Not all bad news • 12 October 2008 • The SnowBlog

Not all bad news

I feel a little bit bad writing a blog post about anything that doesn't directly relate to the new member of Em's family, but out in the big world things are happening. Economies appear to be crashing. Markets certainly are. And viewed from certain angles you could almost find it encouraging. My teenage years coincided with a period of privatisation. 'Government' was synonymous with waste and stagnation and the private sector was all about vitality and modernisation. The need to place national infrastructure in private hands was so urgent that some of it was sold off at bargain prices. When you think what British Telecom was worth, at the dawn of the current telecommunications era, it's impossible to believe that the government got value for money. Other concerns were so unappealing that they could only be unloaded if they came with fat subsidies. The railways were a potential poisoned chalice and required so much government sugar to sweeten the deal that a privatised railway system isn't really any cheaper in terms of public investment than the old dinosaur of British Rail. At the time, if seemed obvious to all good entrepreneurial capitalists that the market could improve the power and water and transport and phone companies beyond anything that moribund state control could ever achieve. Twenty-five years on and I'm not sure the case is quite so clear. The vigour of the marketplace comes from competition and some of the privatised industries were pretty close to being monopolies. BT, for instance, has enjoyed monopoly-style profits while allowing levels of service to drop, especially in the last couple of years. The railways were a state monopoly and attempts to break it up and create a genuine market were artificial and unconvincing to my way of thinking. If you want to get from station A to station B, it's very unlikely that you've got a choice of routes, unless you detour out of your way. So there's no real competition from the customer's viewpoint. And even if somehow there were three separately-owned rail routes waiting to take you from A to B, that would be duplication not efficiency. (The only way I could conceive of real competition would be to have multiple train companies covering the exact same routes, giving you a choice of which train to hop on, but the train companies would never have agreed to that during the privatisation/handover.) The same problem applies with electricity and gas and water. If you live in London, you can't really buy your water from Scotland. The pipes don't go there and it wouldn't make any sense if they did. Attempts have been made to pretend that you can buy your power from whoever, by separating energy supply from the distribution of the power to each house, but that too strikes me as artificial and more of a pretend market than a real one. And the problem with placing all of these utilities in private hands is that they are, and always were, vital parts of national infrastructure, so they can't be allowed to go bust, raise their prices capriciously, shut down for the holidays or become unreliable. In other words, what we have in most cases are privatised companies overseen by state regulators with no real geographical competitors. And consider this point: a privatised firm has to do everything a nationalised firm must do, but it also has to pay a dividend to its shareholders. If two companies are equally efficient, the one that doesn't have to pay out 7% a year of profits to its shareholders will be the most successful. But of course the idea is that the private company will always be more efficient than the public one and those profit dividends will come out of the gains in efficiency which follow privatisation. How often that's been borne out by experience I think is open to debate. When privatised utilities fall on hard times, and state subsidies are required, we face the prospect that public money is going directly to pay dividends to private shareholders, which is as ridiculous a situation as I can imagine. In the heyday of privatisation, it was felt that the entrepreneurial spirit of the marketplace could overcome most obstacles. By the turn of this century, that ethos had strengthened in many quarters to a belief that any tampering with the market risked disaster. State ownership had been eliminated, state regulation was next. Once the markets could act freely, without the 'distortions' and 'interventions' of policymakers, economies could really bloom. But if you sit down this morning to read the papers, you'll find this orthodoxy in ruins, almost overnight. People are talking about nationalised banking. Not because they like the idea - in fact many hate the ideology of it - but because there's no other choice. We either hand subsidies to the banks for them to spend as they please (which really isn't going to work in Britain, even from a Labour government which has abandoned its Labour principles as thoroughly as this one), or we take a stake in them in return for the money we provide. And if the banking sector, with its highly fluid, global flows of capital, needs partial nationalisation (needs it because it cannot survive if left to the mercy of the free-market) then what does that say about those more troublesome industries for which privatisation was never going to create a genuine market? I imagine that free-market ideologues are far from beaten. They'll find a way to justify the biggest bail-out in history as something other than a failure of their beliefs. But I like to think this will at least make the idea of state ownership and state regulation seem more palatable, more prudent and perhaps occasionally more desirable. Why shouldn't the water companies be state-owned? And why should roads benefit from massive state infrastructure-building programs while the railways must build their own bridges and tunnels? Many countries provide public transport as a right and not a profit-making opportunity and there's plenty of evidence to suggest the countries concerned benefit from that approach. We are entering a period where we'll need massive coordinated efforts in areas like power generation and distribution, transport and the supply of water. We'll need decisions to be taken that are right for the UK as a whole, but not necessarilty for any one particular business with entrenched interests. To me, there's little sign that turning over chunks of our national infrastructure to private hands has caused them to be modernised or updated - except where the government has insisted upon it. The water pipes leak, the power companies charge too much, the trains run late and BT can't be trusted to connect a phone line on time. Markets are resilient things. They work well even with state hands on the tiller. Microeconomic theory would have us believe that markets are at their most efficient when there is no unemployment benefit, national health service, state pensions, minimum wage, income tax, health and safety rules, environmental protection or sick pay. But none of us (bar a few die-hard US Republicans) want to live in that world. We want capitalist markets to pull the economy not to steer it. We risk stifling it when we regulate it, but we risk ruining our society when we don't. And this latest crash suggests that even the markets themselves don't always benefit from the free-market system. I'm sure someone will come forward and explain this latest crash as the fault of too much rather than too little regulation, but unless I miss my guess, no one will have very much interest in listening to them. The goals of sustainability and CO2 reduction, not to mention social equality, fit quite nicely with a world where full-steam-ahead industrial growth and wealth production are not the primary goal. If we're ever going to have another period of benevolent state planning, perhaps modeled after the Scandinavian and low countries, now would be a good time. The bankers who wanted to be richer than Croesus, and screw everyone else, now admit they need public money to avoid losing everything. When even the staunchest free-marketeers are pleading/demanding state intervention just this once, it's a golden opportunity to make some changes and set ourselves on a slightly different track for the future - perhaps one where society and not the economy is our prime concern.


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