UK Conservative Party Vehemently Defends the Free Market.
The Free Market and its Defenders
Given the vast amount of evidence that Free Market Societies like Britain and America are suffering deep economic and social malaises it is somewhat surprising to hear the UK Conservative Party reiterate its support for the free market at its 2017 Conference.
Quote from a Swedish Banker
“Market fundamentalists, stuck as they are on notions of “freedom” competition and winners/losers should get wise to better ways. But alas, bigots are immune to evidence”.
2017 Labour Party Conference: Leadership affirms commitment to State ownership. From one extreme to another: Back to the Future?
Newspaper excerpt: New York Tribune, November 10, 1847
The Irish Potato Famine
“The spark for this tinderbox was the appearance two years ago of a fungal canker that annihilates the potato, the staple food of the Irish poor. The name of the disease is not known.
The name of the economic system within which the catastrophe is occurring is very well known indeed.
It is called “The Free Market” and is widely reverenced. Like (Lord) David Merridith of Galway, it also has an alias. Many criminals do and most aristocrats. Its nom de guerre is Laissez-Faire, which preaches that lust for profit should regulate everything including who should live and who should die. This is the Freedom which permits Irish food merchants to quadruple their prices in hunger-stricken areas……..No other manifestation of humanity may be allowed to intervene in these magnificent workings of Freedom……”
They are still at it!!
Towards the end of the last century the pursuit of Utopia entered the political mainstream. Following the ignominious collapse of Communism (in reality Soviet centrism), the victor in the Cold War, American-style democratic capitalism, was seen by many in the US as the final perfected form of human government. Francis Fukuyama an American philosopher of sorts, characterised the winning of the Cold War, leaving a perfect politico/economic system as the “End of History”. The system was perfected, no further change was needed, therefore history would come to an end.
American Neo-liberals were possessed of the idea that the free market was a scientifically-proven form of economic system that would guarantee the greatest wealth of the greatest number. If all were able to play their part in the market, unencumbered by the corrupt shackles of government, a perfect society could be created. The economics behind the neo-liberal dream were a strange concoction - a blend of laissez-faire thinking, mixed with mathematical constructs based on game theory, and a dash of genetics based on the idea of the selfish gene. The theories thus constructed were given academic respectability through some European economists of the Austrian School, and Nobel laureates such as Milton Friedman at the University of Chicago.
There is a vast number of Institutes, university departments and other organs of propaganda that continue to blast out peons of praise for the virtues of the free market in radically improving the condition of mankind.
Will they never learn?
UK Finance Minister to Conservative Party Conference 2017
“[But] we must be clear-eyed about the challenges along our way," he added. "We must not downplay the difficulties nor underestimate the complexities. This will be one of the most challenging tasks ever undertaken by a peacetime government but with focus and determination and unity, we will succeed.
"But we can only do so by harnessing the power of the market economy to deliver a brighter future. And that means re-fighting a battle we thought we had won against an opposition determined to put Britain’s prosperity at risk.
"We will not let that happen. We will not allow Britain’s prosperity to be threatened, our security to be undermined. We will take on the false promises of Corbyn’s Labour and one by one we will expose them for the fallacies that they are. We will not allow the past to triumph over the future. We will not allow the politics of fear to trump the politics of progress.
"We will see off this threat to our fundamental freedoms. We will deliver on our promise to the next generation. We will do it together. And we will do it for Britain.”
Social and Economic malaises of Free Market economies
(Don’t mention the 2008 global financial Crash!)
The United States has a healthcare system that delivers worse public health outcomes at a far greater cost than most Western European comparators. Britain has a creaking transport infrastructure that is a national economic liability. America fares little better; levees round New Orleans collapsed, devastating that city, which is a shadow of its former self when it comes to providing housing for poorer residents who fled the inundation. US infrastructure overall received a “D” Grade report from a number of sources, indicating inadequate expenditure and a progressive decline.
So-called Private-Public Partnership agreements in the UK, used as a political device to hide public borrowing, have already begun to ruin hospitals and schools through the crippling capital and maintenance costs demanded by private “partners”.
The cost of domestic power and electricity in Britain is a disgrace, fuel poverty is becoming a major health risk, and the lack of a coherent strategy and investment in environmentally responsible generation puts the country at risk of a serious power shortage in the not too distant future. The privatisation of electricity distribution left the population at the mercy of grasping companies, apparently more interested in returns to shareholders than serving communities.
UK rail fares are the highest in Europe for a network that is put to shame by the best in Europe.
Investment in advanced technology and other manufacturing businesses that used to be a mainstay of the UK economy has for some time been amongst the lowest in the developed world. Worse still, most of the once-powerful technology base has been ruined by bad strategies, deals aimed at pleasing institutional investors - or simply sold to foreign bidders.
Britain has the worst record of any advanced country in these regards - the US, otherwise a bastion of market fundamentalism; has been at pains to protect its precious technology base from foreign incursion, and has been willing to give public support to struggling companies - as well as subsidising high technology industry through huge defense spending.
From the late 1970's, consumerism became rampant in Britain and America. A sophisticated advertising industry encouraged beliefs in entitlement to lifestyles and consumption beyond the means of many people. Politicians encouraged consumption as a means of keeping the populace happy. Many people borrowed heavily to support a lifestyle “entitlement”. Booming house prices encouraged the illusion of steadily growing wealth. Driven by stagnant earnings, personal and national indebtedness in both Britain and America rose to, and are still, at dangerous levels. Banks indulged in orgies of irresponsible lending for housing and personal consumption to citizens who couldn't afford to repay their debts. Sub-prime mortgage lending was the trigger for the worst banking crash in living memory - which in turn sparked the worst recession of modern times.
Inequality has soared whilst real average incomes stagnated. The gaps in wealth and earnings between the rich and poor in the US and Britain are the largest of any developed nation and are growing fast as a result of government policies. There now appears to be a growing underclass with no hope of escaping their exclusion from the social mainstream.
Rich companies and individuals have avoided paying tax (their contribution to society) through using sophisticated tax planning and offshore tax havens.
Britain, driven by fear of being downgraded by Standard and Poors and other ratings agencies, leading to higher borrowing costs, embarked on an austerity programme that has arguably made matters far worse and intensified the recession caused by the banks. Public services are being degraded, welfare costs slashed, poor people made homeless, quality jobs lost, lending to business decreased to the point of pain amongst smaller companies. All in all, the current programme of austerity is likely to substantially reduce income to the public exchequer and commit Britain to decades of stagnation.
Trump and Brexit
Much to the horror of the American political establishment and more liberal-progressive voters, Donald Trump was elected as the President of the United States, on the back of passionate support from many of those who have felt themselves excluded from the benefits of American citizenship. This is not Latinos or black Americans, but predominantly poorer white citizens, who have been affected badly by growing inequality. A similar kind of constituency drove the “Brexit” campaign in Britain. It was led by a small group of politicians who saw great advantage in not being “shackled” by the constraints of belonging to the European Union , and large swathes of angry citizens who saw themselves as disadvantaged by the establishment, “rich Bankers” and “foreigners” who “take our Jobs”. They had a point about being disadvantaged: since the inception of the free market, vast swathes of manufacturing and technology based industry has been destroyed, employment has become more and more uncertain, housing beyond the reach of many, and the standard of living undermined. Something has to be blamed – and as with the US, “foreigners” are a convenient target.
There are alternatives!
Most political dialogue in Britain seems to be based on the conviction that nothing lies between Socialism and Nationalising all forms of enterprise on the one hand - and the Free Market, handing all public enterprise to private organisations- on the other.
Governance and politics in free market and social market societies.
Free marketers believe that the state should play a minimal role in governance, its role should be limited to preserving law and order so that the market can work unhindered - and national security. Beyond that, the maximum benefit comes from allowing all to participate freely in the “market”, in the belief that markets are self-adjusting, and the benefits gained by strong players will be shared by all through such mechanisms as the “trickle-down” effect.
Reliance on the market also has profound effects on the nature of society. Many of the roles played by the state acting with other stakeholders in the governance of society are replaced by the functions of the market. So citizens tend to become producers and consumers, powerful players tend to strive for dominant positions, and the market can become dominated by a rich minority. Once finance and industry became dominated by huge global corporations, politicians were open to being “bought” and the functions of the democratic state weakened by rich and powerful interests.
Social market and free market societies – comparisons and contrasts
What follows is an examination of the differences between the United States as a classical Free Market society and a cluster of Northern European societies that include Germany, The Netherlands and the Nordic countries, Sweden, Denmark, Finland and Norway.
The position of the United Kingdom is interesting, as it currently seems to stand between Northern European Social Market forms and the free market United States. Through the 1950’s and 1960’s and most of the 1970’s Britain swung from “Socialism” with state control of banking and big business, to moderate “One Nation” Conservatism. Then the arrival of the Thatcher government at the end of the 1970’s signaled a radical shift towards neo-liberal free market ideas. The primary shifts were privatisation of many corporations and public services and in particular the removal of many restrictions on the operation of the financial markets. Today, Britain is a hybrid, with private companies having entered many spheres of public service from military and infrastructure maintenance, prisons, health provision, education and public infrastructure financing and construction. Yet dying vestiges of old communitarian ideas remain, in particular the provision of public health care funded by taxation and free at the point of use.
A particular irony has been the violent shift from state influence, backed by domineering trades unions to dominance by the finance sector and big corporations. One perspective on Britain is that it has shifted from one form of “bad” to another, without stopping in the middle!
Here are some alternatives to Socialism and the Free Market:
The prevailing beliefs are that markets should be harnessed to serve the interests of society as a whole – and elected governments have a crucial role in preventing any one interest group from dominance and facilitating the collaboration of key societal stakeholders to make sure this happens. Society underpins welfare, education and health, which is freely and equally available to all. The state has a duty to raise the educational standards and skills of the less fortunate so that they can participate fully in the economy. Social market cultures are rooted in the idea of collaboration between different stakeholders. In some social markets these cultures are rooted deep in history – in others traumatic events have caused changes in old beliefs.
The predominant ethos in social market societies can be described as communitarian with state facilitation to ensure equable distribution of wealth and opportunity.
The “Nordic Model”- salient characteristics
Sweden is an archetypal Nordic country, so the Nordic Model is strongly relevant.
“Eindhorn and Logue* characterise the so-called 'Nordic' model as that in which:
- An active and interventionist state,
- Provides universal transfer payments to support the elderly, disabled, unemployed and families with numerous children and low market incomes,
- Provides universal social services for health, education, childcare, services for the elderly and the like,
- Uses national policy to achieve high rates of labour force participation and high employment on the national level, via both macro-economic and sectoral policies,
- Integrates major interest groups in making and implementing national policies (rather than the capture of the state structure by a single group of interests, or state capture of the interests’ organisations),
- Possesses a strong civil society with encompassing and democratic organisation of interests, but particularly the strong organisation of those otherwise weakest in capitalist society - family farmers and urban workers,
- Is underpinned by a set of values around empiricism and social trust; in particular solidarity and reciprocal responsibility are crucial concepts in the development of public policy
“The social market philosophy seeks to marry markets and social justice. It neither sees the market as a necessary evil nor as an end in itself but as a means to improve people’s lives.
The state must therefore protect the competitive environment from the dangers of both free-market and statist approaches: public or private monopoly, and government and market failure.
The state also has an essential role to play in promoting social justice, so that the market can work for everyone in society. A lack of social justice can lead to a sense of unfairness that erodes the legitimacy of the market economy and threatens its existence.
The essence of the social market economy is that private markets are the most effective allocation mechanism, but that output is maximized through sound state macroeconomic management of the economy. Social market economies posit that a strong social support network for the less affluent enhances capital output. By decreasing poverty and broadening prosperity to a large middle class, capital market participation is enlarged. Social market economies also posit that government regulation, and even sponsorship of markets, can lead to superior economic outcomes, as evidenced in government sponsorship of the internet or basic securities regulation.”
A Nordic banker’s view on society
Here are extracts from an article by Swedish banker and businessman Daniel Sachs. His views tally with comprehensive research about the Nordic Model.
“Openness to change is a core aspect of the competitiveness of the Nordic economies. In fact, adaptability is even more important in small, open, export-oriented economies such as Sweden.
... What the Nordic experience shows is that individual incentives can be soundly balanced by solidarity on a societal level. Solidarity makes good economic sense. Solidarity - that is risk-sharing - is a key ingredient in being open to change.
I realise that this insight flies in the face of what many Americans believe. But they no longer “own” the openness to change ideas. In fact, one of the more puzzling developments of our current era, the ability of US society to absorb change, has slowed tremendously. In the US debate, the key charge raised against the Nordic model is the level of taxation- here the state share of GDP is very high. But, befuddling Americans, economic growth in Scandinavia is robust, and unemployment is about the same as in America and lower than in most other European countries.
Why are we ready to put up with a higher level of taxes? Is it because I like living in a society that puts a strong emphasis on equality of opportunity? Is it because I like living in a society that has strong social cohesion and fairness, an open society where everybody has the right to free healthcare and schooling? Is it because I enjoy the fact that, despite a certain prosperity, I cannot buy better schooling for my kids or better healthcare than someone with less means? Or is it because it benefits my business?
The answer is “all of the above”
And this flows from how the relationship between openness and risk-sharing works. The “haves” share their personal gains with the “have-nots” through taxes that finance comprehensive benefits.
Our ambition is not only to provide a safety net if a citizen stumbles because of a job loss, but also to invest in human capital so that the citizen is less likely to fail -to invest in making individuals successful actors in a modern, globalised society.
Our “individual investment society”, as it is sometimes called, together with a clear sense that if people fail they will be taken care of, leads to a greater willingness to undertake risk and therefore greater openness to structural change on a society-wide basis.
Nordic countries have remained open to because free trade policies have gone hand in hand with collective mechanisms for risk-sharing.
I would argue that adaptation to globalisation has been made less painful than in many other Western countries, for the reason that the gains from globalisation have been reasonably widely distributed. Because of our tax policies, we don't end up with a small universe of winners and a large group of losers.
The importance of Trust : The sustenance of High Social Capital
Sweden's wide distribution of economic benefits also helps create social cohesion. There is a clear sense that we are in this together, that we share the benefits, also the burdens. In turbulent times, this has very clear value.
These aspects of the Nordic Model - the relationship between state and individual, generous social protection, freedom of the individual and high levels of trust - all help to foster risk-taking and openness to change. But the other reason why, as a businessman, I like the Nordic model is that high levels of trust, fairness and transparency also mean that transaction costs are low. Corruption is low.
So, fairness, equality of opportunity and openness to change are fostered by collaborative societies in which all make a full contribution to economic health and the rich support improvement in the prospects of the poor.
Intelligent economies depend on economic and social policies that foster support, education and flexibility. And societies that demonstrate these characteristics support strong governments working in collaboration with other stakeholders to forge and enact economic and social policy. That way, the common interest is forged.
Market fundamentalists, stuck as they are on notions of “freedom” competition and winners/losers should get wise to better ways. But alas, bigots are immune to evidence.
More recently, performance indicators have tended to become more nuanced and to build in social and psychological factors that are often easier to describe than measure by precise numbers. There is still considerable suspicion on the part of conventional economists about anything that cannot be numerically measured or fed into mathematical models. But mainstream practitioners in economics are in danger of being exposed as limited in their approaches in a world where human capital and psychological factors are being recognised as crucial to economic and social health. It is becoming understood that human factors create performance and financial numbers are outputs – the creations of human actions. Industry is moving away from an era where physical and financial capital were the key factor into one in which human knowledge and skill are key.
The United States and Sweden have been chosen for comparison because they are fairly close to being typical of free market and social market societies. Neither are “pure” examples, but represent two Points on a scale. Britain can be described as “hybrid” because it has moved over 50 years from considerable state control of economic and social affairs to a much more free market position – and is still changing.
The data describing Sweden and America start with some conventional measures such as GDP and move to more descriptive ways of comparing different societies.
GDP: Gross Domestic Product
- GDP per head average, US$
- USA $38,000
- Sweden $25,500
This OECD statistic indicates that the US Gross Domestic Product per head is considerably higher than that of Sweden. Both are rich by comparison with most OECD countries.
Index of Equality - GINI
This shows how average GDP per head is distributed amongst the population. A GINI score of 100 would indicate that one person owned all the wealth – 0 would indicate prefect equality.
- US GINI score
- Sweden GINI score
Wealth and especially income are evenly spread relative to OECD countries in Sweden, whilst there are great contrasts between wealth and poverty in the US.
The US is very unequal compared to the vast majority of OECD countries
Wealth and Poverty in the USA
In the United States, wealth is highly concentrated in a relatively few hands. As of 2010, the top 1% of households (the upper class) owned 35.4% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 53.5%, which means that just 20% of the people owned 89%, leaving 11% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one's home), the top 1% of households had an even greater share: 42.1%. Inequality appears to have grown greater since 2010.
The Relationship between Wealth and Power
Wealth can be seen as a "resource" that is very useful in exercising power. That's obvious when we think of donations to political parties, payments to lobbyists, and grants to experts who are employed to think up new policies beneficial to the wealthy, for example, tax avoidance schemes.
Wealthy individuals support a large number of university faculties and institutes promoting “freedom”, which is defined as the right of individuals to amass and keep their wealth, and the state to limit its roles to maintaining law and order and defence.
Wealth also can be useful in shaping the general social environment to the benefit of the wealthy, whether through hiring public relations firms or donating money for universities, museums, music halls, and art galleries.
Second, certain kinds of wealth, such as stock ownership, can be used to control corporations, which of course have a major impact on how the society functions.
Index of Social Health
In recent years, it has become increasingly understood that gross wealth is not an effective predictor of social wellbeing or even individual life satisfaction. What follows is a range of indicators that compare different facets of the health of societies. These indicators can be used to compare societies against each other and also to indicate trends over time.
The first example is the American Index of Social Health. It is useful to review what has changed over time. In this case, the comparisons cover a period of considerable economic growth, culminating in the collapse of the global financial system in 2008.
The Index of Social Health monitors the social well-being of American society. It has been released annually by the Institute (formerly the Fordham Institute for Innovation in Social Policy) since 1987. Like the Index of Leading Economic Indicators or Gross Domestic Product, it is a composite measure that combines multiple indicators to produce a single number for each year.
The Index of Social Health is based on sixteen social indicators. These are: infant mortality, child abuse, child poverty, teenage suicide, teenage drug abuse, high school dropouts, unemployment, weekly wages, health insurance coverage, poverty among the elderly, out-of-pocket health-care costs among the elderly, homicides, alcohol-related traffic fatalities, food insecurity, affordable housing, and income inequality.
In 2011 (the last year for which complete data are available), the Index of Social Health stood at 50.2 out of a possible 100—up 1.7 points from the previous year, but still five points below the most recent peak in 2007. This score is the second lowest in the past fifteen years, the only lower score being last year’s 48.5. Overall, between 1970 and 2011, the Index declined from 64.0 to 50.2, a drop of 21.6 percent.
The performance indicators since 1970 shows the following pattern:
|Progress||Lack of Progress|
|Seven indicators have improved since 1970:
||Nine indicators have worsened since 1970:
“A ‘Good’ society is one that furthers the wellbeing of all its members”
Healthy Societies are founded on a positive partnership between the State, the Private Sector and other key Stakeholders.
It is apparent that simple measures of economic wealth and growth do not give a comprehensive view of the “success” of a society.
This is especially so if a “Good” society is rated by the degree to which it acts in the interests of all its citizens, and not privileged minorities.
Comparisons between free market and social market societies are of course subjective. But it seems probable that that countries which foster collaboration between stakeholders, ensure a good measure of equality of wealth and opportunity - whilst supporting the less able and fortunate to participate fully in economic life – are suffering less social and economic stress.
These societies may be more socially resilient and economically successful in the longer run.
Privatisation hasn’t Worked – UK experience
The Free Market has failed dismally to provide good value, effective public utilities.
Free Market propaganda asserts that the only choice is between the Market and state ownership and management. This is arrant nonsense, there are many alternatives.
In Britain, it is almost universally the case that handing public services to the private sector has resulted in a deterioration in levels of service and increases in cost.
Social market economies, Germany, Sweden, Denmark, Finland, Norway – and in the far East, South Korea - demonstrate the benefits of partnerships between the state and the Market.
Social Interest, not shareholder returns
Then, as is fully demonstrated in the social enterprise sector, different variants of the Community Interest Company have proven very successful in developing and runnning businesses ranging from small community businesses to large international enterprises. It seems to be a fact that Free Market supporting governments like the UK Conservatives are dogmatically adamant about the market and actively wish to block progressive change. A small example of this was their rush to offer the Directly Operated Rail East Coast main line operation back to the private sector after a brilliantly successful history. This amounts to dishonest hiding of the true facts.
Privatised rail franchises in the UK have resulted in high costs for consumers for poor services compared with European experience
Directly Operated Railways proved that privatised railways were not the only way. There WAS an alternative
In November 2009, the then Labour government took the North East Main line under public control because its private operator, National Express, could not afford to run it on the terms it had rashly promised back in 2007. Back then it had beaten off opposition from competitors, agreeing to pay the Treasury an increased £1.4bn to operate the franchise until the end of March 2015.
The previous private owner of the franchise, GNER, had been stripped of the route after its US parent firm was struck by financial troubles. National Express, a seemingly solid company, was saving the day, and promising to inject £7.4m into upgrading stations, including the creation of 2,000 car park spaces, while the number of weekday trains would rise from 136 to 161 and a new London-to-Lincoln service would be added.
It was, according to then transport minister Tom Harris, very good news. BUT, within two years, National Express realised it was losing money hand over fist – and the government was not willing to renegotiate. Lord Adonis, then transport secretary, set up Directly Operated Railways, a not-for-dividend subsidiary of the Department for Transport, to manage the service . The last four years, according to DOR's own accounts, published this month, have been an extraordinary success.
The first half of this year has seen levels of punctuality not achieved by any operator of the east coast mainline "since records in their current form began", although poor weather affected the latter part of last year. The company has won 13 industry awards since April 2012, including that of being Britain's top employer. There has been a 4.2% increase in ticket sales year-on-year, £208.7m returned to the taxpayer during the year in premium and dividend payments, and a record level of customer satisfaction.
And while Virgin, on the west coast, has received £179.6m in revenue support from the government since 2009 and a £1.2bn network grant, DOR has had no revenue support and a lesser, £980m network grant.
Free Marketeers desperate to return a successful company to the private sector
The answer from the current transport secretary, Patrick McLoughlin, launching the re-privatisation on Friday, was that he wanted to see a
"revitalised east coast railway, one that both rekindles the spirit of competition for customers on this great route to Scotland and competes with the west coast on speed, quality and customer service".
Today marks 20 years since the privatisation of the railways when the Major government passed the Railways Act. You would struggle to find anybody that believes the promises made have been met. The free-market experiment with our railways has delivered a poor service, with high fares and no sign of these increases being curbed or significant improvements to the service we receive.
The privatised US Health System costs twice as much as European systems, including the NHS, for far worse results:
Sweden and America have different public health models. The United States has a predominantly free market health system, with a safety blanket for poorer parts of the population. Sweden has a publicly underpinned public health system, with some requirement for those who can afford it to contribute. Healthcare facilities are relatively uniformly provided, with only a small private sector.
In summary, only Sweden has a public health system – and the outcomes are clear:
|Life expectancy||83.8 years||81.1 years|
|Obesity||10 % of population||36% of population|
|Diabetes||6% of population||13% of population|
|Infant Mortality |
(deaths/ 1000 live births)
|2 deaths||6 deaths|
|Death from heart disease |
(per 100 thousand)
|Death from cancer |
|Health expenditure per head |
|Health expenditure per capita |
Prisons and Probation services
The momentum for privatisation began in the late 1980s.
Margaret Thatcher had a strong desire to extend the free market in public services based on the contested assumption that private sector provision would be more cost effective, efficient and catalyse system-wide improvement.
Since then, the pace of change has been remarkably uneven with periods of accelerated reform as well as complete stasis.
More recently, in 2016 and 2017, a series of scandals has shaken the privatised prisons and remand centres for immigrants. Some prisons are almost out of control, with drug taking, violence and depression/ suicides.
Staff are unable to provide anything that might remotely be regarded as remedial training
The same has been the case with remand centres for potential immigrants. In this case, the staff have been accused of systematic abuse.
Successive Conservative governments have cut back on prison staff, until the service is nearing collapse.
UK prime minister Theresa May has recently described the energy and power market as “broken”.
Report by the Free Market Adam Smith institute:
(Like many justifications of privatised utilities, The Adam Smith Institute chooses to compare one form of “bad”; the private market, with another; state ownership.)
Neither form is desirable, what works is either Community Interest Companies or Partnerships between local/regional government with the private sector. In Scandinavia, local or regional organisations provide generally good services.
Excerpt from the report
“In an attempt to rebut criticism about the benefits of privatisation voiced by Labour leader Jeremy Corbyn, the Adam Smith Institute has drawn up a paper examining the sale of electricity, gas, water, the railways and telecoms in the 1980s and 1990s.Mr Corbyn made the record of utility privatisation a key plank of his leadership campaign, and a renationalisation agenda is likely to figure heavily during the Labour party conference starting next Sunday.The radical Labour leader wants the railways to be returned to state ownership, a policy dubbed “People’s Railway”, as well as a rethink on how the energy industry is shaped.The institute’s paper concluded that privatisation had resulted in “notable failings”, including endorsing long-term monopolies, modest R&D expenditure, large job losses and the flotation of businesses at “far too low a price”.The paper said “very few of the privatised utilities operate in a genuinely competitive market”. It has taken 25 years after the start of privatisation in the water market for genuine competition to take place, while competition in the electricity market ebbed away at the end of the “dash for gas”.Privatisation had also proved “bad news” for the nuclear industry, given the length of time to design, build and generate output from new power plants. The decision to split the UK rail network into train operators, track infrastructure and rolling stock companies rather than create a regional model was “undoubtedly flawed”, the institute said.Although investments rose as a result of privatisation, “so did retail prices”.Customers have benefited from increased investment and improved customer service. But there were numerous billing errors in electricity and gas, levels of bad debt remained and several companies were guilty of questionable selling techniques.There is a mixed picture on prices paid by consumers. While telecom prices have fallen thanks to aggressive competition, gas and electricity prices have risen. At the same time, water and sewerage customers have paid large real price increases to fund investment. BAA and Railtrack have been the butt of severe criticism of their performances, both operationally and over price increases, the institute noted.”
in England and Wales remains controversial. A 2001 study by the Public Services International Research Unit stated that:
- tariffs increased by 46% in real terms during the first nine years,
- operating profits have more than doubled (+142%) in eight years,
- investments were reduced and
- public health was jeopardised through cut-offs for non-payment, however, this was made illegal in 1998 along with prepayment meters and 'trickle valves'.
At privatisation the industry's £4.95 billion debt was written off. Privatisation critics argued in 1997 that infrastructure -particularly sewers- was not adequately maintained and that Ofwat implicitly "gave (its) approval to running down the underground network". Furthermore, Ofwat was accused of not comparing company performance with targets, not relating performance standards with past or projected levels of investment, failing to "publish information in a consistent form" and not requesting that levels of service indicators become mandatory. Instead company licenses were renegotiated to address performance issues. The critics concluded that in the "conflict between making profits and providing a certain level of services" the legislation "resolves it in favor of profit"
Thames Water has come under renewed criticism following a series of service failures in London over the Christmas period. The water company has been told it must step up efforts to reduce the risk of water supply incidents, such as a pump failure which left thousands without water on Christmas Day and a series of pipe bursts in December.
“It is enormously frustrating for people to be left without a water supply on Christmas Day but we’re particularly concerned that this is the latest in a series of service failures to affect thousands of consumers across London
Alternatives to the state or private ownership.
Community Interest companies have big advantages over both state and particularly private companies
- Their service mission can be clearly focused on service to a particular community
- They are mandated to reinvest in their products or services, and not external shareholders. Community interest companies are not permitted to have external shareholders.
A community interest company is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners. CICs tackle a wide range of social and environmental issues and operate in all parts of the economy. By using business solutions to achieve public good, it is believed that CICs have a distinct and valuable role to play in helping create a strong, sustainable and socially inclusive economy.
CICs are diverse. They include social and community enterprises, social firms, mutual organisations such as co-operatives, and large-scale organisations operating locally, regionally, nationally or internationally.
Legal forms and social objectives
CICs must be limited companies of one form or another. A CIC cannot be a charity, an IPS or an unincorporated organisation.
Regular limited liability companies that do not have charitable status find it difficult to ensure that their assets are dedicated to public benefit. There is no simple, clear way of locking assets of such a company to a public benefit purpose other than applying for charitable status. The community interest company is intended to meet this need.
When a CIC is requested, the CIC regulator considers whether applications meet the criteria to become a CIC. If satisfied, the regulator advises the registrar in Companies House who, provided that all the documents are in order, will issue a certificate of incorporation as a CIC.
A charity can convert to a CIC with the consent of the Charity Commission. In so doing it will lose its charitable status including tax advantages. A charity may own a CIC, in which case the CIC would be permitted to pass assets to the charity. CICs are more lightly regulated than charities but do not have the benefit of charitable status, even if their objects are entirely charitable in nature.
Those who may want to set up a CIC are expected to be philanthropic entrepreneurs who want to do good in a form other than charity. This may be because:
- CICs are specifically identified with social enterprise. Some organisations may feel that this is more suitable than charitable status.
- Members of the board of a charity may only be paid where the constitution contains such a power and it can be considered to be in the best interests of the charity. It means that, in general, the founder of a social enterprise who wishes to be paid cannot be on the board and must give up strategic control of the organisation to a volunteer board, which is often unacceptable. This limitation does not apply to CICs.
- They are looking to work for community benefit with the relative freedom of the non-charitable company form to identify and adapt to circumstances, but with a clear assurance of not-for-profit distribution status.
- The definition of community interest that applies to CICs is wider than the public interest test for charity.
Optimum structures for Utilities and Strategic services
National or regional structures and strategies:
It is important that such public utilities as transport, power, water, health and social support should be regarded as National assets. For example, public health should not be fragmented into privatised bits, otherwise national standards will seriously slip.
But within a framework of consistent national standards, service provision is best provided regionally or locally. The UK National Health Service still manages this balance brilliantly, despite underfunding and neglect by Conservative governments, which seem to be confused by the US example.