Wednesday 23 January 2019

Paul McNeive: Free markets tend to fail without State intervention

The right moves

Paul McNeive
Paul McNeive

Paul McNeive

My late father, Jim McNeive, was a socialist. And an academic. Many of this column's more mature readers will remember his book 'An Economic History Of Ireland', which was on the Leaving Certificate syllabus for many years. He was also secretary of the Association of Secondary Teachers of Ireland (ASTI) and he took the teachers out on their first, long strike, in the seventies. After that victory, we sometimes had roast beef on Sundays, instead of the usual chicken.

Not surprisingly, perhaps, as a teenager, I too was a socialist. In 1979 the then Tanaiste, George Colley, presented me with second prize in a national economic essay competition. I was probably unlikely to win first prize as the competition was sponsored by a bank, and my paper proposed nationalising the banks in order to control the interest rate.

Just like the singer Janis Ian, however, I felt I had learned the truth when, at 17, I entered the property business as a trainee with Osborne King and Megran (now Savills). This was the cutting edge of commerce - buying and selling, developing and investing, with fierce competition from great competitors, and where the smartest and hardest-working, would rise to the top. Your earnings were partly commission based, which suited me fine. I threw myself into it and began to do well.

As my career developed, my views on economics and politics quickly changed. I became convinced that a strong economy depended on free markets. The power of the market would solve all problems, and it was brutally fair. You would get out what you put in. Taxes should be reduced to encourage people to work harder, to earn more money, and to generate more overall tax. State regulation was an overhang from the Soviet Union.

These topics were debated over the years with my father. The tide was turning my way, however, as Thatcherism took hold in eighties Britain and made impressions here. I had a great victory with 'Glasnost' and the break-up of the Soviet Union. I had been proved right.

My father held firm to his beliefs though, and as we roared through the Celtic Tiger, he warned that the banks (or the moneylenders, as he called them) were headed for disaster.

In the long run it turns out that he was more correct than I was. Us 'free-marketeers' assumed that the bankers, the Central Bank, and the Financial Regulator knew what they were doing (whatever about the politicians.) That the healthy free-market thirst for profit could be controlled.

The collapse in the property market did not cause the collapse of the economy, but it certainly contributed to it.

But that right-of-centre political ideology took hold and a reliance on the market to run itself has had disastrous consequences in Ireland. The worst example is our housing crisis, where government ideology was to rely on the private sector to provide social housing. It has been an unmitigated disaster, and its social effects will be felt for decades.

Almost as bad, the decision to demolish the tried and trusted system of building regulation and replace it with self-certification by developers and builders is already producing a swathe of serious problems, in apartment blocks and public buildings.

These days I find myself agreeing with the Central Bank's limiting of lending for residential mortgages, but the State should also make it compulsory for banks to obtain an independent 'Red Book' valuation for commercial lending.

Developers are back paying more than sites can be made worth, based on today's rents and building costs. They are assuming that rents will keep rising. For the moment, they're probably right, but it can't last.

The regulation of the Airbnb market was needed too.

The incontrovertible evidence, in property at least, is that free markets left to themselves will fail unless we have the right balance with State intervention.

Jim McNeive is having the last laugh.

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