Recent
events in the UK have gestured toward an emerging debate over the ideas
that will decide how we do capitalism in this country. Firstly, the
opposition leader Ed Miliband stated that if elected in 2015 his
government would freeze energy prices until the beginning of 2017 in
order to tackle the problem of overcharging by private energy companies.
Next we have last week’s Royal Mail sell-off in which a state-owned
entity was put into the hands of the private sector, a pendulum swing
away from Mr Miliband’s interventionist policy. In the same week we had
an announcement from British Gas that it will be implementing a 10.4%
rise in electricity prices and an 8.4% increase in the gas tariff from
the 23rd
November. This announcement has prompted considerable backlash to the
tune of 16,000 complaints via Twitter within hours of it being issued
and puts the pressure back on advocates of privatisation to justify the
continuing wisdom of this approach. This week has seen the
eyebrow-raising entry of former Prime Minister John Major (himself no
great enemy of privatisation) to the fray, arguing for an energy
windfall tax on the grounds that the status quo amounts to asking poor
people to choose between heat and food. Thus, the aforementioned clash
appears to be between those
that continue to see Britain’s future as one in which public services
are increasingly given over to the market, this would be illustrative of
the governing coalition’s approach, and those who believe there are
limits to how much a state should hand cede control to market forces. So
how strong is the argument for the superiority of the free-market over
the state? And does the recent history of privatisation prove this?
The
ideas that inform the policy of privatisation do of course fall under
the rubric of neoliberalism or neoclassical economics. The history of
how these ideas came to the fore from a minority of advocates in the
early to mid-20th
century to almost global orthodoxy by that same century’s close is well
established. However, it does serve to restate that the contemporary
interpretation of the work of Chicago School luminaries such as
Freidrich Hayek and Milton Friedman is the belief that the free market
fundamentally offers a better guarantee of value, quality and efficiency
than a model in which the state has a greater hand in running things.
Furthermore, this belief is held to include the provision of public
services. Indeed, in the case of Milton Friedman, a key horseman of the
neoliberal crusade against ‘big government’, this view is taken to great
lengths to include the privatisation of every facet of the structure of
a nation with the exception of some roads and the army. Such deep faith
in the power of the free market to ensure the smooth running of
everything, from law courts to healthcare to car manufacturing,
reasonably requires some justification. For Friedman and his wealth of
supporters this is articulated in terms of staying faithful to liberal
ideals of individual freedom and the right of such individuals to
prosper via the market both as consumers and suppliers.
The
idea goes that, if left free from government intervention, the power of
the consumer to choose the products that offer the best value will
ensure the emergence of a virtuous circle where competitive markets
respond to the demands of people, thus acting as an incentive to offer
greater value as well as driving innovation and economic growth. In this
picture, we as consumers are masters of our own destiny. We do not
require coddling by the cumbersome hand of the state to act in our
interests; by forming the constituent elements of the market the people
cannot fail to be the ultimate beneficiaries of this system. It is the
faith in this narrative on the part of the Thatcher government that led
Britain to embark on a radical program of transforming the structure of
its economy and society from a state-run system to a market-run system, a
program that continues to this day. The question we need to ask, 30
years in to this project, is: has this process lent support to the
overall desirability of Freidman’s end-game of a totally market-run society?
Thatcher
carried out mass UK privatisation at a time when the state was
demonstrably struggling to fulfil its remit. The 1970s had seen Britain
flirt with economic disaster, lurching from crisis to crisis and one can
ponder, without hyperbole, the very real possibility of this nation
falling far down the global pecking order to middle income territory. As
such, Thatcher’s radical program was an easier sell to the public than
it might have been and many ventures including British Airways, British
Aerospace, Jaguar and Rolls Royce fell under the auspices of the
business community. As Andrew Rawnsley argued in his recent piece in the
Observer[1]
the record of this first wave of privatisation is fairly strong
resulting in well-run services that are able to compete globally.
However, it is when we encounter what Rawnsley terms the second wave of
privatisation (water, gas, electricity and the railways) that the record
of the free market becomes less positive. In brief, it is difficult to
argue what exactly it is that the British public has gained in terms of
value from the privatisation of these services. They are paying an
eye-watering amount more money year on year for the same service, both
as consumers (the average duel fuel bill has risen from £543 to £1340
since 2003) and, in the case of the railways, as taxpayers via
subsidies. Indeed,
the railways remain the most difficult to square with the selling point
that the free-market provides better value; if ticket prices are rising
well above inflation and the cost of running the things, and the UK
taxpayer is shelling out more in subsidies, then somebody somewhere must
be doing very well but it cannot be the consumer. Today it is cheaper
to fly to parts of the UK than to catch a train, a state of affairs that
puts the UK out of step with most other European nations. Anecdotally, a
Norwegian colleague of mine was so incensed by the price of his train
ticket from London to Bristol it prompted something of a Damascene
conversion from his (hitherto robust) belief in this approach to
economics to the social democracy of his homeland. The question is: do
these mixed results for market run enterprises hint at potential
drawbacks of the deployment of a blanket approach to this policy and
should this prompt similar soul-searching (such as my colleague’s) for the rest of us?
In
the face of quite varied results it might be wise to deduce that the
free market is very effective in some areas but not so effective in
others. This is the argument of economist Ha Joon Chang from Cambridge,
who has made the case for a more nuanced approach to the application of
market-based reforms. Professor Chang argues that basing public services
on how much people are prepared to pay can have devastating
consequences on the quality of life for many people. This is because
such services tend to have an in-built “natural monopoly” and therefore
the usual benefits of competition fail to emerge. What emerges instead
are higher prices and/or lower quality services. If people cannot afford
things such as healthcare that have hitherto been guaranteed by virtue
of citizenship their quality of life is threatened. For evidence of this
in action one need only look to America where 47 million people live
without healthcare, a state of affairs my Norwegian colleague describes
as “wealth based apartheid”. The effects of this appear fairly constant
across sectors as part of the issue with energy companies is the lack of
any threat of competition to act as leviathan and keep the naturally
profit-driven motives of company directors in check. Indeed, there is
growing evidence to suggest that the p-word may be the source of much
that is flawed in market-run public services.
Steve
Keen, formally professor of Economics at the University of Western
Sydney, argues that there is an issue with the profit motive per se: if
used as the sole criteria by which we judge the success of an entity we
often get counter-intuitive results, with sometimes devastating
consequences. The case Keen cites as demonstrative of this is the
“Adelaide Pong”[2],
where in 1997 the waterworks of the Australian city were privatised and
handed over to a consortium made up of Thames Water and Vivendi. Within
fifteen months of the takeover the entire city was engulfed in a stench
of sewage that went on for several months. At first the company placed
the blame for the smell on adverse weather patterns preventing normal
sewage odours from dissipating. However, a subsequent investigation by
Ken Hartley, University of Queensland water treatment expert,
found no evidence of different weather conditions from previous years.
What he did find was that in an effort to minimise costs (the quickest
way to maximise profits) the water company had cut back on monitoring
and maintenance of the sanitation of the water allowing sewage to be
funnelled straight into the lagoon system, causing the smell. This
scenario in which a private company neglects its remit (in this case to
provide clean water) in pursuit of alternative ends (in this case
reducing costs) is held by Keen as illustrative of the issues that can
arise from excessive emphasis on profit. Going further, such short -term
focus, often termed the ‘race to the bottom’ as companies endeavour to
minimise the cost and content of what they are providing in pursuit of
maximum gain, is only possible where there exists no incentive to act
otherwise. As Professor Chang argues this is much more likely to occur
in the case of the natural monopolies of utilities, welfare and health
provision- services on which people are most dependant, thus vulnerable,
and therefore sadly have the greatest capacity for causing human
suffering.
When
operating as described by Friedman, the market is a truly positive
thing. The example of the breath-taking evolution in the capabilities of
mobile phones from 2000 onwards is illustrative of how competition, in
pursuit of greater profit can lead to private companies investing a huge
amount of resources that drive development to the benefit of the
consumer. However, when applied elsewhere such approaches can be
detrimental to society. Furthermore, as the example of the privatisation
of the US prison system illustrates, this potential danger is so
significant that it makes the vision of a Britain built in Friedmans’
vision potentially deeply troubling.
The
privatisation of America’s prisons began in the 1980’s as a not
entirely unreasonable response to states’ struggling to meet the costs
of running such facilities. What has come out of this, the emergence of a
70 billion dollar industry, has produced outcomes that arguably test
the limits of contemporary notions of civility. In brief, the US
government has contracted out the running of correctional facilities as
for-profit businesses to for- profit companies in several states. The
companies are awarded huge sums by the state meaning their margins are
dependent upon spending as little as possible on prisons. However the
incentive to offer minimal quality to maximise profit, as in the
examples above, is not the worst outcome. Far more troubling is the fact
that companies such as Corrections Corp of America (CCA) and the GEO
Group actively seek to ensure a greater proportion of Americans are
incarcerated year on year to attract investors[3].
By making prison pay, the United States has created a scenario in which
in the words of Adam Gopnik, in the New Yorker, “it’s hard to imagine
any greater disconnect between public good and private profit: the
interests of private prisons lies not in the obvious social good of
having the minimum necessary number of inmates but in having as many as
possible, housed as cheaply as possible”[4] . Is there evidence that this is occurring? The answer, sadly, is yes as these numbers illustrate:
· Despite a decline in violent crime, America’s incarceration rate has tripled since the privatisation of its prison system
· There are 13 million people introduced to American jails per year
· 6
million people are under “correctional supervision” meaning that one in
fifty Americans are presently within the prison system either as
inmates, on parole or on probation
· Today one out of every 100 Americans is in prison
However, these numbers don’t tell the whole story. How
such numbers emerge is a result of the offer of the cheap running of
prisons on the part of private companies which comes with the caveat
that the prisons would have to contain at least 1000 and a requirement
for states to maintain 90% occupancy rates for 20 years. As
observed by Robert Werholtz, formerly the Kansas secretary of
corrections, how states achieve this has led to the “subtle pressure to
make sentencing more severe with a clear intent to drive up the
population.”[5]
An example of laws passed in order to assist private corporations in
this regard would be the three-strikes law, which make 25 year sentences
mandatory for multiple felonies, thus comfortably meeting CCA et al’s
requirement for 20 year occupancy. This example of the power of private
interests to influence the remit of state machinery so far against the
interests of society is almost without parallel in a western nation, and
it gets worse. In 2009 it came to light in that two judges in Luzerne
County Pennsylvania had been receiving bribes from the Mid Atlantic
Youth Service Corporation to jail youths and send them to private
prisons. Over a ten year period the judges had received $2.6 million
from the company and passed sentences on 5000 young people, sending many
to jail for petty crimes such as trespassing or shoplifting. The damage
caused to the lives of these children is a damning indictment of the
potentially malignant influence corporate interests can have a on the
public good. This should be food for thought for those that seek the
blanket application of the free-market approach to public sector reform,
yet this is precisely what our present government is doing.
A
Britain totally free of state hands in nearly all public services may
happen in our lifetime. The above suggests that this could lead to
outcomes in which private interests threaten the wellbeing of huge
sections of society, often the most vulnerable. Another State-side
example that has followed this pattern includes the privatisation of
emergency services, again with a negative impact on much of the public.
There are ways and means to privatise and states can minimise this risk
by attaching robust regulation which forces corporations to act first
and foremost in the interests of the public. However, to Friedmanites
such restriction is often an anathema. Many of the coalition’s reform
have already appeared to take a myopic approach, ignoring the opinion of
experts[6] and raw data[7]
that suggests what they are doing is going to impact negatively on the
public and serve a narrow group of interests. Such is their apparent
faith in the free-market, the present generation of politicians largely
but not exclusively on the right, seem committed to emulating the
American example, including their prisons, with sadly similar results[8].
But
what makes proponents of privatisation so certain of its benefits given
the disconcerting record described above? Much of the original
proponents of this approach were writing in the context of a Europe that
was diving head first into authoritarianism, a scenario in which the
very worst excesses of big state and big government were there for all
to see in blood-soaked resonance. In such a context the fears of these
patently able and gifted minds were both justified and arguably
articulated to the benefit of this species. However in the 21st
century there appears to be risk of over prescribing the medicine,
turning helpful ideas into harmful ideology. In the face of very mixed
results the insistence on the blanket application of a narrow strategy
is to mirror the intransience that plagued the left in the 1980’s, from
which it has arguably yet to recover, as it failed to adapt to the
demands of a changing globe. The financial crisis demonstrated that the
free-market can look as cumbersome and unwieldy as big government; the
much-maligned state which provided a safety net when the market stood
powerless to halt its own self-made catastrophe appears to have the back
of the people when it really matters. To totally abandon such a vital
safeguard may indeed result in an end-game but it may prove to be the
end of both the freedom to live with the guarantee of basic social
goods, as well as freedom in its purest sense. Something that 1 out of
100 Americans will know all about.
