for encouraging enterprise in the EU. But it is only one aspect of a much wider collectivist creep that tries to regulate what adults can do in the light of the latest and often conflicting papers coming across the prime minister's desk. On both sides of the Atlantic, professional advice on how to cope with regulators could well be the most rapidly growing industry, as small and medium-sized companies are becoming more and more fearful of getting into bed with these bodies on their own.

Regulation, however well intended, has now reached a point where it threatens to kill the goose that lays the economic golden eggs. At the annual City Debate organised by the Futures and Options Association in 2002, a motion asserting that "regulation keeps reinventing itself to hide the inevitability of its failure" was lost by 60 to 40 per cent of those present. When it was put again this January, without discussion, it was carried by 81 per cent to 19 per cent. The reason I was given was that the superimposition of EU regulations on UK ones was becoming ridiculous.

It is often rightly said that in the US the litigation culture has similar effects to the legislative overload in Europe. Nevertheless, there has been a large liberalising advance in the US on other fronts. For instance, a study by Paul London, a former undersecretary for commerce in the Clinton Administration, details the "massive and bipartisan" resurgence of competition in the US economy, which he thinks was the main reason for its advance in the 1990s*. He gives examples of how competition during the 1990s broke down old and unimaginative oligopolies that dominated industries such as cars and steel, telecommunications, transportation, finance and retailing. A succession of presidents, regulators, and Congresses gave bipartisan political support to the new challengers in every one of these sectors.

An attempt has been made by the free-market Adam Smith Institute to see how Britain can make a similar leap forward - or more accurately, avoid several steps backwards - on the regulatory front**. Those who fear that it will have an anti-EU slant can relax. There is no call to leave the European Union; the constitutional treaty is consigned to an appendix and the euro is hardly touched on at all.

Indeed, the report is indifferent to the relative EU and Whitehall shares in regulation. "What matters is the total amount of red tape." In areas where EU directives are in force, existing UK regulations should be presumed unnecessary and subject to a one-year sunset clause. But the 16,000 pages of the Acquis Communitaire needs radical consolidation; and the EU itself needs a value-for-money watchdog like Britain's National Audit Office to do a cost benefit analysis for all new regulations.

The UK is now awash with so-called statutory consumer interest bodies. Only 2 per cent of consumers, for instance, have heard of Energy Watch. Regulators should rely instead on more competition, and small businesses should have to face only two officials - one for tax and one for all other regulation. The government, in its search for triangulation, substituted better regulation for deregulation bodies. The report suggests going back to the latter; and more is likely to be achieved by a few rules of good conduct and competition than by thousands of pages of detailed prescriptions.

But more telling than any of this nitty gritty is the following quotation: "Every function superadded to those already exercised by the government causes its influence over hopes and fears to be more widely diffused and converts, more and more, the active and ambitious parts of the public into hangers-on of the government, or of some party which aims at becoming the government."

Which Third Way thinker penned these words? It was John Stuart Mill in his 1859 essay On Liberty. What more is there to be said?

* Paul London, The Competition Solution, AEI Press ** Tim Ambler and Keith Boyfield,Road Map to Reform, Adam Smith Institute

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