• The UK has a so-called “mixed” economy
  • The cost of maintaining this continues to rise
  • Will we eventually run out of other people’s money?

Open an introductory Economics textbook and one of the first things you’re likely to come across is a definition of what, exactly, Economics is. These tend to be short, for example, “The science of resource allocation” or “The study of production, exchange and consumption”.

Next you’re likely to come across some discussion of how there are different economic systems, for example Capitalism and Socialism. In the former, resource allocation is generally price-based and production and consumption decisions are generally voluntary. In the latter, allocation tends to be quantity-based (e.g. rationed) and usually involves some form of either soft or hard coercion.

The modern reality is that most economic systems are some combination of the two. This is certainly the case in the UK. There is a large amount of voluntary production and exchange taking place but then there is also a high taxation and regulatory burden. Healthcare, a large part of the economy, is largely state-administered although there are elements of voluntary, price-based exchange around the edges.

This sort of “mixed” economy has long been thought, at least in policy circles and ivory-tower academia, to be some sort of earthly Nirvana: an ideal mix of the best features of Capitalism and Socialism.

What is often overlooked, however, is that, as with economic goods generally, Nirvana appears subject to inflation. It has been getting ever more expensive through the decades. The UK, among nearly all other developed, mixed-economy countries, has accumulated a huge debt burden that is increasingly expensive to service.

Now, if that debt burden had been run up to make the economy fundamentally more productive, then it could, in theory, be easily serviced. But this has not been the case. Productivity growth in the UK has been abysmally low for many years.

Accumulating ever more debt while not becoming more economically productive is a recipe for eventual default and associated economic and social disaster. That may sound bad, but it happens to be the road we are on.

Yes, this grim fate may be a long, long way down that road. Eminent economist John Maynard Keynes once famously said “In the long run we are all dead,” but then he didn’t have any children, so perhaps he was less personally invested in the long term than others.

Some mixed economy advocates who do concern themselves with the long term point to the Nordic countries as examples of near-Nirvana. But with the notable exception of Denmark, those countries have vast natural resources and low population density when compared to the UK.

As for Denmark, it is a large per-capita recipient of EU agricultural funds and occupies an advantageous position between the North and Baltic Seas offering huge logistical and associated commercial advantages.

It should be no surprise that countries well-endowed with such natural advantages can more easily afford to provide government benefits. Indeed, Norway provides generous per-capita benefits to its citizens while also stashing away huge sums in its large sovereign wealth fund for the distant future.

Such long-term thinking is admirable, but how realistic is it for the relatively population-dense and resource-poor UK to try to copy the Norwegian or other Nordic model? It’s not at all realistic, to which the UK’s large and growing debt pile attests.

As former Prime Minister Margaret Thatcher once famously said, “The problem with Socialism is that eventually you run out of other people’s money.” She had a point, in that Socialism requires a huge, never-ending, state-directed siphoning of resources from the productive to the unproductive. As the former thus contracts and the latter grows, bankruptcy and default become inevitable.

That said, the quote is perhaps not entirely accurate. If you work for the government, say, then yes you eventually run out of other people’s money. But if you’re in the private sector, then the money you eventually run out of is, or was, very much your own.

If you’d like to do the best you can with what you are able to save, notwithstanding high taxation, then you need to invest prudently. Here at Southbank Investment Research, we do our best to offer our customers a wide range of practical, actionable advice – including over at The Fleet Street Letter. To find out more, just click here.

Until next time,

John Butler
Investment Director, Fortune & Freedom