Within weeks, Andy Burnham will walk into Number 10 carrying a plan for the biggest rebalancing of power in Britain’s modern history. On the diagnosis, almost everyone now agrees. Britain is one of the most centralised economies in the developed world. But buying into the cure will be harder.
The basic case for devolution is that local people understand local conditions, so decisions taken nearer the ground will be better. There is something in this. Friedrich Hayek built much of his life’s work on the insight that the knowledge a society runs on is never held centrally but exists only as the particular circumstances of time and place, dispersed among the people actually on the spot. Whitehall cannot know what a mayor in Wolverhampton knows.
But knowing more is not the same as being made to act on it.
What makes the private sector work is not that entrepreneurs are wiser than mandarins. It is that competition, profit and loss, and the possibility of failure force a kind of discovery that no amount of cleverness can deliver. Give places the freedom to try different things, to keep the upside when they succeed and bear the cost when they fail, with voters and mobile investment standing in for the market. As Ryan Bourne argues in The Times this week, the postcode lottery is “a feature, not a bug”. A devolution that can’t tolerate a postcode lottery isn’t really devolution at all.
Mann Virdee, our Head of Science and Tech, set this out in our APPG for Entrepreneurship’s latest newsletter:
“There are really two kinds of devolution on offer. One hands money in the hope that local knowledge makes for better decisions. The other lets places keep the proceeds of growth — and bear the consequences of failure. Only the second changes incentives, and it is the harder sell. Letting places keep the proceeds of growth also means letting them diverge, and fears of a postcode lottery are the likeliest barrier.”
Charles Tiebout argued in 1956 that where people can move between jurisdictions, choosing the mix of taxes and services that suits them, local governments face something close to a market. Gabriella Montinola, Yingyi Qian and Barry Weingast went further, describing a system in which competition between regions for people and capital disciplines governments into behaving, and which they credit with a good deal of China’s growth.
Blöchliger’s work for the OECD finds decentralisation — and genuine tax autonomy rather than mere spending freedom — positively associated with GDP per capita, on the order of a few percentage points for a doubling of the local share. It is, however, a small and contested literature, so to some extent we’re relying on first principles here.
Of course, failure has its limits. When a firm fails, its customers walk away at no cost; when a region fails, most of the people living in it cannot simply leave, and would not want to. Exit is sticky. The evidence from Scotland’s divergent income-tax rates is that migration responses have been small.
But just because it’s not a pure market doesn’t mean it’s not better than the status quo. We are already bearing the brunt of failure. The levelling-up years were wasteful and dispiriting. Councils spent around £30,000 a bid to compete for grants from central government, with roughly three-quarters of them rejected, in what the Public Accounts Committee heard described as a “begging bowl culture”.
Local experimentation will uncover more of what works, voters and investors will back success, and over time good governance will be copied. There is no discovery without the divergence. If Number 10 North is to mean anything, it means letting Wolverhampton and Wakefield make different choices and reach different ends.
Supercharging Serendipity
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You Too
On the topic of Advisers, David Herbada has joined us. David is an operator-investor and venture builder working at the intersection of deeptech, health innovation, AI and entrepreneurship.
Over more than 25 years, he has helped translate complex scientific and technological innovation into investable, governable and scalable companies. He is a Venture Partner at Zinc, where he supports science- and technology-led ventures across health, deeptech and medical devices, and a Founding Partner at Fikra Ventures, an AI-native venture studio focused on building technology companies around complex real-world problems.
David supports The Entrepreneurs Network for exactly the same reason we started it. He believes entrepreneurship is one of the most effective mechanisms for turning innovation into long-term economic and societal progress. Maybe you do too?