Why has the Public Sector Grown so Large in Market Societies? The Political Economy of Prudence in the UK, c. 1870-2000
Avner Offer
Abstract
The public sector allocates 40 percent of expenditure in Britain. Why do affluent consumers acquire so much welfare outside the market? If choice is affected by myopic bias, optimisation is costly, consumer choice is fallible, and collective consumption provides a commitment device. For a century after 1870, collective investment gave superior payoffs, and collective consumption grew faster than the economy. Public/private standoffs were resolved against entrepreneurs. By the 1970s, prudential saturation set in, as public investment soared. Rising incomes, new goods, and falling prices shifted consumer preferences towards market provision, and crowded out the public sector. This shift supported investor capture of government, privatisation and de-regulation. Consumer expenditure increased, while prudential investment declined sharply. In consequence, Victorian-style public/private standoffs have emerged again, with prudential crises in pensions, education, health, communications, and transport. These will need to be resolved once again by means of political competition.
Date: March 2002 | Reference number(s): 2002-W44
Series: Oxford Economic and Social History Working Papers
Notes:
Now at All Souls College, Oxford University