This article was originally published in Reinventing the State: Social Liberalism for the 21st Century. We are grateful to Duncan for allowing us to reproduce this article. Visit the Methuen website to purchase the latest edition of this book for the discount price of £10.

The Liberal Democrats exist to build and safeguard a fair, free and open society, in which we seek to balance the fundamental values of liberty, equality and community, and in which no one shall be enslaved by poverty, ignorance or conformity … We reject all prejudice and discrimination based upon race, colour, religion, age, disability, sex or sexual orientation and oppose all forms of entrenched privilege and inequality … We recognise … that the market alone does not distribute wealth or income fairly. We support the widest possible distribution of wealth …

Extracts from the Preamble to the constitution of the Liberal Democrats

Of the three ‘fundamental values’ which the party’s constitution claims we ‘seek to balance’ – liberty, equality and community – equality has traditionally held least appeal for Liberal Democrats. The very title of the 2002 policy paper on Lib Dem philosophy, It’s About Freedom, relegates it explicitly to, at best, second place. As the paper made clear:

We place the principle of freedom above the principle of equality. Equality can be of importance to us in so far as it promotes freedom. We do not believe that it can be pursued as an end in itself, and believe that when equality is pursued as a political goal, it is invariably a failure, and the result is to limit liberty and reduce the potential for diversity.¹

I served on the working group that produced that paper, so I share the responsibility for the statement. I now believe, however, that it drastically understates the importance of the pursuit of equality as the essential underpinning of our ultimate aim of individual freedom, Similarly, equality underpins the type of communities in which individuals thrive best. The pursuit of both these other values will be compromised by a lack of attention to equality. Furthermore, I don’t mean just equality of opportunity, the Liberal get-out for most of the past century. I mean equality of outcome – or to be more accurate, a significant reduction in inequality of outcome.

This chapter will argue the case for promoting (or restoring) equality to the place where the party put it in its founding constitution, as a ‘fundamental value’ balanced against – rather than subordinate to – the other two. My case is based on three main arguments. First, that the extent of income and wealth inequality in modern-day Britain is seriously undermining the fabric of society, and needs urgently to be tackled by government – not just for the sake of those at the bottom of the income and wealth pile, but for all of us.² Second, that a commitment to reduce levels of income and wealth inequality fits naturally into our Liberal philosophy. Third, that it’s smart politics.

Is Britain unequal? Income and wealth inequality

First, we need to examine the extent of income and wealth inequality in modern-day Britain. Is Britain in reality an unequal society? The answer is emphatically yes. After falling in the 1970s, income inequality grew significantly under Thatcher, and has declined only slightly since. By 1979 the percentage of the population living in relative poverty³ had fallen to about 14 per cent, a post-war record. By 1996–97 this had almost doubled, to 25.3 per cent, and by 2006–07 it still stood at 21.6 per cent, representing 12.7 million people.⁴ As the Institute for Fiscal Studies found:

Inequality rose dramatically over the 1980s … The scale of this rise in inequality has been shown elsewhere to be unparalleled both historically and compared with the changes taking place at the same time in most other developed countries … Over the first two terms of the Labour government, the net effect of these changes was to leave income inequality effectively unchanged and at historically high levels.⁵

Wealth distribution remains even more unequal than that of income, partly because of the substantial rise in house prices. Between 1990 and 2001 the proportion of wealth held by the wealthiest 10 per cent of the population increased from 47 per cent to 56 per cent.⁶ A Joseph Rowntree Foundation study published in July 2007 concluded that Britain was becoming an increasingly segregated society in terms of wealth distribution. The last fifteen years have seen an increase in the total number of households living in poverty. At the same time, households in already wealthy localities have tended to become even wealthier, with many rich people now living in areas segregated from the rest of society. This widening gap between rich and poor has led to a fall in the number of ‘average’ households (neither rich nor poor), with those families gradually disappearing from London and the South East. The report concluded that ‘Britain is moving back towards levels of inequality in wealth and poverty last seen more than forty years ago’.⁷

The filthy rich

That income and wealth inequality grew dramatically under the Thatcher governments is no surprise. It was a predictable side-effect of the reductions in the higher levels of income tax, the shift from direct to indirect taxes, cutbacks in government spending on public services, and government- engineered recessions which saw unemployment soar. It was not countered significantly, however, by the recovery in employment and output experienced from the mid 1990s onwards.

Why is this? One might have expected a Labour government to be more concerned about inequality than their Conservative predecessors. In fact Labour’s tax and benefit reforms have helped the poorest groups, though only since 2000–01, after they dropped their rigid adherence to Tory spending plans. Since then, significant increases in means-tested benefits and the use of tax credits have helped to raise the income of most of the poorest 40 per cent by more than the average, although the poorest 10 per cent have not done nearly so well. The complexity of the tax credit system has led to significant administrative problems, and redistribution has also has been counteracted by substantial increases in Council Tax, which affects those on lower incomes more heavily.

The other main reason why inequality has remained stubbornly high is because the highest rate of growth of incomes, in both absolute and proportional terms, has been experienced by those in the top 10 per cent: the rich have got even richer. This is not really surprising; when Peter Mandelson said, in 1998, that New Labour was ‘intensely relaxed about people getting filthy rich’, he really meant it.

Partly this is the outcome of government policy – the way in which the tax system operates, or can be manipulated, to benefit the super-rich. Overall, the poorest fifth of the population pays a higher percentage of their gross income in tax than the richest fifth. The House of Commons Treasury Select Committee’s recent investigation into private equity firms revealed how the tax relief structure on capital gains tax has helped many in that industry pay less than 10 per cent on their investments,⁸ even if they paid tax legitimately. More broadly, chief executives’ pay levels have increased enormously. In 1979, FTSE100 chief execs earned on average about ten times as much as the average worker on the shop floor. By 2002, the ratio had increased from 10 to 54, and by 2006 to 76.⁹ Last year FTSE100 chief execs’ pay rose by 30 per cent on average; the average pay of their staff increased by 2.8 per cent.

Can’t this be justified by improved performance and competitiveness? After all, the British private sector in 2006 has a rather better image than its predecessor in 1979. A University of Manchester study comparing corporate performance from 1983 to 2002, however, showed that the sales of the top 100 quoted companies on the stock exchange rose by an annual 2.7 per cent, as did pre-tax profits, while the pay of their chief executives rose almost ten times faster, by 26.2 per cent.¹⁰ The study concluded that ‘giant-firm CEOs might be just another averagely ineffectual officer class’, who have in effect been ‘value-skimming’, quietly enriching themselves for mediocre performance. This picture was reinforced by a Work Foundation study in 2006 showing that higher pay rates could be justified neither by higher levels of personal risk (the turnover rate for their jobs was lower than the national average; only one was made redundant, and he left with £5m compensation) nor by competition in the global market (most CEOs of British companies are British, and promoted from within their companies).¹¹

Does this growth in the super-rich really matter? I return to this question below, in terms of its indirect impact on social cohesion, but there are direct impacts too. As the Rowntree Foundation study highlighted, the concentration of super-rich households in some urban and suburban areas is pushing house prices way out of the reach of even the betteroff. Shops and restaurants follow the trend, helping to create super-rich ghettos – the real impact of ‘trickle-down’. The super-rich increasingly buy their own media and then use it to promote the political parties that come to them for funds, as ordinary party membership dwindles.

No way out: social mobility

None of this need matter so much if people have a reasonable chance of escaping from poverty, of climbing into the ranks of the rich – or even into those of the average. But on top of the UK’s current pattern of income and wealth inequality, the country suffers from low and declining social mobility.

A 2005 study showed that the chances of children born into low income groups of moving into high-income groups as adults were lower in the UK than in the Nordic countries or Germany, and the chances of upward movement were significantly lower for people born in 1970 than for those born in 1958. There is a far stronger relationship between educational attainment and family income in Britain than in other European or North American countries. Young people with parents with higher professional jobs, for example, are four times more likely to go to university than those with parents in routine manual employment.¹²

The UK performs very poorly in international comparisons of social mobility. A league table of eight developed states found that only the US had lower social mobility than the UK. In contrast, the four Scandinavian countries, along with Canada, are all nearly twice as socially mobile as Britain. Social mobility appears to be related to, or at least strongly correlated with, the degree of income inequality.

And despite the small fall in levels of inequality, social mobility is not improving. A 2006 Rowntree study on persistent poverty suggested that the chance of a poor child growing up to become a poor adult were still growing.¹³ An Institute of Education report in June 2007 showed that by the age of three, children from disadvantaged families were already lagging a full year behind their middle-class contemporaries in social and educational development.¹⁴

The impacts of inequality: health and well-being¹⁵

Clearly, then, Britain is a deeply unequal society in terms of income and wealth distribution. It is also relatively socially immobile: your life chances are determined heavily by your parents’ social class and status. Self-evidently, this is bad news for those at the bottom of the pile.

Its has been recognised for almost thirty years that standards of health and well-being are closely related to income levels. As far back as 1980, the Black Report, Inequalities in Health, concluded that from birth to old age, those at the bottom of the social scale had much poorer health and quality of life than those at the top. Recent studies show that the gap is still widening – the areas with the highest life expectancy a decade ago are the places that have seen the biggest increase in life expectancy since.¹⁶ These disparities in health standards are nothing much to do with the NHS: social and economic factors such as income, wealth, employment, environment, education, housing and transport all affect standards of health more fundamentally, and all favour the better-off.

So inequalities in health are an outcome of inequalities in society. Life expectancy in rich nations correlates precisely with levels of equality – so Greece, with half the GDP per head, has a longer average life expectancy than the US, the richest country in the developed world, but also the most unequal. The people of Harlem live shorter lives than the people of Bangladesh. Average male life expectancy in the Calton area of Glasgow is eight years less than in Iraq, even after more than ten years of sanctions, war and insurgency.¹⁷ A study of 528 cities in the US, UK, Sweden, Canada and Australia showed a strong relationship between death rates and inequality levels within each city. The two most egalitarian countries in the developed world, Japan and Sweden, also have the longest life expectancies.

This is not just about differences between extremes of wealth and poverty; there is a continuous gradient in death rates all the way through society. The higher people’s status, the longer they live. A study of government office-workers in London in the 1970s and ’80s found that death rates from heart disease were four times as high among the most junior office workers as among the most senior administrators working in the same offices; intermediate levels had intermediate death rates. Only a third of these differences could be explained by risk factors such as smoking, exercise and diet. Considering all causes of death, not just heart disease, the most junior workers were three times as likely to die prematurely as the most senior. As Polly Toynbee put it, if one office was found to be killing three times more than another next door, it would be evacuated instantly – but the social environment doesn’t matter as much as environmental pollutants like asbestos.¹⁸

The impacts of inequality: violence, trust and social cohesion

This link between inequality and health standards is relatively familiar. What is much less appreciated is just how strongly levels of inequality are correlated with other social outcomes – which in turn mean that inequality is bad not just for those at the bottom of the pile but for everyone. Unequal societies function badly.

Violence is more common in societies where income differences are larger. About half the variation in homicide rates between different states or provinces in the US and Canada is accounted for by differences in levels of equality. Most criminologists regard this relationship as the most firmly established link between homicide and any environmental factor. Levels of imprisonment in a country can be shown to be related to income inequality and levels of literacy and mathematical ability – which are themselves closely linked to inequality.

This link between violence and inequality is not just exhibited in murder rates; it reaches all the way along the ‘spectrum of hostility’. Both racial hostility and discrimination against women in US states is greater where inequality is higher. One British survey in the 1990s showed that families living on less than £10,000 a year were more than twice as likely to have daily arguments as those living on more than £20,000.

Perhaps most striking of all for Liberal Democrats, the extent to which communities work as communities is also highly correlated with levels of equality. In the US, levels of trust between individuals – the essential underpinning of any functioning community – can be shown to be higher in the more equal states. In the most equal states, only 10 or 15 per cent of the population feel they cannot trust others, while in the most unequal ones the proportion rises to 35 or 40 per cent.

The US Professor Robert Putnam has worked on people’s involvement in community life, using a range of indicators, including the proportion of people belonging to voluntary groups and associations, propensity to vote in local elections, and readership of local newspapers. In Italy, he showed that involvement was highest where inequality was lowest. Although there was a tendency for local government performance to be better where the region in question was richer, a stronger correlation could be demonstrated with his index of ‘civic community’, which was in
turn linked to equality.

Underlying causes: why inequality is harmful

Why is there such a pervasive relationship between inequality and social outcomes? The underlying reason, it is believed, is the stress caused by living at the bottom of the pecking order, on the lowest rung – the continuous stress of low social status, disrespect and exclusion.

Humans are a social species, and the quality of the social relations we experience matters enormously. Feelings of shame and embarrassment are powerful ones, and in extreme cases can lead to violence. Similarly, in Britain today, small premature babies are not, with a few exceptions, caused by bad diet – even poor nutrition, by British standards, will rarely harm a foetus. It is stress in pregnancy that does the real damage, and the poorer the mother, the more likely she is to be stressed. This is hugely important – maternal stress in pregnancy affects the son or daughter throughout their life, from behavioural patterns to standards of health to life expectancy. And these are further affected, of course, by stress levels in the children themselves. An orphanage in post-war Germany found that children on the same diet were found to have grown most under the kindest matron and least under the unkindest matron.

The stress hormone cortisol appears to be responsible. Cortisol is the most important hormone involved in preparing the body for sustained physical activity in meeting a threat. It shifts the body’s functions away from housekeeping activities like digestion, energy storage, fighting infection and growth – a sensible move when fleeing from a predator or an enemy, but of less use in dealing with pervasive shame and disrespect. Long-term elevation of cortisol levels impairs immune system efficiency, raises blood pressure, causes diabetes and arteriosclerosis – and reduces birth weight amongst the children of stressed mothers.

How can stress levels be reduced? Primarily through improving the quality of social relations. We need to build a society which relies less on social status and more on friendship, which tend to vary inversely. Status and friendship have their roots in fundamentally different ways of resolving the problem of competition for scarce resources. Status is based on pecking order, coercion and privileged access to resources, while friendship is based on a more egalitarian basis of social obligations and reciprocity. Lynne Featherstone’s chapter in this book explores this theme in more detail. It is a complicated and difficult area for government to be involved in, but an important one. Here I concentrate on the extent to which the reduction of income and wealth inequality can contribute to this strategy.

Why equality matters to Liberals

So tackling inequality is hugely important for those at the bottom of the income and wealth distribution, those lacking disposable income and assets and, furthermore, trapped by social immobility, where too much of an individual’s future is determined before she is born. It is also important for the rest of us, for those lucky enough to live on a reasonably decent income and to enjoy possession of some level of assets, but who nevertheless exist in the middle of a broken society, riven by distrust, unhappiness and failing communities.

That’s fine in practice; how does it work in theory? Aren’t Liberals more concerned with freedom than with equality? Don’t we fear that too much attention to equality risks creating a society of dull uniformity, where initiative, choice and innovation are frowned upon?

No. The Liberal commitment to equality derives from the Liberal commitment to freedom; it is neither separate from it nor subordinate to it. This belief can be traced right back through the long history of British Liberalism, and can perhaps best be expressed as a commitment to equality of justice.¹⁹

The fundamental belief in freedom leads logically to a corresponding belief in a diverse and tolerant society, where individuals are able to exercise freedom of choice, conscience and thought. Since such a society cannot exist where individuals are treated differently by the law or by government institutions because of their nature, ‘equality before the law’ has been one of the great rallying cries of Liberalism, from the earliest days of the Whigs in the seventeenth century.

The French Revolutionary slogan of ‘liberty, equality, fraternity’ (transposed in the Liberal Democrat constitution into ‘liberty, equality, community’) was not simply a list of three separate words; the three concepts interlinked and reinforced each other. ‘Liberty’ did not mean merely the freedom of choice that consumers experience in modern market democracies – it meant not being subordinate to arbitrary power, whether exercised by monarchy, aristocracy or clergy. The concept of freedom was very closely bound up with the extent of differences in social status and social exclusion, and the belief in equality (and in fraternity) in the levelling of those differences.

This Liberal belief in equality was expressed in the nineteenth century primarily through the removal of barriers – to the right to vote, to the right to practise one’s beliefs free of discrimination, to the right to trade freely across national borders. From the end of the century onwards, however, it became obvious that this was no longer enough. Industrialisation, urbanisation and the drastic changes in the structures of society that resulted had led to the spread of poverty, slums, ignorance and disease. Not only were these all serious impediments to freedom, to the ability of people genuinely to exercise control over their own lives and destinies, but they were also impediments that it was difficult, if not impossible, for the affected individual to remove by themselves. Negative liberty, the removal of constraints on the individual, would not necessarily lead to freedom of choice for all, as not everyone enjoyed access to the same opportunities; freedom of choice was therefore heavily constrained.

Equality and social liberalism for the twentieth century

Thus was born the New Liberalism, which came to be the dominant ideology of the early part of the twentieth century. As Michael Freeden put it, this was ‘the crowning achievement of British liberalism … its subtle and intelligent integration of the requirements of social welfare into a continuing respect for individual liberty, a formula that encapsulates its commitment to both individual and social progress’.²⁰

The great reforming Liberal government elected by a landslide in 1906 took up this agenda of social justice. Asquith, Lloyd George and Churchill laid the foundations of the modern welfare state. Labour exchanges were introduced, old-age pensions were paid by the state for the first time, the national insurance system was created, taxation was raised in aggregate and made more redistributive. This was the realisation of the New Liberal programme – removing the shackles of poverty, unemployment and ill-health so as to allow people to be free to exercise choice and realise opportunity. Thus freedom and equality remained interlinked. As the New Liberal thinker L. T. Hobhouse put it:

The struggle for liberty is also, when pushed through, a struggle for equality. Freedom to choose and follow an occupation, if it is to become fully effective, means equality with others in the opportunities for following such occupation. This is, in fact, one among the various considerations which leads Liberalism to support a national system of free education, and will lead it further yet on the same lines.²¹

Or, as it is more commonly attributed, ‘liberty without equality is a name of noble sound and squalid result’. This belief underpinned the system of redistributive taxation and social services which Labour built on after 1945 and which brought Britain to its lowest level of inequality – until Thatcherite Conservativism came to reverse the achievements of the previous seventy years.

Equality and social liberalism for the twenty-first century

Thatcherism did not, of course, appear out of thin air. The growth in the size of the state throughout the twentieth century, partly consequent on its new welfare role, led to new problems, including the increased power of bureaucracies, and the infringement on civil liberties that may entail, the tendency for elites to capture elements of state power (leading to market distortions such as subsidies), the growth of corporatism, a rising burden of taxation, and so on. The centralised and directive state that Labour built – very different from that which the Liberal Party would have created – helped to create the Thatcherite backlash, and its consequent legacy of inequality.

So, in taking action to reduce inequality, it is important that we do not simply recreate the centralised state. Many chapters in this book stress the need for a more decentralised, responsive and participatory structure and style of government. It is not just the structure and size of the state, however, that is the problem. More fundamentally, the redistribution of resources needed to reduce inequality must, to the greatest extent possible, equalise conditions (or endowments, or birthrights), while respecting choices.

There are two main reasons why inequality may exist. First, because individuals choose different lifestyles. I have worked all my life in the voluntary sector; I have had fulfilling jobs, for the party, for a trade union and for a think-tank, but I have been consistently paid less than my university friends who went into the civil service, or law, or public relations. That was my choice, and I don’t regret it (usually). Given the ability to choose freely, people can and should choose different types of jobs, or different mixes of work and leisure. No system of redistribution should counteract that, or reduce the incentives for effort and enterprise.

What we are concerned with, of course, is the inequality which stems from the unequal distribution of endowments. We have seen already how parents’ income, social class and levels of education affect the lifechances of their children, so markedly that this can be measured even by the age of three. Similarly, people experience different levels of health and ability and access to knowledge, generally through no choice of their own. Liberals have always opposed vigorously discrimination based on gender or race or sexuality or disability; should we not also oppose just as vigorously discrimination based on inherited poverty and ignorance?

The trick, of course, is to create a system that redistributes resources while preserving choice and incentives. This is not easy, either in practice or in theory, though it has occupied the time of many of the liberal thinkers of the later twentieth century.²² John Rawls developed his ‘difference principle’, which stated that inequality could only be justifiable if it proved to be to the greatest benefit of the least advantaged members of society. Perhaps more importantly, Ronald Dworkin’s theory of distributive justice, or equality of resources, claims that how people fare in life should, as far as possible, depend on their ambition, or personality, but not on their endowment, or circumstances. Dworkin defended the postwar structure of progressive taxation, unemployment insurance and universal health provision, while at the same time arguing for the option to buy private health insurance, in order to maximise choice.

A series of further writers, including Bruce Ackerman, Philippe van Parijs and John Roemer, have suggested various means of putting Dworkin’s approach into practice. This includes, most commonly, the idea of allocating some form of basic income or ownership of wealth to every citizen, regardless of their status. Roemer has argued for a programme of ‘compensatory education’, investing more in the education of children from poorer families and communities. What these approaches have in common is their aim of giving everyone a more equal share of society’s resources, and thus a fair start in life. As R. H. Tawney observed, opportunities depend ‘not only upon an open road, but upon an equal start’.²³ This is more than just the traditional Liberal approach of aiming to guarantee equality of opportunity (the ‘open road’); we recognise that whatever people choose to do later in their life, it is socially just to start them from a position where they have as equal as possible a prospect for a good life (the ‘equal start’).

Equality and liberty

It should be obvious, then, why Liberals should support a substantial reduction in inequality. First, because it is an important extension of freedom for those suffering from low levels of income, wealth, education, etc., though no fault of their own – the equality of justice argument. In that sense, It’s About Freedom was right to point out that equality is important because it promotes liberty.

Clearly, though, if income and wealth are to be redistributed, some people will have their freedom restricted, for example by being subject to higher levels of taxation. The classical utilitarian argument in favour of this is that the marginal utility of income decreases as income increases – i.e. an extra £1,000 a year is worth a lot more to someone living on £10,000 a year than it is to someone on £100,000. In addition, however, as I have tried to show above, there are direct benefits to everyone, no matter what their levels of income and wealth, from living in a more equal society. Lower levels of crime and anti-social behaviour, stronger political institutions, and more thriving communities provide a benefit to set against the cost of redistribution. Thus, once again, equality promotes liberty, in that a well-functioning society provides an easier and better environment in which to live.

And a more equal society is probably a more economically efficient one too. Higher levels of inequality tend to lead to lower educational attainments, on average, wasting the talents of those at the bottom of the pile. A focus on the equality agenda will be essential to deal successfully with the pressures of competition from the developing world (particularly China and India) and economic migration – both clearly of benefit to world development and to the migrants themselves, but both also leading to downward pressures on wages for the low-skilled in developed economies, including the UK. Once again, equality promotes liberty by spreading prosperity.

At this point opponents of reducing inequality will generally come up with the argument that the danger of pursuing equality is that in practice it limits liberty, stifling initiative, destroying the incentive to work, and generating uniformity. This may be true, at least in theory, if equality is pursued as an end in itself, regardless of the consequences. But why should we do that? One could just as well criticise the pursuit of freedom as a dangerous slippery slope. No one (no Liberal, at least) quarrels with the need to force people to drive on the left, be educated to a minimum age or pay taxes – yet we can still regard liberty, or freedom, as one of the party’s fundamental principles. We do not pursue it to its extreme conclusion any more than we need pursue equality – or, indeed, community.

The question then becomes, how much equality is enough? It is hardly necessary for Liberals to give a precise answer, any more than they need answer how much freedom is enough, or how much community. I would settle for the levels of equality seen in most of the Scandinavian states, but in the mean time Britain is so far away from that level that it would take a government dedicated to reducing inequality many, many years to reach it – so let us at least make a start. The reality is that the degrees and forms of freedom, equality and community that best suit a country at any particular point in time will vary, and will themselves depend on circumstances and political compromises.

If you want a theoretical answer, though, I would argue that it is not the difference in outcomes that derives from individual preferences that should worry us; rather, it is the inequality in outcomes that arises from the structures of society which should, as far as possible, be eliminated. Different outcomes should be the result of choice, not inheritance.

Liberty and equality are not a zero-sum game; on the contrary, the ability to enjoy the opportunities provided by a democratic society is increased by the redistribution of wealth and power. Equality is not just another desirable objective in the party’s list of three, but the essential precondition for liberty and community. Too much inequality limits freedom and destroys community.

An equality agenda for Liberal Democrats

What does all this mean in practice? In the same way as the party has tried, with some success, to ensure that a commitment to environmental sustainability underpins all our policy proposals, not just those relating directly to DEFRA, a commitment to reducing inequality should similarly underpin our programme. This is a logical outcome of the ‘Meeting the Challenge’ policy review exercise of 2005–06, which concluded that ‘tackling inequality is one of our top two political priorities’.²⁴ I do not have the space to do more than outline a few headings, but here are some thoughts.

To redress the great injustice of inequalities of income and wealth in Britain today requires a commitment to a thoroughly redistributive taxation system. To a significant extent the party now has this; its two recent policy papers on taxation²⁵ aim to make the system more progressive by removing many of the exemptions and tax reliefs enjoyed by the upper income groups, reducing the basic rate of income tax, and replacing Council Tax with local income tax. Nevertheless, this is a complex and not easily communicated package, and there is a strong case, in due course, for increasing the top rate, both to increase the extent of redistribution and as a clearly visible commitment to a fairer society. It’s worth remembering that Britain has lower top tax rates than almost all other comparable countries – in 2004 it was twenty-third (just ahead of Turkey) in the list of thirty OECD countries ranked by top marginal tax rates. Push it up to 50 per cent and it would rise only to eleventh.²⁶

As has been seen, part of the problem of inequality is caused by excessive pay rates and tax loopholes for the super-rich. The party’s approach of closing tax loopholes should help with the latter, but can we do anything about high rates of pay? Legislation in this area is notoriously difficult, but there may be scope for exposure – along the lines of the Treasury Select Committee’s investigation into the private equity industry. I would suggest converting the Low Pay Commission into a Pay Commission, analysing and commenting on the disparities in pay rates within major companies, and their relation (or lack of one) to performance indicators – if not company by company, at least on a sectoral basis. Shareholders could be encouraged to require companies to justify, at their AGMs, increases in top executives’ salaries greater than the rise in the average company wage.

The tax papers did not address the issue of a wealth tax, or even the related one of a property tax. Yet this is a hugely important area; as has been seen above, inequalities in the distribution of wealth are more pervasive than inequalities in the distribution of income, and thanks to the housing market are changing the social fabric of many communities. The introduction of land value taxation for domestic properties, sensibly adjusted for the income of the owners, needs exploring.

Along with the taxation papers, the party’s 2007 policy paper Freedom from Poverty, Opportunity for All: Policies for a Fairer Britain goes a long way towards creating a programme based on social justice in the areas of pensions and benefit, education, employment and housing. The idea of the ‘pupil premium’, increasing the funding available to schools for pupils from the most disadvantaged backgrounds, fulfils John Roemer’s aim of ‘compensatory education’, touched on above. Similar principles need to underpin the party’s approach to health and social services.

Studies of health standards in the workplace show that people are healthier, with lower death rates, where they have more control over their work. Industrial democracy – employee participation and share ownership, and support for cooperative enterprises, creating a more equal society at work – used to occupy a prominent place in Liberal manifestos. They have, however, steadily disappeared from Lib Dem programmes: the 1992 commitment to a right to participate in decision-making had become, by 2001, simply a right to consultation, while by 2005 the topic was entirely absent.²⁷

It’s about equality

Undoubtedly there is much more that needs to be added to this programme – but much of this is already party policy, or has been at various points in the recent past. Perhaps my main conclusion is that the party needs to talk about it all more. As I observed above, Liberal Democrats tend to talk about ‘freedom’ and ‘community’ much more than ‘equality’. The party’s new tax package, although it is more redistributive than the old one, does not look like it very obviously. The party runs the risk of failing to engage with the electorate about why redistribution is so necessary, leaving the field open for our opponents to focus only on perceived negatives around such policies. As Steve Webb has written, ‘a comprehensive expression of liberalism must not simply accommodate fairness as some reluctant and unwelcome travelling companion, but must embrace it as an indispensable partner’.²⁸

Furthermore – and this is the final reason for advocating a greater emphasis on reducing inequality – it should be popular with the kind of people who are likely to vote for us, generally highly educated, socially liberal and progressive, concerned about the quality of life, not just personal consumption. Private polling for the party before the 2005 election suggested that the ‘fairness’ component of the ‘freedom, fairness, trust’ slogan used in the run-up to the election resonated well with the electorate. It made a welcome return in the 2006 policy review document Trust in People: Make Britain Free, Fair and Green, and we should keep it. Because the equality agenda is all about fairness. An unequal society is not a fair one. Too many of its members start off hobbled by inherited disadvantages which are enormously difficult, by themselves, to remove. Almost all of its members are affected by the breakdown in neighbourliness and social cohesion which they did nothing to choose themselves. A stress on fairness would resonate with these people – and, possibly, already does. The coverage given to the Treasury Select Committee investigation into the private equity industry is one symptom; Harriet Harman’s condemnation of a £10,000 handbag is another. No minister today would dare repeat Peter Mandelson’s affection for people ‘getting filthy rich’. Opinion polling regularly shows that a substantial percentage – 73 per cent of people in 2004 – considers the gap between those with high and those with low incomes to be too large.²⁹

Can the other parties adopt this agenda? David Cameron has argued that society is ‘broken’. As we have seen, in many ways it is, but it is almost impossible to see even Cameron arguing for the fundamental redistribution of income and wealth than is needed to help heal it. Labour under Gordon Brown could go further – though it was the government in which he was Chancellor that failed to do more than reduce inequality marginally, and has seen social mobility levels decline. Furthermore, part of the fairness agenda is about democratic and civic equality, building on and supporting the redistribution of income and wealth by a redistribution and decentralisation of political power – not a subject Labour is particularly familiar with.

A hundred years ago the New Liberals faced many of the same challenges of deeply ingrained inequality as we see today. They rose to this challenge, recognising that however much one removed constraints upon individual liberty, there were some things that individuals could not accomplish by themselves – and therefore could not be truly free.

Now we face the same challenge, to accept that there is a limit to what we can do to promote health and well-being, reduce violence and disorder and build functioning communities without tackling the underlying problem of a deeply unequal society, where social relations are dysfunctional and the stress of low social status, disrespect and exclusion is widespread. We need to accept the central role that the assault on inequality plays in all our attempts to promote both liberty and community. They can’t be won without it.

1. Liberal Democrat Policy Paper 50, It’s About Freedom (Liberal Democrats, 2002), p. 8, para 1.10. The paper itself did not have a separate section on equality.
2. This chapter is primarily about income and wealth inequality. I recognise, of course, that other forms of inequality – e.g. those deriving from race or gender – are also serious issues, but I do not deal with them here because I think the party’s position on them is right.
3. Sixty per cent of median income.
4. Mike Brewer, Alissa Goodman, Alistair Muriel and Luke Sibieta, Poverty and Inequality in the UK: 2007 (Institute of Fiscal Studies Briefing Note 73), p. 29. Figures are after taking housing costs into account.
5. Ibid., pp. 19–20.
6. Will Paxton and Mike Dixon, The State of the Nation: An audit of injustice in the UK (IPPR, London, 2004), p. 60.
7. Poverty and Wealth Across Britain 1968 to 2005 (Joseph Rowntree Foundation, July 2007).
8. By the admission of the British Private Equity and Venture Capital Association’s chief executive – he resigned two days later. ‘Private equity boss quits after Commons mauling’, Daily Telegraph 15 June 2007.
9. Larry Elliott, ‘Nice work if you can get it: chief executives quietly enrich themselves for mediocrity’, Guardian 23 January 2006; Polly Toynbee, ‘I was only the hapless decoy duck for David Cameron’, Guardian 28 November 2006.
10. Julie Froud, Sukhdev Johal, Adam Leaver and Karel Williams, Financialisation and Strategy: Narrative and Numbers (Routledge, London, 2006).
11. Nick Isles, The Risk Myth: CEOs and Labour Market Risk (The Work Foundation, London, December 2006).
12. Liberal Democrat Policy Paper 76, Trust in People: Make Britain Free, Fair and Green (Liberal Democrats, 2006), para. 3.1.2.
13. Jo Blanden and Steve Gibbons, The Persistence of Poverty Across Two Generations (Policy Press / Joseph Rowntree Foundation, 2006).
14. Kirstine Hansen and Heather Joshi (eds.), Millennium Cohort Study: Second Survey (Centre for Longitudinal Studies, Institute of Education, University of London, June 2007).
15. Except where noted, all references in this and the next two sections are from Richard Wilkinson, The Impact of Inequality (Routledge, 2005).
16. ‘What’s the prognosis?’, Guardian, 7 September 2005.
17. Audrey Gillan, ‘In Iraq, life expectancy is 67. Minutes from Glasgow city centre, it’s 54’, The Guardian, 21 January 2006.
18. Polly Toynbee, ‘Inequality kills’, Guardian 30 July 2005.
19. See Duncan Brack and Richard Grayson, ‘Equality’, in Duncan Brack and Ed Randall (eds.), Dictionary of Liberal Thought (Politico’s, 2007).
20. Michael Freeden, ‘More than freedom: the ideology of liberalism’, in Julia Margo (ed.), Beyond Liberty: Is the future of liberalism progressive? (IPPR, London, 2007), p. 28.
21. L. T. Hobhouse, Liberalism (Williams & Norgate, London, 1911).
22. For summaries of their thinking, see the relevant entries in Brack and Randall (eds.) Dictionary of Liberal Thought; and Will Kymlicka, Contemporary Political Philosophy (OUP, 2nd ed., 2002), particularly Chapter 2, ‘Liberal Equality’.
23. R. H. Tawney, The Acquisitive Society (G. Bell & Sons, London, 1921).
24. Liberal Democrats, Trust in People: Make Britain Free, Fair and Green, para. 3.2.4.
25. Liberal Democrat Policy Papers 75, Fairer, Simpler, Greener (Liberal Democrats, 2006) and 81, Reducing the Burden: Policies for tax reform (Liberal Democrats, 2007).
26. OECD Tax Database, ‘Taxation of wage income’, table I.4; available at http://www.oecd.org/document/60/0,3343,en_2649_37427_1942460_1_1_1_37427,00.html. Figures include central and local taxation, employee social security contributions and tax credits.
27. See Stuart White, ‘Liberalism’s progressive past: post-war Liberalism and the property question’, in Margo (ed.), Beyond Liberty.
28. Steve Webb, ‘Free to be fair or fair to be free?’, in Margo (ed.), Beyond Liberty, p. 135.
29. Michael Orton and Karen Rowlingson, Public Attitudes to Economic Inequality (Joseph Rowntree Foundation, 2007).

This article was originally published in Reinventing the State: Social Liberalism for the 21st Century. We are grateful to Richard for allowing us to reproduce this article. Visit the Methuen website to purchase the latest edition of this book for the discount price of £10.

The democratic deficit in the NHS

Of all issues in public policy, health care is the one in which the public is consistently most committed to a major role for the state. The basic principle of the National Health Service – a tax-funded state-run system free to all citizens at the point of use – is a hugely popular one. Even the most pro-market politicians are reluctant to challenge it. Of course, the principle of tax funding was undermined as early as 1951 when the Labour government introduced prescription charges for false teeth and spectacles, and charges were then expanded further under the Conservatives in 1952. However, charges make up a tiny percentage of the NHS budget today, and the core of the tax-funded system remains unchallenged in party programmes.

Is that a problem? Some believe that funding through taxation has meant that the level of financing the NHS has been too low compared to other European countries. Michael Portillo made that case in 1998, saying that the necessary money could not be found through taxation: ‘The gap between what we spend on health care today and what we ‘ought’ to spend is large, and no party is going to make it up from taxation.’¹ However, the record of the Labour government since 1997 has suggested that this analysis is wrong. They have put billions more into the NHS; one of Labour’s proudest claims is that ‘Investment into the NHS has doubled since 1997 and is set to treble by 2008 to over £90 billion.’² The funding of health care in the UK now compares favourably with other European health systems, whether publicly or privately funded.

This suggests that it is possible to fund the NHS through general taxation at levels which compare with other countries, and that Liberal Democrats should not be seduced by arguments that more funding means private funding. Moreover, Liberal Democrats should recognise that tax-funding is the surest way to ensure socially just funding. Such funding is socially just on two grounds. First, it is redistributive, in that the wealthiest in society pay the highest share of the costs. Second, and most important, access to health care is not limited (at least in principle) by an individual’s ability to pay charges, whether on a one-off basis or through an insurance premium. For these reasons, this chapter does not propose any alteration to the basic funding regime of the NHS.

In contrast, decision-making within the NHS needs radical change. Despite the increased levels of funding under the Blair government, if only from 1999, there is no sense in which the public believes that all is well with the NHS. In particular, despite the extra money, the cumulative deficit of NHS trusts has risen past £1 billion. Consequently, some hospitals are faced with losing services or even closing altogether. The case has been particularly marked in the author’s own constituency, Hemel Hempstead. In July 2006, Liberal Democrat research found that sixteen hospital trusts, running twenty-seven hospitals in England providing acute services, were under strong pressure due to their deficits. The research identified the West Hertfordshire NHS Trust, which runs St Albans City Hospital, Hemel Hempstead General Hospital and Watford General Hospital, as being under the most pressure. Others at high risk included West Middlesex University Hospital NHS Trust, and Surrey and Sussex Health Care NHS Trust. The list suggests that deficits appear to be greatest in the south-east of England.³ The deficit means that trusts are obliged by the rules to make cuts, albeit after going through public ‘consultation’ exercises. Despite the huge public support for keeping all hospital services, trusts find they cannot do that because they do not have the money. But because they have little real meaningful independence from central government, and no power to raise extra public funds locally, they are unable to have a meaningful debate with local people about how local aspirations can be met. The end result is that after nearly a decade of increases in NHS funding, all that some local people see is the closure of wards. They understandably fear for the future of entire hospitals.

The situation in West Hertfordshire is admittedly an extreme example of the problems faced by today’s NHS. But it flows from a political failure at the heart of the NHS throughout England: the inadequacy of the current decision-making structure for any kind of rational debate about the cost and shape of health-care provision in local communities.

The NHS is enormous. As Patricia Hewitt pointed out in June 2007, ‘If the NHS was a country, it would be the 33rd biggest economy in the world, larger than new European Union transition economies like Romania and Bulgaria … The NHS is four times the size of the Cuban economy and more centralised.’⁴ Within this massive bureaucracy the ability of local people to influence decisions is extremely limited. In the current system, ministers are able to claim that any local closures have followed public consultation and that decisions have been made locally. Yet the unelected bureaucrats who make such decisions pay scant attention to local wishes for two reasons. First, they do not have to: they are unelected and their jobs do not depend on any form of public satisfaction. Second, they are not able to act on most local demands because they work within tightly defined budgets and central rules, which do not allow them any flexibility in the amount of money they spend on local services.

It is argued in this chapter that it is this absence of a democratic authority which can take decisions based on meaningful local debate that is the greatest barrier to satisfying public demands on the NHS. Without such a body, it will always be possible for everyone to blame somebody else without taking responsibility. Ministers can blame local bureaucrats, when those ministers have given the bureaucrats very little independence. Health care bureaucrats can point to rigid central controls, but can also blame the public for making supposedly unrealistic demands, when the bureaucrats have little incentive to engage with the public. The public can blame ‘them’ – usually the government or bureaucrats – despite the fact that the system allows the public to make demand after demand for high levels of local services without ever having to face their real cost. Meanwhile, without local power, demands for higher quality are difficult to balance with fairness, as only the better off can access the ‘more’ or ‘quicker’ health care which is so often what people mean by quality.

In place of this current system, the NHS in England needs radical reform. We need a radically different system which puts elected local people in charge instead of the plethora of unelected bureaucrats currently in power, and the remote national ministers who set targets. Crucially, these elected local people need to have the power to raise funds for the NHS so that any demand made by the public for higher quality can have a real price attached. Only in that way can there be a rational public debate about local health-care provision in which those making the demands also pick up the tax bill.

The danger of not reforming the NHS is that its noble concept will lose public support. In 1970, the economist Albert O. Hirschman wrote a classic study of what happens to organisations faced with difficulties: Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States.⁵ This study has relevance for the NHS today. Hirschman argued that in any organisation which is failing to deliver a satisfactory service, its users have two choices: exit and voice. In the NHS today, exit is an option for the wealthy, but it is not a real choice for the many. Meanwhile, the ability to have a voice is extremely limited. Democratic reform can provide that voice.

Counties and cities, not regions

Although the NHS is notionally UK-wide, and is certainly funded as such, the system in England post-devolution to Northern Ireland, Scotland and Wales is unique to England. So although an English parliament would stop MPs from the devolved parts of the UK voting on England-only matters, it would do nothing to decentralise decisionmaking in the NHS, as the Parliament in Westminster already makes decisions on English health matters. But the problem with the NHS in England is not that Jo Swinson, Alun Michael or Ian Paisley can vote on English-only matters, but that the NHS in England is too vast. The challenge is therefore not simply to remove Scottish, Welsh and Northern Irish MPs from decision-making in England, but to devolve power below the English level that already exists.

As part of a model for a federal UK, the Liberal Democrats have long argued for regional devolution. The regional dimension was a particularly important aspect of the 2002 Liberal Democrat public services policy paper, Quality, Innovation, Choice. This was the report of what was colloquially known as the ‘Huhne Commission’, named after the working group’s chair. The paper proposed that where elected regional authorities existed in England, current unelected Regional Health and Social Care Directorates and Strategic Health Authorities should be scrapped. Instead, regional assemblies would take responsibility for the strategic development of health and social care services. Crucially, these regional bodies would be able to vary taxation (specifically, a proposed earmarked NHS contribution) to supplement funding received from central government. Meanwhile, Primary Care Trusts would be scrapped, with their powers given to whatever tier of government in the area had responsibility for social services. In such a system, regions would have agreed collectively on setting minimum health care standards across England. The role of central government would be limited to public health, regulation, medical research, and medical, nursing and other professional training, while a new Finance Commission for the Nations and Regions would allocate central funds to each region based on need.⁶ There was no alternative proposed for regions without an assembly because implicit in the policy was the belief that in time, regional assemblies would cover all of England, and those which did not initially want such a body would be encouraged to adopt one through the promise of more control over the NHS in their area.

I was closely involved in developing these policies as the party’s Director of Policy at the time, and I still believe that given the assumptions of the time, they were the right policies for us to develop. However, it now turns out that one of our key assumptions was wrong. The context in which we operated was a shared belief, held in both the Labour Party and the Liberal Democrats. We believed that regionalism in England offered the only way in which England could have the same measure of democratic devolution as that enjoyed in other parts of the UK through elected bodies in Belfast, Edinburgh and Cardiff. It was assumed that there would be a rolling process of devolution across England, with the North East being the first to adopt a regional assembly. However, those assumptions were faced with a reality check when the North East decisively rejected such a body in 2004. It had always been known that some ‘regions’ (notably the South West, which has always had strong county identities) were resistant. But from the south of England, the ‘Geordie nation’ looked like exactly the kind of region that could blaze a trail for regional devolution.

With even the North East rejecting a regional assembly, that chapter in progressive plans for devolution is now closed. The Labour Party rapidly shelved further plans, and even the Liberal Democrats downplayed the proposal in the 2005 election. Three lessons came out of the North East case which need to be learned by anyone who wants to see decentralisation in England. First, people are inherently sceptical about additional layers of government or bureaucracy. There is always a fear that such a body could be a gravy train for politicians who had not quite made it to Westminster. Second, there is no appetite for ‘talking shops’ as bodies with minimal powers tend to be called. This was a major problem with the type of regional body proposed by Labour in 2004. However, it is not at all clear that people would have opted for a more powerful body, for the third problem that emerged from the North East is that regions, even in the North East, are not natural communities. For all that there is a ‘Geordie nation’, it is easy to forget that such a label does not apply to the people of Sunderland, Middlesbrough or Durham, and within each region there are often major divisions. Put simply, regions are just too big and too recent a creation for people to feel any emotional affinity to them.

So anybody who wants to decentralise within England has to look for alternative natural communities. These must be ones through which people will consent to organise services and with which people will feel some community of interest. They must also be large enough in which to take strategic decisions. Do they exist already? The simple answer is yes: they are counties and cities. Crucially, although county identities are not as strong as they once were, people already understand them as legitimate political entities because they exist in the form of county councils, and the same can also be said of England’s major cities which have their own authorities.

The task therefore becomes to prove that they are large enough units to take on strategic health care functions, or that in the cases of very small counties, there is a way of pooling responsibilities with neighbours. Part of the evidence lies in another part of the UK. Northern Ireland manages to take strategic decisions for its share of the NHS with a population of around 1.5 million. That is significantly below the populations of the current ten strategic health authorities and more in line with the size of many of the twenty-eight strategic health authorities that existed in England between 2002 and 2006. The NHS in Northern Ireland is also the part of the NHS with integrated decision-making on, and provision of, health and personal social services. Does it work? Mortality rates per 100,000 of the population (standardised for age) are about 2.4 per cent higher than for the United Kingdom as a whole. However, the direction of this figure is downwards, and at a faster rate than for the rest of the UK. Between 1996 and 2001, for example, overall mortality in Northern Ireland fell by nearly 14 per cent, which was faster than for the whole United Kingdom, at 9 per cent.⁷

However, further evidence of such a scale of decision-making can be found from another country: Denmark.

Danish lessons

In the early part of this century there was a vogue for examining public services in other parts of Europe – and indeed outside Europe – in order to see what can be learnt. The think-tank Civitas has carried out extensive research on health care. Conservative spokesmen were dispatched to the continent, prompting wry smiles from those who had grown used to the Conservatives being at best wary of the supposedly pro-state solutions of the French, Germans and, not least, the Scandinavians. Liberal Democrats took part in this exploration too, first on education, and then on health. Within the party, some of this research had an impact on policy. The Dutch model of funding schools, set out in a pamphlet by myself and Nick Clegg, found its way into the party’s policy in 2002.⁸ Meanwhile, the Centre for Reform’s work on comparative systems of health funding offered strong arguments against health insurance schemes at a time when the party was looking at all options and ended up not choosing insurance.⁹

However, the party skirted round the need for radical devolution. That was despite the fact that Denmark, the country with the most radically devolved health system in Europe, was cited as a model of good practice. The 2002 public services paper said, ‘Although Denmark has a population of just 5.3 million, its popular and tax-funded health service is run by its 14 counties and two cities. Denmark spends modestly more than we do as a proportion of national income – about 1.2 per cent – but has the highest satisfaction ratings in Europe.’¹⁰ Having failed to follow this approach through in 2001–02, it is now time that the Liberal Democrats revisited the Danish model as one that could be transplanted to the NHS in England.

The Danish system is now even more appropriate for England than it was in 2002. At that point, as the policy paper said, it was run by fourteen counties and two cities (Copenhagen and Frederiksberg). These bodies were responsible for both GPs and hospitals and they funded them mainly from county taxes, used primarily for health. Below the counties were local authorities (273 of them) which had responsibility for matters such as school health care. At a national level, the government played a hands-off regulatory role, for example on parents’ rights.¹¹ However, even though the Danish public were very satisfied with health care at that point, there was a sense that the system was not as efficient as it could be. Moreover, in a relatively small area, there were difficulties in coordinating between a large number of decentralised authorities.¹² Even the counties were often very small compared to England. The smallest, Bornholm, had a population of 43,245 in 2006. The largest, Aarhus, at 661,370, was smaller than most English counties. Several were smaller than all English counties except Herefordshire, the Isle of Wight and Rutland.

As a result, the Liberal Minister of the Interior and Health, Lars Løkke Rasmussen, pushed a series of proposals through the parliament, the Folketing, in 2005. These measures, a total of fifty acts under a broad ‘Agreement on Structural Reform’, abolished the counties (including the two city authorities) and replaced them with five regions, ranging in population from about 600,000 to 1.6 million, thus making them analogous in size to English counties rather than regions. The 273 municipalities were replaced with 98 on revised boundaries.¹³ The powers of the new levels of government, which came into being on 1 January 2007, are now as follows:

• Municipalities:
  • Preventive treatment, and non-hospital care and rehabilitation,including that at home; and
  • Treatment of alcohol and drug abuse.
• Regions:
  • Hospitals;
  • Psychiatry; and
  • General practitioners, specialists and reimbursement for medication.¹⁴
• State:
  • Planning for specialist treatment; and
  • Follow-up on quality, efficiency and IT usage.

The argument here is this: if Danish counties, which were smaller than English counties, could deliver a health care system, funded from general taxation, that was the most popular in Europe, why cannot English counties do the same? Moreover, why is this model not even more appropriate now that it has been established on a working basis in units that even more closely match the English counties in size? The arguments against are only those about whether the units are to small for strategic thinking, but the Danes have shown that a radically devolved system can work, and work well.

The argument about exactly what a Danish transplant would mean for England in terms of organisation is developed further below. However, one other issue from Denmark needs to be discussed before that: funding. Under the pre-2007 model, most of the money for health care in the counties was raised in the counties. In the new scheme, approximately 80 per cent of each region’s funding comes from a national health contribution, amounting to a rate of around 8 per cent on income tax. That is part of the replacement of county taxes which had been, on average, over 30 per cent, and which were completely scrapped in the 2007 reforms, so it is not an additional tax. The minimum national health contribution per year is 1,000 Danish kroner (about £90) and the capped maximum is 1,500DKK (about £140). That represents only a small amount, but it can provide useful extra funding at a local level, and can be vetoed on a vote of two-thirds of the municipalities. The final 10 per cent of the regional health budget comes from a basic contribution payable through municipalities, but set by the regions, described as an ‘activity-related contribution’. Since the municipalities have a non-hospital care role, the amount they pay through this final contribution is reduced as they make relatively low demands on hospitals, thus rewarding effective preventive treatment care.¹⁵

As with decentralisation, the funding aspect of the Danish model is similarly capable of being transplanted to English counties without being rejected by the host. At its core are concerns for equalisation and redistribution, to ensure that the very different tax bases of the regions and municipalities do not result in disparities in funding. As the Danish government said:

If each municipality were to finance its own expenditure, the service level and tax burden of the municipalities would … vary considerably. The purpose of the equalisation system is to ensure that the same service level involves the same tax percentage regardless of the income of the inhabitants and any demographic factors … [T]he grant and equalisation system means that money is transferred from the rich municipalities to the less affluent ones.¹⁶

However, the system also allows local flexibility in funding should more funds be needed and rewards attention to preventive measures. That makes the Danish funding system compatible not only with the principles of a National Health Service, but also with the Liberal Democrat commitments to localism.

The absence of democracy: the NHS in England today

To determine what could be devolved in England, the starting point has to be an analysis of the situation as it currently is. There are two main levels of the NHS which ministers regularly describe as ‘local’ and are concerned with commissioning services: Primary Care Trusts (PCTs) and Strategic Health Authorities (SHAs). Yet neither are democratic in any meaningful sense, as local councillors have very limited powers of scrutiny. Meanwhile, the Strategic Health Authorities are hardly local, as they operate on a regional basis. There are also other bodies, such as acute trusts, which will be discussed briefly.

The Primary Care Trusts are the key building blocks of the NHS. Created in 2002 following the government’s 2001 Shifting the Balance of Power initiative, they are responsible for 80 per cent of the NHS budget. PCTs can provide services but their main role is to commission services from GPs, hospitals and other parts of the NHS. Their role is officially described as to ‘make sure there are enough services for people within their area and that these services are accessible’.¹⁷ The boundaries of PCTs are often counties, but they can be smaller. For example, in the East of England region, there are fourteen PCTs. There are two for Hertfordshire and five for Essex; four nominally cover whole counties (Norfolk, Suffolk, Beds and Cambridgeshire), but a further three cover parts of these counties: Luton, Peterborough and Great Yarmouth & Waveney. Although these PCTs match local government boundaries in some cases, they do not always do so, and one result is a confusing array of mechanisms for accountability to local people.

The Strategic Health Authorities were created in 2002, to replace existing health authorities. They are the link between the Department of Health and the local NHS, ensuring that national targets are incorporated into local health service plans. They also develop strategic plans for health services across the region and monitor performance. There were originally twenty-eight of them, based on a city or one or more counties, with London divided into five. Most covered an area containing 1.5–2 million people. However, in 2006, they were reduced to ten: London, South East Coast, South West, South Central, East of England, West Midlands, East Midlands, Yorkshire and the Humber, North East, and North West. They range from a population of 2.2 million in the North East to 7.4 million in London, with most in the 4–5 million range (that is, as large as Denmark as a whole).

In addition to PCTs and SHAs there are other bodies which aim to make the administration of the NHS more local. Acute trusts manage hospitals and are sometimes regional or national specialist centres. They employ those who work in hospitals and thus have a crucial role in spending the money that comes from elsewhere in the NHS (for example, from PCTs), while those attached to universities have a role in training professionals. The acute trusts often have boundaries which come close to those of PCTs, but not always; for example, the East of England’s fourteen PCTs are joined by eighteen acute trusts. Some of the acute trusts have become the controversial foundation trusts, of which there are fifty-four across England. Other types of trusts include ambulance trusts (which largely match SHA boundaries), care trusts (covering only thirteen very specific parts of the country), and mental health trusts (MHTs). As regards the latter, their boundaries can match those of other trusts, but not always. To take the East of England as an example again, its fourteen PCTs and eighteen acute trusts are joined by eight MHTs. The result of this is a confusing mish-mash of overlapping boundaries which can bemuse any member of the public who is trying to work out who runs which part of the NHS. But all these bodies have one thing in common: democratic accountability, and the ability of local people to make meaningful choices about levels of service, is extremely limited.

Theoretically, the Secretary of State for Health can intervene in decisions made by trusts, but they have been reluctant to do so, sometimes deploying the argument that local decisions should be made by local people. That is right, yet it is not what happens, because local people have very little power or meaningful voice over decisions. There are plenty of ways for the public to make their views known about the NHS and to scrutinise its work. Not only can they lobby politicians, but they can currently get involved in Patient and Public Involvement (PPI) Forums. These Forums monitor each NHS trust (including SHAs) and monitored bodies are obliged to respond to their reports. However, the government is in the process of abolishing PPI Forums and replacing them with Local Involvement Networks (LINks) which will be organised in such a way as to match social service boundaries.

In addition to this, since 2000, local authorities (both counties and boroughs) have had powers to scrutinise the NHS in their area, and councillors have been vocal in criticising all types of NHS trusts. However, they can only challenge trusts over whether procedures have been correctly followed.

Consequently, the central political problem of this system in the NHS in England is that there can be mass consultation on local health care, but there are rarely the means to implement local people’s wishes on the most controversial issues such as keeping hospital wards open. Those running trusts are able to respond to local demands by saying that they would like to do as the public wishes but simply cannot. They can say that they are unable to act because they do not have the money within existing budgets and do not have the power to raise extra funds. Moreover, because local people are never faced with a real choice – such as having to pay higher taxes for the services they went – they end up feeling profoundly powerless and dissatisfied. The only way to change that is to introduce radical democratisation of the NHS at a local level.

A democratic and local NHS

One option for democratising the NHS in England is simply to elect Primary Care Trusts, replacing them with elected Local Health Boards. The attraction of this option is that it would not involve any reorganisation of the current NHS management, and would recognise the extent to which people see the NHS as separate from other parts of government. With all the change that there has been in the NHS in recent years, such an approach has huge practical attractions and may be necessary as a first step to further reforms. However, in the long term, more radical democratic decentralisation is necessary if we are not only to devolve decision-making in the NHS but to create the kind of devolved government in England that is enjoyed in the rest of the UK. Such radical reforms should be centred upon counties, which are historic units of England, and many of which encourage strong feelings of local identity.

Creating a democratic NHS at a county level will mean revisiting the boundaries of existing trusts. As part of that, the distinction between PCTs and SHAs should end, with their commissioning powers given to elected local people who are in touch with local needs and have the ability to raise extra funds to meet local demand. That will mean centralising some functions which currently take place at a level below that of counties (or a similar level of government), and decentralising those which are dealt with at a regional level. But it will mean democratisation all round, giving real power to elected local people.

The last thing the public wants is another level of government. Indeed, in many places, the number of levels is already being reduced with the introduction of unitary authorities. So instead of creating regions, the powers of SHAs and PCTs should be given to more local levels. The most obvious boundaries, very much in line with the Danish model, are those of the thirty-four counties, six metropolitan counties, or forty unitary authorities across England. London is a special case which is discussed below.

There are two options for the way in which such devolution could be achieved to provide local people with the voice that they lack. The quickest and simplest way might be to give PCT and SHA commissioning powers to existing county-level authorities. The great advantage of this approach is that it could have positive effects on the quality of government beyond the NHS. By giving county councils significant powers over the NHS, counties would become more directly comparable to the devolved bodies in Belfast, Cardiff and Edinburgh. This would help to answer the ‘English question’, which is increasingly a factor in debates on the power of Westminster. If an effect of that was that people who are ambitious to wield power in their area stood for county councils rather than Westminster, the overall quality of decision-making at a county level would be greatly increased.

An alternative option would be for each county-level local authority to choose whether to run the local NHS itself, or to create a Local Health Board with powers to vary local taxes in much the same way as unelected police authorities do. Such a Board would be directly elected by local people at the same time as local elections, on the basis of manifestos put forward by local parties or independents. The advantage of this approach over the more timid measure of simply turning PCTs into Local Health Boards along current boundaries is that county boards would reflect wellunderstood community boundaries and reduce confusion about where decisions are made and by whom. Meanwhile, the advantage of such an approach over submerging NHS functions into wider county-council matters would be that there could be a very clear focus on NHS-related issues at election. All the evidence suggests that this is the primary concern to voters, so why not give them a chance to have a separate debate over how to run the NHS? This would allow clear choices to be made over, for example, additions to the NHS budget in return for maintaining a local hospital ward, rather than confusing health matters with the broad range of issues tackled by local authorities. It would also allow those with specific expertise of the health service, such as retired doctors or nurses, to get involved in the running of the local NHS, having put their case to the electorate. Their expertise could greatly inform manifestos and invigorate local debates on health care.

County-level devolution – whether to councils or Local Health Boards – would be a significant development of Liberal Democrat policy. As regards the powers of PCTs, this approach is already in essence party policy in the proposal to give the commissioning powers of PCTs to local government at the same tier as social services.¹⁸ But the proposal goes much further on SHA powers because it assumes not only that regional assemblies do not exist and are unlikely to, but also that they should not exist, as they are far too remote from local people. Overall, this proposal will mean the devolution of commissioning powers from ten regional SHAs, and the centralisation of power from 151 PCTs. So the wide-ranging but unaccountable decision-making bureaucracies of 161 bodies will be scrapped and their powers given to around eighty existing countylevel councils.

Underpinning these changes in decision-making must be one crucial change on funding. Core funding has to remain at the national level, as it does in Denmark, to maintain fairness across the country and so that poorer areas do not have under-funded health care. Yet local decision-making cannot be effective unless there is local flexibility over funding. So aside from having the power to make those decisions currently made by PCTs and SHAs, local authorities must have the ability to support those decisions with necessary funding. Only by having the ability to raise extra funds can authorities truly respond to local needs because more often than not, local demands for services will have a price attached. Thus, authorities should be empowered to raise funds for the NHS through additions to the NHS Contribution discussed in the next section. That will give them the power to meet public demand, while at the same time showing the public that their expectations have costs.

There should not, however, be wholesale change of all structures in the NHS. Although the commissioning powers need radical reform, there are three reasons why it does not make sense to make such major changes in the provision-side of services, as regards the role of acute and mental health trusts. First, those working in the NHS are already demoralised by government targets and consistent reorganisation. Second, giving powers over provision to politicians rather than clinicians would fly in the face of the strongly held Liberal Democrat belief that professionals should be allowed to get on with their jobs. Third, if one wants to retain the advantages of the purchaser–provider split in the NHS, which can promote value for money, then it is necessary to retain separate acute trusts so that the commissioning arm of the NHS can make real choices between them. There is the danger that acute trusts will continue to make decisions which are unpopular with local people. For example, a trust which runs the same service at more than one different hospital (perhaps in two different towns), may decide that it wishes to centralise a particular service in one hospital. Such decisions are usually driven by financial limits, and so negotiations will have to take place between the acute trust and the locally elected commissioners. If the latter are convinced that there is no case for retaining services at both hospitals, then they will have to defend that at election time. However, if they believe that it is essential for services to remain at both, they will be able to raise money locally to pay for that.

There is one important caveat to the proposed radical democratisation of the NHS in England. We need to recognise that some local authorities may feel that they are not the right size for taking sole responsibility for health care because they feel themselves to be too big or too small. It may be that larger counties wish to split the geographic areas they cover into two or more units. If so, they should be able to do that. But smaller counties may wish to work with others. So they should be given the opportunity to collaborate with other authorities by agreement. Two smaller counties may decide to commission hospital services together, and that may well make sense. In such a situation, they would have the option of making decisions either through joint meetings of the county councils or through a joint health board. But the crucial democratic accountability element should remain, so that at elections, council or health board candidates put a health programme to voters and can be held to account on their NHS-related decisions.

The precise nature of boundaries is a problem that will be faced by Londoners in particular. The current London SHA covers a population of over seven million people. It may well be that Londoners would wish to run health on a city-wide basis, and if so, the Greater London Authority and Assembly already exist. However, to ensure that the potential benefits of devolution and genuine local accountability can be enjoyed across the city, London boroughs should be offered the same powers and choices as counties, or the chance to pool their powers with other boroughs. The result may be London-wide decision-making, or the city may be split into smaller units, but that will be for Londoners to decide.

Maintaining national guarantees

The Liberal Democrats have a clear position on how the national level of the NHS should be reformed and that approach is consistent with the model advocated here, though with no role for regions.¹⁹ The starting point should be a reformed Department for Health. Its current role in defining national NHS targets should end, as they have consistently distorted clinical priorities. Instead, the Department should focus on matters such as ensuring standards of professional training and competence, inspection and audit, and coordinating the agreement of minimum standards for quality of care and patient experience.

Funding for the NHS should come from an earmarked NHS Contribution, based on National Insurance, and distributed using current formulae. When this policy was first developed by the Liberal Democrats in 2002, the amount raised by National Insurance Contributions (NICs) conveniently matched the NHS budget. This meant that the revenue stream from NICs could easily be diverted to the NHS. However, the NHS now consumes more money than is raised by NICs. This is not a problem if five steps are taken. First, all NICs should be diverted to the NHS. Second, the shortfall should be made up by money from general taxation. Third, a rate should be set for an NHS Contribution which will provide enough revenue to maintain the current NHS budget. Fourth, the basic rate of income tax should be reduced by the difference between the NHS Contribution and the old level of NICs. Finally, there should be an exemption from part of the NHS Contribution for those pensioners who pay income tax (since they do not currently pay NICs) so that they do not pay more under the new system. The overall effects of these steps will be that the NHS Contribution will be higher than the NICs rate, but the basic rate of income tax will have been reduced, and pensioners will not have to pay the full NHS Contribution, so that the overall level of taxation remains the same. The amount of money coming into the NHS will remain the same, but the cost of the NHS would be much more transparent, greatly aiding political debate and decision-making.

Conclusion: the need for voice

Within such a national framework, a reformed local NHS can flourish. But it can only do so if the existing bodies are scrapped and given to democratically accountable local people with wide-ranging powers. Those could be existing local authorities on a county or city basis, or they could be new Local Health Boards. There may also be more short-term attractions in simply transforming PCTs into health boards, as already proposed by the Liberal Democrat health spokesman. But without one of these reforms, people will not have a voice over the local NHS and will be continually frustrated about their inability to influence decision-making in the areas of the NHS that most affect them.

Without local power, local people will be continually asking for health care that is not on the menu, and for which they have not been given a price. Without local power, people have no chance to pay for the quality they want, and monitor the quality of local services. Radical devolution has happened in Denmark, and it works. The challenge in England is to sweep away swathes of unaccountable local bureaucracies and give their powers back to the people through elections in which local health care can be thoroughly debated. As regards the NHS, that does not mean reducing the overall size of the state, but relocating it.

1. Michael Portillo, ‘The Bevan Legacy’, Kathleen A Raven Lecture given at the Royal College of Surgeons on 10 June 1998; available at: http://www.pubmedcentral.nih.gov/articlerender.fcgi?artid=1113449.
2. http://www.betterwithlabour.co.uk/nhs/Made_by_Labour#top10.
3. Liberal Democrat press release, ‘Lib Dems highlight English hospital trusts most under pressure’, 25 July 2006; available at: http://www.libdems.org.uk/news/story.html?id=10674&navPage=news.html.
4. Patricia Hewitt, ‘The NHS: The Next Ten Years, Speech at London School of Economics, 14 June 2007; available at http://www.lse.ac.uk/collections/LSEPublicLecturesAndEvents/pdf/20070614_Hewitt.pdf.
5. Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Harvard University Press, 1970).
6. Liberal Democrats, Quality, Innovation, Choice (Liberal Democrats, London, 2002), pp. 50–51.
7. Angela Jordan et al, Health Systems in Transition: the Northern Ireland Report (World Health Organisation, Copenhagen, 2006), pp. 1, 6.
8. Nick Clegg and Richard Grayson, Learning from Europe: Lessons in Education (Centre for European Reform, London, 2002), pp. 19–21; Quality, Innovation, Choice, p. 57.
9. Nicholas Bromley, Universal Access, Individual Choice: International Lessons for the NHS (Centre for Reform, London, 2002).
10. Quality, Innovation, Choice, p. 21.
11. Ministry of Health and the Interior [Denmark], Health Care in Denmark (Ministry of Health and the Interior, Copenhagen, 1997, revised August 2002), pp. 8–10 and 15–17.
12. Ministry of the Interior and Health [Denmark], The Local Government Reform – In Brief (Ministry of the Interior and Health, Copenhagen, 2005), p. 7.
13. The Local Government Reform – In Brief, pp. 53–56.
14. Note that this category is described as ‘health insurance’ in the English translation of the Danish documents. However, this is misleading as the ‘insurance’ is simply funded by taxation, and is not a form of insurance as understood in the UK.
15. The Local Government Reform – In Brief, pp. 36–39.
16. Ibid., pp. 36–37.
17. Details of the scope and roles of trusts are available at: http://www.nhs.uk/England/AuthoritiesTrusts/Default.cmsx.
18. Liberal Democrats, Healthy Communities, Healthy People (Liberal Democrats, London, 2004), p. 25.
19. Ibid., pp. 23–29.

This article was originally published in Reinventing the State: Social Liberalism for the 21st Century. We are grateful to Steve and Jo for allowing us to reproduce this article.

Liberal Democrats are good at coming up with policies. Probably the best policy decision of New Labour – independence for the Bank of England – was actually a policy from the 1992 and 1997 Liberal Democrat manifestos. In many other areas, notably on environmental issues and international affairs, Liberal Democrat policies have set the agenda, only to be picked up in whole or in part by other parties.

But where Liberal Democrats have sometimes failed has been in converting those strong policy ideas into a coherent story about the sort of party that we are and the kind of society that we want to create. In short, we have often got across Liberal Democrat policies, but failed to communicate Liberal Democracy. We have made electoral progress by ruthless targeting of key seats and vigorous grassroots campaigning, but we have failed to promote Liberal Democracy in a way that has won the hearts and minds of large sections of the British public. How, then, do we communicate our philosophy and our principles in a way that will connect with the reality of people’s lives, hopes and fears?

At first sight, a collection of essays such as the present one risks falling into the same trap. Eminent Liberal Democrat thinkers have tackled key policy areas such as the environment, health and education, but at the end of the journey do we have a story to tell and a story to sell? Our contention is that there is a distinctive ‘social liberal’ narrative, illustrated by the contributions in this book, which is both intellectually coherent and politically saleable.

We would identify three key steps in the social liberal argument:

Step 1 – Relying exclusively on unfettered market mechanisms to deliver a liberal and democratic society is doomed to failure. In some cases markets fail to deliver because there is insufficient competition, leaving individual consumers or service-users at the mercy of monopolistic providers. In other cases markets fail to deliver a socially optimal outcome because the market price fails to include the social cost or benefit of an activity – environmental externalities are one example, but the existence of public goods such as rural post offices would be another. Equally importantly, the outcome of a market process reflects the relative power of the participants, and extreme inequalities of income and wealth mean that unfettered markets will tend to produce highly unequal outcomes. There are many areas in society – such as educational or health outcomes – where such inequalities would be totally unacceptable.

Step 2 – Positive state intervention to tackle market failures is not only perfectly compatible with Liberalism, it may be actively necessary for a full understanding of individual freedom. There is nothing illiberal in tempering the power of a monopolist. There is nothing illiberal in ensuring that market prices are adjusted to reflect the social costs of an activity. And it is surely essential to the concept of an individual’s freedom to achieve their full potential that their prospects are not stunted from the start by material disadvantage. To that end, there is nothing illiberal about the state taking an active role in promoting equal life-chances through, for example, high-quality health and education services. In short, in a well-defined set of circumstances, liberals have a duty to intervene where markets fail to deliver.

Step 3 – Liberal interventions in markets are different in kind from socialist interventions. We are constantly wary of the dangers of an overmighty state. Effective state intervention should be as local as possible and as accountable as possible – it should be the ‘state with a human face’. The state, as big bureaucracy, does not know best about the diverse needs of individuals, even if it can be effective at providing the means to meet those diverse needs. The justification for intervention is always in the name of the greater good of enhancing liberty.

In this chapter we set out the basis for these arguments more fully, before considering how best to communicate such a ‘social liberal narrative’. In particular, we emphasise the importance of linking this coherent political philosophy to the day-to-day, real-world concerns of the voting public.

Step 1: The failures of unfettered markets

We have identified three main areas where market solutions are likely to lead to outcomes that would be unacceptable to liberals – where effective competition does not exist; where market prices do not reflect society’s values; and where inequalities in the initial distribution of income and wealth would give some individuals too much power in the market. In this section we consider examples of each.

a) Lack of competition

In many commercial spheres, market-based competition is undoubtedly good news for consumers. In the market for telecommunications, individuals can now choose between a wide range of providers for domestic telephone and data services. There is innovation, competition and the potential for new entry to the market. Few people would now want us to go back to the world where the GPO was the principal provider of domestic phone lines and customers had to wait months to get a phone put in. Liberals of all stripes are comfortable with a competitive market of this sort, and the role of the state in such a market is now minimal.

It is, however, instructive to note that, even in this example, the state still has a role in promoting competition and preventing monopolistic behaviour. For historic reasons, the dominant incumbent provider, BT, has control over the vast majority of telephone exchanges. It has little incentive to allow rival providers to access its exchanges to set up alternative ‘local loop’ networks. The state therefore has had to intervene to ensure that competing providers are given rights of access to BT exchanges, thereby undermining BT’s monopoly on line rentals and giving consumers enhanced choice.

Among contributors to this collection, Tim Farron (Chapter 14) makes a strong case for intervention in the market for wholesale milk supplies, where a small number of supermarket chains are able to exploit their monopoly position to the detriment of small dairy farmers. Dairy farmers are a ‘captive market’ – they cannot store their day’s output until they get a better price, and the scope for setting up rival supply chains is very limited when most of the eventual consumers buy their fresh milk through one of the large supermarkets. Consumer pressure for a fair deal for producers can have some effect (witness Tesco’s new ‘local’ milk scheme, where a premium price is paid to regional suppliers¹), but progress is often painfully slow, and the welfare of smaller players in the market cannot be preserved if the power of the big players is not limited in some way.

While there can be some debate about what it means to talk about a ‘fair’ outcome of a market process, liberals of all kinds must surely be united in the view that a fair outcome requires a fair process. Where a small number of players can dominate a market, whether as buyers or sellers, the outcome is unlikely to be conducive to the common good. We should be strong in our condemnation of the abuse of market power, resistant to the lobbying of special interests and forthright in our defence of the individual consumer or supplier.

b) Failures of the price mechanism

Prices convey information about the economic costs of production and reflect the relative level of supply and demand. But where the true costs of an economic activity are not reflected in the price, the market outcome will not be optimal from a social point of view. In some cases, therefore, the appropriate role of the state in a liberal democracy is to adjust market prices to reflect wider social costs and benefits.

Perhaps the clearest example of where unfettered market outcomes do not lead to the best social outcomes is where an activity has a wider environmental impact. If climate change really is the biggest threat that our world faces today, it is clear that government, the business world and individuals all need to change their behaviour. We are living, to use AlGore’s phrase, in an ‘age of consequences’, in which we can no longer simply take our natural environment and its continual production of resources for granted. As Ed Randall has noted in Chapter 3, a proactive and strong environmental message is an essential component of modernday Liberalism.

In some cases the most efficient way of achieving the desired change in behaviour is to intervene directly in the market by changing market ‘prices’ through taxes or subsidies.

One example of how this has been highly successful in the UK context has been the switch from leaded to unleaded petrol. Back in the 1980s, a price differential was introduced by the Chancellor of the day to encourage consumers to switch over to unleaded petrol. This triggered demand for conversion of cars to run on unleaded petrol, to increased supply on station forecourts and ultimately to manufacturers designing and building cars that ran on unleaded petrol from day one. Within a period of just a few years a near total switch-over had been achieved.

However, in an increasingly globalised world there are obviously limits to how far an individual nation-state can take action on environmental externalities without putting itself at a comparative disadvantage. Liberal Democrats, who are internationalists by nature, were the first to recognise that it is only by coordinated international action and market interventions that real progress can be made in this area. For market mechanisms themselves will penalise countries who unilaterally raise the ‘price’ of pollution. If the UK unilaterally imposes a tax on high-polluting businesses, this will be good for the environment, but not so good for the businesses concerned as they try to compete in the international market. Only by concerted international action can the common good be achieved.

Not only do markets often fail to capture the social costs of an activity, but they also often fail to reflect the wider social benefits of a transaction. The provision of rural post office services is a case in point. The people who run small village post offices often do so on a shoestring, often out of commitment to their community rather than because it is the most profitable thing that they could be doing. Pure market economics – as is increasingly being practised by the present government in the case of post offices – might dictate thousands of post-office closures. But the social impact of such a closure programme could be devastating. Small post offices are often the hub of a local community. They can sometimes provide an invaluable point of social contact, particularly for elderly or disabled people. Yet the value of this ‘social service’ does not appear on the profit-and-loss account. The market therefore would not deliver the socially optimal number of post office outlets. Only state intervention, perhaps in the form of explicit subsidy for such offices, will produce the desired outcome.

Whether we are dealing with social costs or social benefits, both need to be fully reflected in market prices if the market is to deliver socially optimal outcomes, and only the state can ensure that this happens.

c) Inequalities in income and wealth

A market process can be likened to a horse race. In theory, any number of riders can enter the race and each has an equal chance of winning. The reality, however, is that many markets are like handicap races, where some horses are weighed down and others can run free. Time and again, the same horses win.

In some cases, we would not wish to intervene in this outcome. If someone works hard, makes the most of their skills and attains a higher post-tax income, they are going to be able to buy a larger house, a better car, etc. Even in the presence of redistributive taxation (of which more below), we would not seek to reduce everyone to absolute equality at the start of the race. Liberals can cope with the fact that all races have winners and losers.However, social liberals believe that there are some races where, at the very least, everyone should be able to finish the race; and others where it matters that the gap between the finishing time of the winner and the loser is reduced. Examples include basic rights to education and health care. Not everyone will receive identical standards of service, but every citizen should have a right to a decent minimum.

The ultimate handicap in a market is having no or a relatively low income. Someone without the money for food, clothing and shelter is not free in any meaningful sense. Therefore, Liberals (and others) accept the case for redistributive taxation to take from those who will suffer least by being taxed in order to provide for those who will benefit most from being supported.

But simply providing a subsistence income is not sufficient in itself to overcome the handicaps in the race of life. Access to key services such as health, housing and education is another key determinant of quality of life.

One option would be to go further with redistributive taxation to provide all individuals not only with enough money for subsistence but also with the something akin to vouchers with which they could buy other services from the market. However, there are many reasons why the state goes further than simply providing the income to buy services, and is actually involved in their direct provision, or at least collective purchase. One reason why the state provides or purchases services on behalf of the population is that of efficiency. Whilst in principle millions of individuals could strike individual bargains with competing providers of health care or education, it is often far more efficient for the state to act, either as provider or as bulk purchaser of the service. In the case of secondary health care, for example, it is unlikely to be efficient for a community to have competing acute hospitals. It is better for the state to provide or purchase the service and then allow equal access to all.

The second reason for access being regulated by the state rather than being the outcome of a market process is that in a society where all individuals are equally valued we do not want to see undue inequalities in the quality of health care that people receive. For example, even with a highly redistributive tax system providing generous support for those on low incomes, the costs of health care can still be prohibitive to those at the bottom of the pile. We would not want to see someone who, for example, had a chronic condition requiring sustained medication finding themselves unable to obtain treatment because they had run out of money. Access to decent health care is regarded in most liberal societies as something akin to a human right, and this right cannot be guaranteed by a market alone.

A third concern about the market model for the allocation of public services is that too much emphasis on ‘choice’ over ‘entitlement’ can again lead to socially undesirable outcomes. The ‘choice agenda’ so enthusiastically pursued by New Labour has in reality favoured the articulate, well-informed middle classes. Labour has created a market in the NHS, to enable patients to exercise choice over where to go to receive hospital treatment. However, the King’s Fund recently found that the middle classes were likely to choose the best hospitals, while those who were less well-educated tended simply to go to the local hospital.² King’s Fund chief economist John Appleby compared this trend with the education system, where middle-class parents gravitate towards the ‘best’ schools. He warned: ‘If this happens in health care we could see potentially a widening of health and health inequalities between those with formal education qualifications and those without.’³

While Liberals are instinctively in favour of ‘choice’ as part of the exercise of freedom, these examples clearly demonstrate that unfettered markets can simply lead to a beggar-my-neighbour form of choice, akin to the biggest and strongest barging past other people in the queue. If competition and choice genuinely drove up standards for the many and not just the few, we could live with some inequality of outcome. But this is not proving to be the case. Markets make good servants but poor masters.

Step 2: The social-liberal case for state intervention where markets fail

Much of the analysis in the previous section will be familiar to those who have studied the rudiments of micro-economics. Markets can fail where there is insufficient competition or where prices do not reflect the full costs and benefits of an activity. And the outcome in a market is strongly shaped by the starting positions of the participants. Unlike elections, markets do not operate on a one-member-one-vote principle. Those with the most money have the most say and the most influence in the outcome of a market process.

The next question, however, is a political one – does the fact of market failure necessarily imply state intervention, especially for liberals who are instinctively wary of the power of the state?

It is our contention that when market outcomes impinge on the freedom of individuals to maximise their potential, and where effective state interventions are available, then not merely may we intervene, but we must intervene.

Looking at the types of intervention that we have outlined here should also offer some reassurance to the concerned liberal that what we are talking about is strengthening the position of individuals and their communities against vested interests; about adjusting incentives rather than controlling or banning.

Consider, for example, the issue of tackling monopoly power in markets. If a single supermarket chain buys up all the retail outlets in a town – for example in Inverness, where Tesco operates three stores and has sought planning permission for a fourth, giving the town the dubious honour of being the UK’s Tesco Capital⁴ – it is unlikely to be for the wider social good. Planning restrictions may mean that competitors cannot simply set up shop and compete, and individuals may not readily be able to travel to the next large town, so the monopoly operator has a stranglehold on local consumers. It is hard to believe that acting to prevent such practices offends against liberal sensitivities!

Consider next the issue of interfering in markets to ensure that prices more fully reflect costs and benefits. As Chris Huhne has argued in Chapter 12, on climate change, Liberal Democrats do not argue that people should be prevented from flying or driving their cars, but rather that the true environmental costs of their actions should be reflected in the price that they pay when they fly or drive. Using market mechanisms as a servant in this way will ensure that those who have alternatives are more likely to use them, while the remaining flights are used by those who most value them. Interventions of this sort actually help markets to be more efficient in delivering socially desirable outcomes.

More contentious is the idea of a Liberal case for income redistribution. Most Liberals would accept that redistribution is required to ensure that the poorest do not go destitute. But we would argue that more comprehensive state involvement in the provision or purchasing of public services such as health, education and housing is necessary for all people to be able to achieve their full potential.

One of the authors of this chapter has written elsewhere: The sort of freedom that motivates liberals is the freedom to achieve all that you are capable of. Liberals recognise that to do nothing in the battle between the strong and the weak is to side with the strong. Intervention, where it can be shown to be effective, is justified by an enabling state that seeks to empower its citizens and not simply to stand by as a passive spectator and occasional policeman.⁵

Indeed, building on the work of Richard Wilkinson and others, Duncan Brack argues persuasively in this collection (Chapter 2) that inequality of outcome in and of itself can undermine society to the detriment of all. This would seem to imply a greater amount of redistribution than we have sometimes advocated.

Whilst there are obviously pragmatic limits to redistributive taxation (including disincentive effects and the ability of individuals to move to lower tax jurisdictions), and indeed liberal limits to redistribution (the freedom to choose how much to work and to be appropriately rewarded is also one that we value), social liberals would argue that we have been too wary of redistribution as a force for delivering a more liberal society in which all can achieve their full potential.

Step 3: The character of Liberal intervention

Steps 1 and 2 could also be espoused, to a greater or lesser extent, by a socialist. However, unlike socialists, liberals tend to have an inherent distrust of establishments and concentrations of power. Liberals will therefore go further and emphasise that the state must only do what needs to be done, and no more; and that it must perform its tasks in a way that is local and accountable. We consider each characteristic in turn.

a) State intervention must be as local as possible

The arguments that we have advanced in favour of state intervention imply that the form and nature of the intervention will vary from place to place. For example, the extent of competition in a market may be very different in different parts of the country. In some high streets the big supermarkets are all represented and battle it out for customers. In others, one supermarket has a monopoly. The implications for state intervention in each case are quite different.

Similarly, the existence of social costs and benefits that are not included in market prices will vary from place to place. There may well be a case for state subsidy of rural post offices that are the only retail outlet and source of free cash in a community, but much less of a case in a suburban town with many shops and well-served by bank branches. The intervention needs to be tailored to the local situation.

b) State intervention must be as accountable as possible

An inevitable consequence of local variation will be what are pejoratively known as ‘postcode lotteries’. But it is quite wrong to think that all variations in services between different areas are necessarily bad. To the extent that such variations reflect genuine differences in needs and preferences, they are not only acceptable but desirable. The problem is that under the present system too many of these variations are apparently arbitrary and are certainly not the result of any expression of preference by local people. This is why intervention needs to be not only local but accountable.

Often state intervention is given a bad name because of the way in which it is carried out. The public does not like the idea that ‘Whitehall knows best’ – that important decisions affecting local people are taken by quangos and bureaucrats who are un-elected and un-accountable for their actions. This has been clearly seen in the recent NHS reconfigurations where decisions have been taken from afar to reorganise local health services, and to close down wards and even entire hospitals, without meaningful consultation of local people.⁶

‘Active citizenship’ involves re-engaging people in their communities and in the decisions that affect them. This not only addresses the need for local decisions to reflect local desires, but brings people together where they might not previously have been involved in their local communities; a point that is argued powerfully by Mark Pack in Chapter 8.

But people are not interested simply in elections or consultations for their own sake. Turning again to health, there is always a great deal of local support for the local NHS, but turnout in elections to foundation hospitals is minuscule. Liberal Democrat research found that less than 1 per cent of the population served by a Foundation Trust elect the governors who hold the Trust to account, and in most Trusts, membership is made up of only around 3 per cent of the population it serves.⁷ Sham consultations and token elections do not fool people. They want to know what their vote means.

One way in which political decision-making can be made more accountable is by harnessing the power of new technology.

Many of those who are currently disenfranchised or turned off the political process are the young. But these are the very people who are most likely to use the internet, especially for ‘social networking’ on sites such as MySpace and Facebook. Literally millions of young people spend time on these sites keeping in touch with the latest news on their friends as well as registering support for causes.

The political potential of these sites is massive and is only just beginning to be harnessed. Joe Trippi, one of the key architects of Howard Dean’s path-breaking campaign for the Democratic presidential nomination in 2004 writes:

What we’re … in now is the empowerment age. If information is power, then this new technology – which is the first to evenly distribute information – is really distributing power. This power is shifting from institutions that have always been run top down, hoarding information at the top, telling us how to run our lives, to a new paradigm of power that is democratically distributed and shared by all of us.⁸

While we always need to be wary of opening up new forms of exclusion, the potential of social networking to remould our politics is enormous. Instead of the professional politician being in charge, the citizen can initiate, debate and mobilise. In this model, accountability is not about the politician taking decisions and being answerable for them, but it is about the public being involved from the very beginning in shaping the debate and developing and refining solutions. Technology is not an end in itself but can facilitate the building of community networks so that local decisions are far more representative than ever before.

For example, politicians are increasingly tuning in to the potential of the Facebook networking site. At the time of writing, Steve Webb’s online presence has almost 1,500 ‘friends’, of which more than 1,000 are young constituents in their late teens and early twenties – precisely the age group that has disengaged from the political process.⁹ However, through Facebook, they are able to enter into a dialogue with their local MP, raising issues of poor local transport or requesting assistance with claiming benefit entitlements. Most of these young people would not consider writing a letter or picking up the telephone – or even emailing –to get in touch with their local MP. But if politicians can go to the places where their constituents already spend their time, they can connect to them in a new and genuinely interactive manner.

In sum, where state intervention is driven by local needs and preferences, where the process of decision-making has been transparent, consultative and accountable, the outcome is likely to command much greater public acceptance. Indeed this is the only way in which a liberal and democratic administration should conduct itself.

Communicating social liberalism

Many of the strands of social liberalism that have been identified in this chapter and throughout this book are ones which strike a chord with the British public today. For example:

• There is widespread resentment at gross inequalities in income and wealth which appear to bear little relation to effort or talent. Network Rail bosses were recently forced by public disapproval to defer taking the large bonuses to which they were contractually entitled, because they were simultaneously withholding payment from members of staff, amidst widespread public perception that the company had performed poorly.¹⁰
• There is growing public demand for coordinated international action on climate change, recognising that market forces alone are not enough to deal with environmental degradation.
• Whilst many people support the basic principle of a market economy, there is growing awareness of the problems that can be caused when one player becomes too powerful. The growth of local protests against various expansion plans by the supermarket giant Tesco is indicative of this.
• The public increasingly wants control over decisions affecting local public services such as hospital reconfigurations. There is a wave of protest against decisions taken behind closed doors by unelected national or regional bureaucracies,
• Concern about the ‘nanny state’ is increasingly widespread, particularly in reaction to rafts of centralised targets which seek to micromanage the public sphere. The public wants to see common sense and flexibility in the delivery of public services, not a Whitehall-led tick-box mentality.

Against this backdrop there is a golden opportunity for social liberals to set out a message which is both ideologically consistent and in tune with the popular mood.

This social liberal narrative needs to have three main strands:

a) It needs a global dimension

Many of the big issues facing the nation state today – whether climate change, terrorism, economic competitiveness, peacekeeping or managing migration – all have one thing in common: they cannot be solved by individual nation-states acting alone.

On climate change, whilst it is necessary to ‘act local’ and make individual small changes, it is also necessary to ‘think global’. World leaders need to take strategic long-term action if the threat to our environment is to be addressed. For Britain to be seen to be taking action ahead of the rest of the world will not only set an example for other nations to follow, but may offer other first-mover advantages, such as the potential for developing and benefiting from more environmentally friendly technologies.

Similarly, to maintain our economic competitiveness, and having regard to the need to promote well-being and not just wealth, it is necessary to work with other nations. Whilst a fortress-Britain mentality is superficially attractive, it has historically been the most open economies which have prospered the most. Pan-European and global trade deals which ensure fair access to markets and also provide protection for vulnerable developing economies are an essential part of a strategy for sustained prosperity.

Strong states are necessary to harness, control and respond to globalisation. They have a role to play in regulating international markets, ensuring that people are well fitted to compete in the new global markets, and helping areas currently dependent on declining and uncompetitive industries to adjust.

Perhaps most potently, in the case of the US-led military action against Iraq, we have seen what can happen when international institutions are not strong enough or are bypassed. Ill-judged unilateral military advances by individual nation-states are guaranteed to destabilise and inflame an already unstable situation. Recent events have show more pressingly than ever the need for international checks and balances on such action. Despite the siren calls of protectionism and isolationism, there is increasing recognition that effective international institutions and effective international partnerships are the best answer to the nation’s and the world’s problems.

Social liberals, who are instinctively internationalists, understand this.

b) It needs a local dimension

Paradoxically, at the same time as recognising the interconnectedness of the world and its problems, the social liberal narrative must also be about localism.

At a time when people are anxious about the pace of globalisation and technological change, we need to rediscover the local community. We need a message which is about reconnecting that community with the decisions that are taken in its name.

We have seen a long-term trend of decline in political participation, especially in locally elected bodies which are perceived to have very limited power. But this is not because people are less interested in politics itself. Indeed, the two-thirds of people who declare an interest in politics has remained broadly the same proportion for thirty years.¹¹ However, many are disengaged from the political process because they do not see how they can make a difference as individuals. The saying that ‘if voting changed anything they would abolish it’ rings all too true today in Britain’s highly centralised system of government, where so many decisions are made by those who were not elected and cannot be removed. As Chris Huhne points out in Chapter 15, almost 95 per cent of tax revenue in this country goes through central government, remote from local communities, making the UK one of the most fiscally centralised economies in the world.

A true social liberal message that was about empowering individuals to shape their local communities would have a real resonance. We need to think through the consequences of such genuine devolution of power and accountability. Central government would need to ‘let go’ and allow local variability in response to local circumstances. Local authorities and individual communities would have the power to innovate and, on occasion, be free to fail.

As David Howarth notes in Chapter 1, this form of active democracy actually creates communities out of individuals, where ‘people come together, decide what they want to change and then work to bring that change about.’

c) It needs, above all, to be about freedom

Our distinctive guiding star in all that we say and do as social liberals must be to promote the freedom of individuals to make the most of their lives in whatever way they define for themselves.

Our commitment to internationalism must be about harnessing the power of the nation-state to tackle global problems, not about using the power of the strong nations to impose their will on the weak.

Our commitment to localism must be about making public services and decision-making responsive to local needs and local preferences, so that people can be free to maximise their potential wherever they live. But our commitment to freedom must be a big vision that is about more than being free from state intrusion. It must be about the freedom to live life to the full, not simply the freedom to exist. In that vision, liberal use of the state is an essential strategy for advancing freedom.

Conclusion

Take a random sample of people and ask them to define social liberalism and you would no doubt draw a complete blank.

But ask people if they think their local public services are responding to local needs and they will have plenty to say. Ask people if they feel empowered as consumers or as users of public services and they will start to see the problem you are getting at. Tell them that there is an alternative to a ‘Whitehall-knows-best’, top-down way of running the country, and they will want to know more.

The politician who wants power so that they can give it away is a rare breed. But that is at the heart of the social liberal message. Where big problems need international solutions we will gladly work with others. But our instincts are local and decentralised. We will pursue fairness in every community by giving a voice to every citizen – not just the rich and powerful. We will reshape public services to meet the needs of local communities and we will make the decision-makers genuinely answerable to local people.

And our goal in all these things is to enable the individual to make the most of his or her life. This will not happen if the state stands idly by. Nor will it happen if the state steps in to control. But it will happen if the state enables, if the state hands power back and if it tames the power of the market so that the weak can compete on level terms with the strong. This is a bold, radical and distinctive agenda. It is a social liberal agenda. And it is an agenda whose time has come.

1. See http://www.tesco.com/regionalsourcing/localchoicemilk.asp.
2. ‘NHS choice “worsens inequalities”’, BBC News, 31 May 2006; available at http://news..bbc.co.uk/go/pr/fr/-/1/hi/health/5033140.stm.
3. Ibid.
4. ‘Tesco accused of running Highland monopoly’, The Scotsman, 10 January 2006; available at http://thescotsman.scotsman.com/business.cfm?id=40052006.
5. Steve Webb, ‘Free to be fair or fair to be free?’ in J. Margo (ed.), Beyond Liberty: Is the Future of Liberalism Progressive? (IPPR, London, 2007), p. 135.
6. For an example, see the case of Hemel Hempstead General Hospital, cited in Chapter 17, by Richard Grayson.
7. Liberal Democrat research, reported in ‘Blair’s pledge over flagship hospitals is branded a sham’, Daily Telegraph, 15 November 2006; available at http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2006/11/13/nhospital13.xml.
8. J. Trippi, The Revolution will not be Televised (William Morrow, New York, 2004), p. 4.
9. Steve Webb’s Facebook page can be accessed at: http://www.facebook.com/profile.php?id=509185764. 1,483 friends were listed at the time of writing, 10 July 2007.
10. ‘Network Rail bosses back down on bonuses’, Guardian, 25 May 2007; available at http://www.guardian.co.uk/executivepay/story/0,,2087908,00.html.
11. J. Healey, M. Gill and D. McHugh, MPs and Politics in Our Time (Dod’s Parliamentary Communications, London, 2005), p. 40; available at http://www.hansardsociety.org.uk/assets/MPsandpolitics.pdf.

This article was originally published in Reinventing the State: Social Liberalism for the 21st Century. We are grateful to David for allowing us to reproduce this article.

Sometime in the late nineteenth century, liberalism began to divide into two different streams. One stream, which came to be called ‘classical liberalism’, confined liberalism’s ambitions to establishing a robust framework to protect individuals from a rapacious and power-hungry state. It aimed to control the size of the state, especially its military expenditure, and to promote international free trade, both for its own sake and as a way to encourage peace. Its ideal was a state that left us alone to get on with our lives. It valued political freedoms – especially of speech and of belief – but also tended to see property rights in themselves as an important bulwark against oppression.

Some classical liberals shaded into what ought to be called libertarianism rather than liberalism. They came to view property rights as natural rights existing outside the framework of the state, so that the state may not even redefine property rights without committing a wrong.

The other stream, which has come to be called ‘social liberalism’ (but which might better be called ‘social justice liberalism’¹ ), also valued political freedom, also thought that the state should as far as possible leave us alone to make our own decisions on how to live our lives, also opposed militarism and also believed that international free trade was a way to preserve peace, but it believed in addition that liberalism required a commitment to a fair distribution of wealth and power, which in turn led to support for redistributive taxation and public services as ways of fairly distributing wealth and for democracy as a way of fairly distributing power.

Fairness can be seen both as a condition for the legitimacy of the state itself (the characteristic ‘social contract’ view as revived by John Rawls) and as a condition for meaningful freedom. In contrast to the views of libertarians and some classical liberals, rights of property came to be seen by social liberals as instruments of state policy that had to contribute to broader political goals rather than as goals in themselves.

In some countries, the division of liberalism eventually led to the creation of two separate liberal parties. An early example was the separation of the Danish Venstre and Radikale Venstre. Later examples include the Dutch VVD and D66 and the division of the French Radical Party into the Radicaux de Gauche and the Valoisien Parti Radical. But in Britain, and in a different way in the United States, ‘liberalism’ has come simply to mean social liberalism. British and American liberals believe not just in political freedom but also in social justice and in democratisation.

As a consequence classical liberalism does not have its own political home in Britain. Some classical liberals have ended up in the Conservative Party, but that has never been a particularly comfortable home for them because of the ever-present authoritarian and socially illiberal strands in Conservative thinking.

The confusion about ‘economic liberalism’

Occasionally the idea comes up that some British liberals are ‘social liberals’ whereas others – for example some of the authors of The Orange Book² – are ‘economic liberals’, and that there is a fundamental difference between them. This is a confused view, which comes about through not understanding the difference between means and ends. All British liberals are social liberals, even the ones who claim to be more ‘economically’ liberal than others. To take an example often cited by commentators, David Laws, regarded by many as an ‘economic liberal’, is nevertheless an advocate of a very social-liberal view of redistribution. ‘Freedom is curbed by poverty and inherited disadvantage’, he has written, ‘which is why liberals have been concerned about these issues for more than a century’³ . Economic liberalism, for Laws, is about the way in which we pursue social liberalism, not about the aims of social liberalism. He has further explained that his often-expressed view that British liberals should ‘reclaim our economic liberal heritage’⁴ has been ‘misunderstood and misrepresented, as implying a downgraded commitment to the party’s social liberal roots … The argument is that social liberal goals should be pursued with economically liberal means.’⁵

The confusion comes about because ‘economic liberalism’ is an ambiguous term. One possible meaning is that it is identical with ‘classical liberalism’, with the view that liberals need not be concerned about redistribution or with democracy but only with limiting the scope and activity of government. If that were what ‘economic liberalism’ meant, it would indeed sometimes come into conflict with social liberalism. That is not, however, the meaning used by ‘economic liberals’ within British liberalism. Their version of ‘economic liberalism’ is a preference for market mechanisms not in opposition to redistribution but as a method to be used in the detailed design of mechanisms for it. For all social liberals, whenever the use of the market might undermine the central aim of social liberalism – namely a society that protects effective freedom for all and which thus can generate and recognise a legitimate form of government – the market has to give way. The political goals of liberalism are always more important than any particular method of achieving them.

Reasonable social liberals can disagree about the desirability and practicality of specific proposals for delivering social liberal goals. Market mechanisms will always have attractions for liberals, because they decentralise decision-making and encourage innovation – both important liberal enthusiasms – but market mechanisms will never be more than means rather than ends in themselves. The inherent limitations of market mechanisms, even in the absence of barriers that all liberals, including classical liberals, have always recognised, such as monopoly, are now very well-known. Asymmetries of information, transactions costs, and our limited capacity as human beings to calculate and imagine (‘bounded rationality’) all inevitably contribute to market failure. That does not mean, of course, that other mechanisms – state regulation or voluntary action – will do any better, but the possibility that they might should not be excluded. Above all, liberalism, as opposed to libertarianism, sees markets, and the property rights on which they rest, as intimately connected with the state, since markets, other than the most elementary and short term, fail without state guarantees of rights. Thus, for liberals, whether a market exists is a matter of policy choice, not a matter of brute fact.

It is an oddity of British political debate that so much emotional energy is expended on a question that almost certainly has no general or stable answer, namely whether public services should be organised using market or administrative mechanisms – except that no one now disputes that the state should compete for labour in the labour market and not be able to direct people into its jobs (though perhaps even that is not fully accepted by some in the National Health Service, who have recently attempted – with disastrous results – to introduce a directed labour element to the employment of junior doctors in training to become consultants). As a practical matter, some kinds of service at some times are better suited to be delivered through commercial contracts with separate organisations, whereas other kinds of service at other times are better delivered by directly employing the providers of the service. For example, where the aims of a service are in dispute or in transition, and so the criteria for its success or failure are unclear, governments would be well-advised not to attempt to contract the service out but instead to retain the flexibility of direct employment and management. On the other hand, simple services with uncontroversial aims might be better managed through a contract with another organisation. The fact is that British politics – largely because of a party structure that originally organised itself around the ‘sides’ of industry – elevated issues of personnel and resource management into matters of fundamental principle, while paying very little attention to issues that really are fundamental, such as political freedom, the development of democracy and the effects of gross inequalities of wealth and power.

The common core of liberalism

One should not, however, exaggerate the differences between classical and social liberalism. Both begin, and end, with the view that a state that fails to secure political freedom is not legitimate. Both reject the conservative view, for which the main advocate in Britain is the Labour Party of Tony Blair and Gordon Brown, that security is always more important than liberty. That view attributes to the state a wildly exaggerated capacity to provide security – not only because of the all-too-apparent limitations of the competence of state officials to keep us safe but also because, as the arbitrary power of the state increases, the more the state itself becomes a source of insecurity. The citizens of the Soviet Union were not more secure because of the immense arbitrary power of the Soviet state – they were less secure. The politics of fear, as practised in Britain by Labour, is ultimately self-defeating. It will destroy both the very freedoms it is the state’s task to preserve and security itself.

That is not to say that liberalism denies any significance to security. It is just that it values security only in so far as it contributes to freedom. Tony Blair’s view, in contrast, seemed to be that the only right that matters is the right to life. He would have sacrificed any political freedom if he thought that by doing so he would save a single life. One wonders what our forebears who sacrificed their lives for political freedom, from the seventeenth century to the twentieth, would make of the view that political freedom is not worth a single life. One wonders what the Blair doctrine would have implied in 1940, when we could have avoided a great many deaths in exchange for sacrificing the political freedom of the whole of Europe. For Labour, however, political freedoms are only ‘traditional’, as if they were a form of folk dance, and as such are merely romantic indulgences be sacrificed on the altar of the ‘modern’. In contrast, for liberals of all kinds, unless the state guarantees political freedom, it has no moral claim on us at all.

Admittedly, to the extent that liberalism is built upon a social-contract view of politics, it cannot ignore existential threats. The social contract is not a suicide pact. But, as Lord Hoffmann has said, aptly but to the fury of large numbers of conservatives in the Labour Party and beyond, the current threat from terrorism is not existential. We are not faced with 1940. The greater threat is from laws that remove political freedom.⁶

Indeed, if there is an existential threat that creates a need to readjust the basic liberal social contract about what powers we ought to cede to the state, it is not terrorism, but climate change. But even a real existential threat such as climate change does not justify the erosion of fundamental liberties such as freedom from arbitrary arrest.

Nevertheless climate change does pose a challenge for classical liberals who are tempted by libertarianism. If one believes, as libertarians do, that property rights are fundamental and pre-political, one will find climate change a very thorny issue. Libertarians typically deal with environmental problems by saying that they depend on deciding which person, the polluter or the pollutee, has the better property right. But the global and existential nature of climate change makes this analysis very difficult for libertarians to apply. The consequence of saying that the polluter has the better right will be to undermine all property by destroying the physical conditions in which property has any meaning. But, because carbon emissions are so pervasive in our way of life, the consequence of saying that pollutees have the better right is to undermine such a broad range of property rights that one would be close to having to abandon any pretence of giving absolute priority to property rights. The exception would have swallowed the rule. Perhaps this dilemma explains why some libertarians tend towards climate change denial.

Classical liberals who are not libertarians, however, should have no difficulty with the idea that property rights should be designed by the state so that catastrophic effects such as climate change are avoided.

Two forms of social liberalism

Social liberalism moves beyond classical liberalism in two ways – a commitment to redistribution and a belief in democracy. But both are affirmations of liberalism’s attachment to political freedom, not contradictions of it. The fundamental idea is that the over-concentration of power is itself a threat to political freedom. Excesses of wealth and poverty are themselves threats to freedom because they tend to produce self-perpetuating oligarchies who buy up the political system, either directly or through politically influential actors such as the media. On the other side, democracy, with its basic rule of political equality (one person, one vote) tends towards the dispersal of power, which safeguards liberty, especially if it takes the form not just of the passive democracy of occasional voting for representatives but also the active democracy of taking part in public decision-making. Social liberalism thus opposes gross inequalities of wealth and supports the extension and deepening of democratic decision-making.

Stating the basic principle does not, of course, settle how far to take it in particular circumstances. Indeed there is a disagreement within social liberalism about whether the principle that freedom should be safeguarded from the consequences of economic inequality is sufficient in itself or whether it should be supplemented by some further principle of fairness (for example John Rawls proposed two such principles: ‘la carrière ouverte aux talents’ – the principle that state jobs should be held only on the basis of ability; and his ‘difference principle’ – that material inequality should only be tolerated to the extent that it benefits the least advantaged). No social liberal would allow a supplementary fairness principle to undermine their commitment to political freedom, so that for all social liberals there is a clear hierarchy of value between freedom and equality (and one that is the opposite of that held by socialists), but there is disagreement about whether state policy should promote economic equality beyond the point strictly required by the goal of safeguarding political freedom.

What is sometimes interpreted as a difference of approach between ‘social’ and ‘economic’ liberals in Britain is often merely a difference within social liberalism between those who recognise supplementary fairness principles (‘maximalist’ social liberals) and those who recognise only the principle that there should be redistribution to the extent that maintains the conditions for political freedom (‘minimalist’ social liberals).

One point, however, tends greatly to reduce the practical distance between minimalist and maximalist social liberalism. Nearly all social liberals accept that the existence of formal political rights cannot be enough by itself to create a liberal society. Citizens need to be in a position to exercise their rights. That principle, which sounds modest, in reality implies a far-reaching programme of public services that goes beyond the classical liberal list of ‘public goods’ (such as defence). It implies in particular a commitment to the broadest possible provision of education, not for the sake of economic development, as in the socialist and utilitarian traditions, but to ensure that citizens can exercise their democratic rights in practical ways and not fall victim to political fraud and demagoguery. It also implies government guarantees in health care, since citizens who are ill or constantly in fear of illness are hardly in a position to give their time to public affairs.

Democracy – dialogue, community and localism

The commitment of social liberalism to democracy, especially to democratic participation, introduces another potential point of tension between social liberalism and markets. Markets are essentially a way in which people can communicate their desires and their abilities to other people without saying very much. Information flows through markets by the device of the price mechanism alone. The process of bidding prices up and down communicates all that needs to be communicated about preferences and costs. Democracy, however, especially in its participative form – but even in its representative form, when the representatives engage in debate – implies a much richer form of communication. Both markets and democracy use forms of rationality, but the rationality of the market is closed. It is limited to working out the consequences of what we happen to want. Democracy, especially in its deliberative forms, goes further, into open discussion of what we ought to want.

Social liberals are drawn to markets because of their ability to disperse power and to promote innovation, but they are often also repelled by their impersonality. Moreover, markets seem potentially to undermine political freedom by undermining political activity. They do this by providing a means for obtaining what one wants without having to engage in anything but the thinnest of dialogues with one’s fellow human beings. The extensive availability of the option of ‘exit’, to use Hirschman’s venerable but still useful vocabulary,⁷ tends to dissolve the option of ‘voice’.

The dangers of replacing political participation with markets are apparent in British society today. It is connected with the rise of consumer politics, in which one’s vote is seen not as a responsibility to choose what is best for all but as an instrument of self-interest. It is one of the factors behind growing disillusion with politics, which in turn is a major threat to political freedom, as disillusion turns inevitably to cynicism. If politics is seen simply as ‘buying’ products in a political marketplace, it will soon lose all coherence, and hence, in the longer term, it will lose all credibility. Pure manoeuvre replaces attempts to reflect values. That in turn leads to endless disappointment, since, unlike in a real market transaction, if voters choose incoherently, as they are likely to do if they follow only their immediate desires (more services and lower taxes) they can and will blame ‘politicians’ for their own incoherence.

In contrast, political participation in decision-making (and not only in campaigning – single-issue politics can only be entry-level politics, not the full deal) is an education in political responsibility. It gives an insight into understanding the problem of political value and choice. To govern is to choose, but if only a few people understand that fact, and the rest are infantilised into believing that they can have everything they want, democratic government will not endure.

The classical liberal view that all the state should do is guarantee rights and then move out of the way leads to a situation in which politics appears not to be necessary. Social liberals fear that this classical liberal dream is a dangerous delusion, for there never can be a society in which rights are so firmly guaranteed that no political action is necessary to secure them. That is because securing rights can only take place through human institutions, such as the legal system, and human institutions are populated by human beings, who are not necessarily to be trusted. Any attempt to create such a perfectly non-political society (what might be called ‘legal liberalism’) will have the unintended but serious effect of making rights ultimately less secure. Liberalism, to be sure, values the rule of law, but social liberalism also recognises that law should not attempt to replace or abolish politics. Instead, law should be seen as a form of vitrified or frozen politics, a form that is valuable because it deliberately slows down some kinds of decision and because it is more firmly committed than the rest of the political system to ideas of procedural justice; but we also need the means by which other decisions can be taken more quickly, whether in the marketplace or in politics.

The value social liberals give to dialogue and democratic participation also emerges in another theme of British liberalism, that of community. If one were to read only recent liberal political theory, and ignore the practice of liberal politics in Britain over the past forty years, one might conclude that the idea of ‘community’ was the exclusive possession of an anti-liberal group of politicians called ‘communitarians’. It is true that anti-liberal, and indeed illiberal, communitarians exist. But they are not the only politicians interested in community. The liberal idea of community arises from the democratic ideal of people taking and using political power⁸ rather than from any metaphysical notion that people only exist in their relations with other people – a view liberals would reject, even though they value opportunities for rich human interaction. Liberal community politics can be criticised as tending to confuse society and the state, but its deeper meaning is as a form of active democracy, in which people come together, decide what they want to change and then work to bring that change about. The idea is not that politics should reflect the views of existing ‘communities’ – the amorphous groups within which communitarian (and specifically Labour) politicians want to trap people – but that it should create communities. More than that (and this is where the practice of community politics can go wrong), liberal politics should aim to create liberal communities.

All this explains why localism is a long-standing social liberal commitment. Local government combines all the liberal desiderata, not just some of them. It helps to disperse power and to promote experimentation and diversity, but, in addition, unlike markets, it can facilitate political participation. It has a human dimension that markets tend to suppress. Classical liberals sometimes criticise social liberals for claiming to believe in decentralising power but failing to promote further decentralisation from local government to individuals through markets. The social liberal response is that political freedom depends on active participation in politics and that can best happen, both from a practical point of view and from the point of view of avoiding the dangers of excessive concentrations of power, in local government.

Localism lies at the heart of what social liberals mean when they talk of reinventing the state. If the units of decision-making are small enough, more people will believe that their participation can make a difference and hence they will be more likely to participate. But, even more importantly, they have to believe that the unit of government in which they are invited to participate can make decisions that make a difference. The first condition of wider participation in local government is that local government needs to have effective power. Undermining that power, by, for example, purporting to ‘devolve’ power further to individuals in markets, will defeat the whole exercise. This is why both Labour and Conservative versions of localism will ultimately fail.

Classical liberals might object that the implication of localism is that, as long as the state is decentralised, it should be permitted to displace the market entirely. But this is not the implication of localism, at least for social liberals. Social liberalism’s devotion to localism arises principally from its commitment to preserving political freedom through encouraging political participation. The degree to which localised state institutions should displace market mechanisms, or quasi-market mechanisms such as voucher and insurance schemes, depends on the degree to which such mechanisms might undermine political participation, and the degree to which local political control might encourage political participation.

Because social liberalism supports localism for its political effects, for its contribution to liberty rather than to fairness, it ought to be supported by all types of social liberal, both minimalist and maximalist. The difference between them will be that minimalist social liberals will be satisfied if localism succeeds in safeguarding political freedom. Maximalists, however, will want to use local power to further their extended fairness goals. Maximalists will also argue that the dangers of state action for freedom itself will be less acute if that state action is taken at local level, since power will inherently be less concentrated and individuals will retain an option to exit (that is, to move house) that will usually be fairly easy to exercise. But maximalist social liberalism is not socialism. Ultimately it values political freedom above fairness, and it should not ignore the real dangers of the abuse of power at local level.

Getting the economy out of the state – beyond public choice

Classical liberalism enjoyed an intellectual and academic renaissance between thirty and forty years ago largely because of the rise of public choice theory.⁹ The basic premise of public choice theory is that since politicians and public administrators are humans too, their behaviour can be explained in the normal economic way of assuming that they are maximising their own welfare. Political behaviour in a democracy, for example, is explicable through the fact that politicians need to win re-election. Bureaucratic behaviour is explicable in terms of bureaucrats’ desire to maximise their number of subordinates. Both incentive structures lead to obvious inefficiencies. Public choice thus became the study of state or bureaucratic failure, a study that parallels, supplements and, crucially, changes the policy conclusions of economic thinking about market failure. Its central policy message was that market failure does not necessarily imply state intervention because state or bureaucratic failure might be worse.

Public choice theory has important weaknesses. Its view of what politicians want is very thin, because it ignores the role of political values and ideals. It promotes a view of democracy that is entirely passive – as a marketplace for desires in which votes are expressions of existing preferences, not as a forum in which desires are formed and changed. It assumes that political actors have no concept of virtue or public service whatsoever, an assumption that has the potential to feed back into a substantive belief that politicians in reality have no such concepts. It turns the older liberal-republican idea that, although political virtue exists, it is limited in supply and thus needs to be husbanded carefully¹⁰ into a conception of politics that dissolves all virtue and seems to require politics to be suppressed altogether.

Nevertheless public choice theory has a kernel of truth. The theme that political discretion is often dangerous and should be minimised forms part of the intellectual background to policies of all the main British political parties. It crops up not only in the Conservative privatisations of the 1980s but also in the quintessentially Liberal Democrat policy of independence for the Bank of England, a policy subsequently stolen by Labour.

There is, however, a problem. Public choice theorists tended towards libertarianism, and therefore tended to downplay the part played by the state in creating and structuring markets. They thought that if state activity were to be replaced by market activity, politics would be less important and we could all sleep more safely in our beds. This turned out to spectacularly wrong. The privatisations of the 1980s and ’90s were accompanied by the biggest-ever rise in lobbying, especially by business. The consultancy sector in the UK rose by a factor of thirty-one (or eleven-fold in real terms) between 1979 and 1998.¹¹ What happened was that for privatisation to work, the state had to create, through regulation, a series of new organisations and markets, but it also created, in the form of the newly privatised companies themselves and others who might have an interest in them or their activities, a vast number of people who might benefit or lose according to precisely how the government chose to regulate. Furthermore, these organisations, unlike the previous state organisations, had budgets to spend on influencing those decisions.

British politics is now dominated by corporate lobbying. Lobbying lies at the heart of the crisis in party funding, for example, and the cash-for-honours scandal. It also contributes to alienation from politics, and ultimately from democracy itself, because the power of big economic interests to get their way demonstrates to everyone else their powerlessness and encourages a belief that political activity is pointless. Corporatism was not killed off by Thatcherism, as the public-choice theorists hoped. It has merely been reborn in a new form, with, for the most part, only one ‘side’ of industry being represented, but still otherwise intact.

Although we should be wary of the dangers of public choice theory’s libertarian anti-politics, its anti-corporatism remains entirely admirable. Public choice theory’s error lay not in hoping for the end of corporatism but in promoting methods of pursuing that goal that only made things worse. But the anti-corporatist theme itself, and especially the aim of rolling back the corporatist-lobby state, is entirely in line with social liberal instincts.

The role of a social liberal party

The question remains: how broad a church should a social liberal party be? Clearly there is no difficulty in holding within itself social liberals with different ideas about how to pursue social liberal goals, such as ‘economic liberals’. Almost as clearly, the gap between ‘minimal’ and ‘maximal’ social liberals does not lead to insuperable difficulties. The question in practice is about the degree of desirable redistribution or equality of opportunity, not the desirability of those things in the first place. And all social liberals can agree about democratisation and the redistribution of power.

The case of classical liberals, however, is more difficult. Classical liberal adherence to the common core of liberalism, namely the ultimate importance of political freedom, provides a very substantial shared base. But where classical liberalism starts to look like libertarianism, with pre-political theories of property rights and suspicion of all politics including democratic politics, there is more difficulty. Perhaps the issue is ultimately a practical one for classical liberals – do they feel more uncomfortable with fellow liberals who happen to believe in redistribution and democracy or with people who are not liberals in the first place?

There is also, and finally, the question of the relationship between the party and personal liberalism. Liberals in politics are often liberals in their own lives as well. Many liberals hold liberalism as a ‘comprehensive’ doctrine – one that offers guidance for all aspects of life – and not just guidance for politics. ‘Comprehensive’ liberalism means, for example, not just that the state should refuse to condemn other people’s choices when it does no one harm but themselves, but also that we should refuse to do so personally as well. Ultimately, personal liberalism comes down to the idea, derivable from the philosophy of Immanuel Kant, that there is no ‘core’ self that we cannot escape. We should be prepared to abstract away from any allegiance or prejudice and be prepared to start again.¹²

There are difficult questions here. Comprehensive liberalism has political implications, for example about the extent to which we should tolerate illiberal behaviour within other people’s communities. Should we tolerate communities that do not allow people to leave them, for example? Irrevocable membership violates the most basic comprehensive liberal view, that people always have the capacity to change, and that denying that capacity denies their humanity. But should the state intervene to preserve that capacity for people who seem not to believe in it or to want it to be preserved?

If we accept the reality that a social liberal party will always have as its bedrock people who are comprehensive and personal liberals, the question becomes whether such a party should discourage from membership liberals whose liberalism is not personal but only political? That is, what about people who are not liberal in their own moral views but who are only liberal to the extent that they believe that, in public life, we should refrain from invoking arguments that appeal only to those from very specific cultural backgrounds or with very specific religious views (roughly ‘political’ liberals in Rawls’ sense)? Or what about those who would not even go that far along the route of restraining their own commitment to their own moral view but who believe that the only way to create a tolerable state of affairs in a society dominated by competing and incompatible comprehensive views is by a non-aggression pact, or more accurately a no-attempts-at-domination pact (‘modus vivendi liberals’)?¹³

These questions are particularly pressing in a party that has always welcomed religious minorities and dissenters (for example the Nonconformist tradition) but whose political line tends towards secularism.

The best tradition of the party is that it should welcome liberals of all sorts, although it should recognise the tensions that will arise as a result. Liberalism, although as strong a political force in Britain as anywhere in Europe, is not so strong that it can afford to divide its forces. And it is also no longer possible to imagine, as Ralf Dahrendorf once did, that there is no need for a separate liberal party because the other parties could be sufficiently suffused with liberalism to make them safe. The rise of illiberalism, both in the media and in the New Labour government, has been too strong in the past decade to make that a plausible stance.

Social liberalism’s combination of political freedom, social justice and democracy are needed now more than ever.

1. See G. Gaus, ‘On Justifying the Moral Rights of the Moderns’ in E. Paul, F. Miller and J. Paul, Liberalism: Old and New (Cambridge University Press, 2007).
2. P. Marshall and D. Laws, The Orange Book: Reclaiming Liberalism (Profile Books, London, 2004).
3. J. Astle, D. Laws, P. Marshall and A. Murray, Britain After Blair: A Liberal Agenda (Profile Books, London, 2006) p. 144.
4. D. Laws, ‘Size isn’t everything’ in J. Margo, Beyond Liberty: Is the future of liberalism progressive? (IPPR, London, 2007) p. 145.
5. Ibid., pp. 145–46.
6. See Lord Hoffmann in A v Secretary of State for the Home Department [2004] UKHL 56 at 95–97.
7. A. O. Hirschman, Exit, Voice and Loyalty: Responses to Decline in Firms, Organisations, and States (Harvard University Press, 1970).
8. See B. Greaves and G. Lishman, The Theory and Practice of Community Politics (Association of Liberal Councillors Campaign Booklet 12, Hebden Bridge, 1980).
9. For a quick summary see the reissue of G. Tullock, The Vote Motive (Institute of Economic Affairs, London, 2006).
10. See B. Ackerman, We, The People: Foundations (Belknap Harvard University Press, 1991), ch. 7, ‘The Economy of Virtue’.
11. D. Miller ‘The Rise of the PR Industry in Britain, 1979–98’, European Journal of Communication 15 (1), 2000.
12. See A. Ryan, ‘Newer than What? Older than What?’ in Paul, Miller and Paul, Liberalism: Old and New.
13. Ibid.