Public service reform, zombie economics and the “Great Forgetting”

In his excellent recent book Zombie Economics: how dead ideas still walk among us John Quiggin, of the University of Queensland, provides an accessible account of some key economic ideas. These ideas provided the intellectual rationale for substantial social changes we have witnessed over the last 30 years. Many of these ideas boil down to theoretical justifications for the claim that markets are a better means of allocating resources than all available alternatives. Quiggin also summarises arguments against these theoretical rationalisations. The case against markets can be boiled down to the argument that whatever conventional economics might believe to be the case in theory, the real world just doesn’t follow the script. Working on the basis that it does is a recipe for disaster. This raises a crucial question: given that many of these ideas lack strong intellectual support – they are, or should be, ‘dead’ – why do they continue to exert such influence on policy? Societies are being subjected to “zombie economics”.

One of the topics with which Quiggin engages is privatisation. He notes (p193) that:

… the view that privatization is always, or even mostly, beneficial is not supported by the evidence.

And he goes on to argue (p199) that:

Some zombies can be killed once and for all. It seems that the Global Financial Crisis may finally have buried the idea of comprehensive privatisation. Throughout the world, the need for governments to act as the ultimate guarantors of economic and financial stability has been evident …

The British Conservative Party, once the standard bearer for privatization under Margaret Thatcher, has announced plans to allow public sector workers to set up cooperatives to run services such a primary schools and job centres. While some have expressed concern that this might be a backdoor route to privatization, the central point is that the idea itself can no longer be defended in public, even by the party that did most to popularize it.

In contrast with some of the other ideas he considers in the book, Quiggin observes (p200):

With the national exemplars of comprehensive privatization in disarray, and its advocates in full retreat, it seems unlikely that this zombie idea will return from the grave any time soon. That does not mean that we will see no more privatization of government enterprises.

I was reflecting on this argument in the light of the initial discussions of the imminent Open Public Services White paper. It struck me that Quiggin is right to say there is little willingness to propound the benefits of privatization directly. But it seems unwise to conclude that we have conquered the idea that it is desirable to turn public services over to commercial interests. On the contrary, it is likely that we are about to enter a phase where this idea is fully reanimated. Quiggin’s conclusion seems rather premature: 2010 feels a long time ago.

Earlier this week I posted a couple of pieces on economic liberalism and public service reforms. The original posts over at Liberal Democrat Voice generated quite a bit of discussion. This discussion was fascinating for all sorts of reasons. Three fundamental points arose:

First, the main point of my first economic liberalism post was that only the most simplistic reading of economic theory can be used to rationalise the indiscriminate marketisation of public services. The sort of arguments invoked to justify the marketisation policies – competition = driving down prices = driving up quality = greater social wellbeing – are only true under relatively restricted circumstances. There is plenty of evidence of the difficulties and inefficiencies in relying on market mechanisms such as (incentive) contracting for certain types of public services, particularly where there are information problems. That isn’t an argument against markets or the private sector. And it isn’t always relevant: contracting out of some blue collar local public services worked perfectly well. But when an appropriate combination circumstances arises it is naive to expect the outcome of marketisation to be anything other than a fundamental transformation in how the system works and the social outcomes it delivers. These points are not all that controversial among economists who specialise in this field. It is an argument about understanding better how markets operate – when they enhance social welfare and when they won’t. Yet, it appeared that several of the comments on my original post missed the point and were premised on an extremely idealised understanding of how markets operate.

Second, the discussion of the benefits or otherwise of marketizing public services made relatively frequent reference to the earlier experience of privatisation of public enterprises and public utilities. The implication being that a successful track record of such privatisations would indicate the wisdom of the strategy. Yet this discussion was ‘evidence-based’ in only the loosest sense. There is a willingness to argue from analogy without recognising that the technical characteristics of goods and services will fundamentally shape whether marketisation is even feasible, let alone desirable. And that is leaving aside the point that the evidence on the benefits of privatisation is considerably more equivocal than many would seem to believe.

Third, we need to be conscious of political economy of the issue. Marketising public services is not simply about pepping things up a bit with an injection of competition. My expectation is that increased marketisation of “public” services will be to the benefit of the multinational corporations that dominate the public service contracting world. It will concentrate economic power. And it is unhealthy for too much power to be concentrated with one sectional interest. The government will come to rely upon these private contractors to ensure that basic needs are met. This will give the private contractors greater leverage. It will mean that the government will be obliged – or indeed willing, in return for appropriate campaign contributions – to pander to these sectional interests because of this reliance. We only have to look at the attempts to deal with the structural problems with the banking system – which have thus far been relatively feeble – to see that such a scenario is entirely plausible. And it would be highly undesirable.

If, in contrast, the White Paper when it arrives proposes that the alternative to our current mixed economy of welfare is one that places more emphasis upon local, small scale social enterprises and not-for-profit private providers, that ensures that the system does not become dominated by MNCs then my reservations would be considerably weaker.

But I do not believe that is what it will propose. And even if it does, I do not believe that it will be able to deliver, for two reasons. First, we do not have a sufficiently robust infrastructure to develop those alternative types of local organisation over the timescale the government will want to see change. Second, once public services are marketised it will be difficult to write legislation in such a way as to exclude domination by MNCs without it being open to challenge under the auspices of competition law. In this sense this issue is something of a Pandora’s Box.

Quiggin refers to the “Great Forgetting of the lessons of the mixed economy” (p201). We do not face a simple binary opposition between laissez-faire capitalism and socialism. Yet, the rhetoric of the Coalition government has a strong tendency subtly – and not so subtly – to construct the issue in these terms. Intermediate positions associated with the mixed economy – striking and maintaining a balance of power and provision between the private and public sectors – have been characterised as the “civilization” of capitalism in the post-World War Two period. A significant de-civilization process has already taken place as governments have dismantled the restraints upon the global finance industry, and as a consequence handing much of the power to shape society to the financiers. We are all aware of consequences of such regulatory inattention. What makes us think that the same will not happen in respect of essential public services that are given an ill-advised dose of marketisation?

It seems to me that there are some core liberal ideas about pluralism, decentralisation, and counterbalancing concentrations of power that need to be rediscovered and forcefully rearticulated. The Great Forgetting urgently needs to be superceded by the Great Rediscovery. The costs of doing otherwise could be enormous.

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