‘The single biggest threat to our security is our debt level.’
Is Britain’s own debt now as dangerous as any foreign rival? This week on The Capitalist, I spoke to Daniel Hannan, the writer and former MEP who has just taken over as Director General of the Institute of Economic Affairs – Britain’s original free-market think tank – at a moment when state spending sits at 46% of GDP.
He made the case that in an increasingly dangerous world, Britain’s economic weakness is a vulnerability we can no longer afford. With debt at £3 trillion and history suggesting our power abroad has always rested as much on deeper, cheaper capital markets as fighting spirit, he argues our stretched public finances risk emboldening our geopolitical foes.
We also discussed how lockdown broke the public’s understanding of what ‘the economy’ even means, why the electorate’s demand for spending deserves as much blame as any politician and how he plans to bring the free-market case to a new generation.
Below, you’ll find some short excerpts from our conversation.
Marc Sidwell
Editor, CapX
Why the economy is so misunderstood:
‘I think I was the first newspaper columnist to come out against the lockdowns in print, and I have never been so unpopular. And this is not online comments – this is neighbours of mine, people I knew at school, real flesh-and-blood people: “Why are you trying to kill my granny?” The phrase people kept using is, “you’re putting the economy before lives”, which made me realise that people do not mean what I mean by the economy. They’re not using that word to mean the system of voluntary transactions through which we pursue happiness and fulfilment. They understand it as some disembodied, numinous entity that churns out ingots of gold for Tory donors, or something, and is unrelated to them. Of course, the idea of “economy before lives” is as absurd as the idea of “people before profits” – how can you have profits without people? That’s when I realised just how bad the general level of understanding of economics is.’
Debt is our biggest security risk:
‘We’ve generally been quite good at wars – and one of the reasons we’re resented around the world is because we tend to be quite successful in them. But why? Was it just the fighting spirit of our men, impressive as that is? I don’t think it can have been only that. We were generally able to defeat countries with bigger populations and greater resources than ours because we had a technological edge, and because we were better at mobilising capital. If you take the 300 years up until the end of the Cold War – from 1689, when we entered the Nine Years’ War, right through the wars we fought against France in the 19th century, the imperial expansion, then the First and Second World Wars and the Cold War – we were able to defeat countries that on paper had every advantage: France in the 18th century, China in the 19th century, Germany in the 20th century. That was because we were technologically superior, and because we had deeper, cheaper money markets, which meant we could concentrate fiscal force. That is no longer true. We owe £3 trillion. Our debt is the fourth largest in the world in absolute terms, after the much bigger economies of the US, China and Japan. And our rivals have noticed. When Javier Milei made his emergency broadcast about the Falkland Islands, he was technically talking about Argentina, but I’m sure he knew what he was saying when he said: a country that does not have growth, and that is lumbered by debt, cannot enforce its sovereignty. That was true of the Galtieri dictatorship too. Who is on the better trajectory now economically, us or Argentina? That should be the concern for all these NatCon types who claim to be patriots. The single biggest threat to our security is our debt level.’
How the IEA changed minds:
‘We were in a very similar position when the IEA was launched in 1955. The Second World War had crushed classical liberalism under its tank treads. Six years of full mobilisation had – like Covid, but more – totally changed people’s expectations of state intervention. It was kind of unpatriotic to be an individualist in a mobilised economy. The Liberal Party, which had dominated the early 20th century, was down to 3% in the 1945 and 1950 elections. So what were classical liberals to do? I remember Ralph Harris, shortly before he died, telling me that they had had these agonised conversations: do we withdraw and wait for a more propitious time, like those monks in the west of Ireland copying up the scriptures, waiting for a happier time to come? And Ralph said: “Look, there’s no point. I do not want to spend the rest of my life giving papers to small audiences at the Mont Pelerin Society. We need to be in the business of changing minds, and changing politics, and changing policies and outcomes.” So the IEA began engaging with new Conservative MPs elected in 1950 – people like Geoffrey Howe, Nick Ridley, Enoch Powell. And the big breakthrough was with Keith Joseph, who of course then came and was your godfather – or indeed your father – at the Centre for Policy Studies.’
Reaching a new generation:
‘I’ve come to realise that, by the time people get to university, it’s almost too late. Think back: whom did you know in your first year at university, and how many of them really changed their minds? If we ask the same question about people we did A-levels with – loads. People’s opinions are more plastic when they’re still 16 or 17. I now regret, in my time in politics, having spent too much time on campus and too little time in secondary schools. If you put together all the people we reach through our schools’ outreach programmes, our future leadership programmes, the people we bring into the office, our summer schools in Cambridge, our interns – we’re getting to a little over 3,000 kids. That’s great and transformative for those kids: we’re opening their eyes to things nothing in the school curriculum has prepared them for, and what they see, they don’t unsee. But if we want to change the trajectory of the country, I need to add two zeros to that number. That’s really what I want to do at the IEA.’
Why AI won’t be different:
‘Every technological change has been met by fears about the destruction of jobs. Very few people focus on the gains. This goes right back to the mechanisation of agriculture. If you look at the response at the time – particularly in the Tory party and the Times, which was the old conservative organ in the 18th century – there was this wonderful thing happening: people were getting a lot more yield out of the same amount of land, which released lots of people from backbreaking labour in the fields. But the dominant feeling was that there were going to be no jobs for them – swarms of vagabonds traversing the countryside, “sturdy beggars”, as the phrase went – that it would disrupt the social order and we wouldn’t be able to feed them. What they couldn’t see – the unseen, as Bastiat would say – was that once you no longer had to work six days in the field to feed your family, because food was cheaper, you were released to do something else. So people went and did something no one had dreamed of before: they worked in these newfangled things called manufactories. For the first time ever, people on low incomes could afford changes of clothes, glass in their windows, cutlery. Foreign visitors to Britain were astonished by the quality of life of the poorest people. When we then made the shift from manufacturing to services, exactly the same fear was voiced: “What are they all going to do? Are they all going to be flipping burgers? Are they all going to be cutting each other’s hair? There won’t be enough jobs.” And just as before, not only were there more jobs, but better jobs, easier jobs, better-paid jobs. We were living much better, working shorter hours. The ultimate automation, if you like, is AI. Why should we assume it will be qualitatively different?’
Degrowth is a pose, not a policy:
‘We got a taste of this in the 2008 crash. I remember being in a debate in the European Parliament, and a friend of mine – a very nice man who was a Swedish Green – was fulminating against capitalism: it’s all failed, everyone’s losing their jobs, we always warned you this would happen. We happened to be walking out of the chamber together at the end of the debate, and I said to him: “I thought you’d be happy.” “What do you mean?” Well, you’re always saying GDP is too high, growth is too much of a big deal, we shouldn’t be flying, we shouldn’t be going on holidays, we’re consuming too much – you’ve literally got everything you said you wanted, and you’re still miserable. It is the wrong people who are suffering. What you realise is that anti-growth, degrowth is a pose. It’s not really a policy, and when people get it, they hate it.’
