Economic liberalism and public service reform

[Originally posted on Liberal Democrat Voice, 22/02/11, and ranked most read post of the week]

Are the Liberal Democrats a party of untrammelled ideology – sorry,“principles” – or do ethics and evidence also play a role in thinking? This question struck me forcefully when reading David Cameron’s article on public service reform in the Telegraph. It appears that the imminent Open Public Services White Paper has been formulated with collaboration from the Chief Secretary to the Treasury and Nick Clegg is fully ‘on side’. We await the details, but if Cameron’s article gives us an accurate sense of what is to come then I think there is – or should be – a significant battle shaping up. Cameron’s position would appear to be “The answer is marketisation. Now what’s the question?”. Is it appropriate for Liberal Democrats to be complicit in this agenda?

The Liberal Democrat leadership is adamant that we’re all social liberals together. So, we might ask, what separates a social liberal from a libertarian? A facetious answer might be that a liberal has a stronger grip on reality. Certainly it entails a less Panglossian view of markets. We recognise that unfettered markets are not an unalloyed benefit. Markets overlaid upon patterns of social disadvantage mean some members of the population will be unable to participate fully and will not realise their full potential. Hence, the emphasis upon equality of opportunity and education. Not only that, but unless we are vigilant markets will entrench and magnify inequality. Hence, the focus upon challenging monopoly and advocacy of the benefits of competition.

Yet, this willingness to temper idealism by recognising the downside of real world markets seems to evaporate when we come to discussing the reform of public services. Rather than being sceptical, there is a tendency to revert to the idea that markets are a neutral means to an end. It is therefore unproblematic to embed them ever deeper into public service provision.

Cameron proposes to legislate for a general presumption in favour of private companies having a right to bid for erstwhile public services. This will save the bother of having to make the case for marketisation in each sector individually. Rather the onus will switch to public providers having to demonstrate, for each specific case separately, why marketisation is inappropriate. The belief is that provider diversity will generate competition and choice. There is also a strong push for greater use of mechanisms such as payment by results in the belief that they will improve effectiveness.

The language used is revealing. Mr Cameron notes that the proposals “will make it impossible for government to return to the bad old days of the standard state monopoly” and a “decisive end of the old-fashioned, top-down, take-what-you’re-given model of public services”. The language is not dissimilar to that used by Jeremy Browne in a post on the Big Society a few days ago. Mr Browne attracted some flak for his references to the “top-down, all-knowing, one-size-fits-all centralised state”. These are such caricatures of public services that it is almost comical. It wilfully ignores 30 years of reform focusing on increasing responsiveness and facilitating choice. It ignores that we already have a system of mixed provision where much funding has been directed towards the voluntary and not-for-profit sector. The only thing we don’t yet have is a dominant commercial presence. It is tempting to presume that this is what Cameron – for all his talk of diversity and decentralisation – thinks is missing. The issue here is not whether there are improvements that can be made in the public sector; clearly there are. But let’s have a discussion grounded in evidence not undiluted ideology. Please.

We might do well to reflect upon where these proposals originate. Many of the ideas are embodied in Payment for success: how to shift power from Whitehall to public service customers [PDF], produced by the multinational consulting firm KPMG which, of course, has no vested interest in pushing a marketisation agenda. It is, presumably, equally coincidental that one of its authors – Paul Kirby – has recently moved to lead the policy team in No 10. This sort of revolving-door between sectional interests and government cannot, by any sensible reckoning, be healthy for democracy.

A problem with several of these proposals is that they are based upon an extremely idealised – indeed simplistic – view of markets and how they operate. The sort of basic textbook economics that underpins the idea that markets will deliver a socially optimal allocation of resources should have no place in informing policy. More sophisticated analysis provides reasons for thinking that under a wide range of circumstances – many of which are relevant to public sector provision – markets do no such thing (I discuss this further here).

We are presented with simplistic statements about competition in health or the benefits of high powered incentives in contracting as if they provide a justification for marketisation, rather than a mystification. Yet, these statements need to be very heavily qualified in the light of theoretical advances and accumulating evidence. Get the design wrong and unleashing such mechanisms can be hugely damaging. And more reflexive economists are quite concerned that even the more sophisticated economic models that recognise this fail to capture important dimensions of the way in which incentives operate in the real world.

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