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When it comes to the crunch, the private sector really does know best

A response to David Mitchell

I guess at the outset I should acknowledge one thing: most people don’t read David Mitchell to understand economics. So my assaulting his article on outsourcing in universities on economic grounds could perhaps be likened to calling down an Apocalypse Now-style airstrike on the Andrex puppy – not only is it overkill, but the target is, putting it mildly, somewhat inappropriate. If I wanted serious economic debate, I should not be laying into the views of a lovable comedian.

But, I think I can justify my behaviour in two ways: first, as the great sage Colonel Hannibal Smith once said: “Overkill, my friend, is underrated”; second, sanctimonious, repetitive, left-wing drivel appears to be clogging up my Facebook feed. Now, if this tsunami of digital botty-water had a single source, I would put it down to the individual in question being dropped on their head from a great height as a child and kindly point them in the direction of the Socialist Workers’ Society. Unfortunately, it has multiple sources, generally from hard-working, serious-minded individuals, and therefore the more apt diagnosis is to trace such leftist-fervour to the kind of ignorance one can only obtain through long hours of study.

In other words, people actually believe the mainstream media’s sermon that the case for state-intervention is an absolute necessity: The evil capitalists, complete with monocles and top-hats, truffles overflowing from their mouths, would, given half a chance, ride roughshod over decent working men and women in their psychotic pursuit of profit, were it not for the virtuous state-employees who prevent such systemic insanity. And, should ye doubt this picture’s accuracy, you must have been living in a cave subsisting on molluscs, for, verily it is written that no one who has witnessed the events of the last five years could but see the truth of capitalism’s excess.

I think Mitchell’s article is slap-bang in this tradition – he is warning that the private sector’s lust for profit is fine when confined within certain ‘reasonable’ preset limits. But if capitalism is allowed loose on currently public operations, it will act like a Viking who has just finished up at a brewery and stumbled into an under-21s abbey with broken locks on the dormitory doors. Let’s take a look at two of his assertions:

The private sector caused the credit crunch, the financial crisis, the global recession. The public sector bailed out the banks and brought the world back from the brink of ruin.

There’s no denying that this is the story that the media’s running with. But is it true? Well, if by ‘The private sector caused the credit crunch…’ Mitchell means a government-owned institution, run by government-appointed staff expanded the money supply at a lunatic rate in response to government-set objectives according to government-defined measurements, generating an artificial boom and allowing unprecedented government-borrowing, before government-bailouts were used to rescue failing institutions which had lent, as per government-regulations, over thirty times the quantity of their actual deposits, then, yeah, I guess Mitchell’s first statement is true. But – and please feel free to call me a sardonic reproductive organ – I somehow feel that this isn’t what Mitchell was getting at.

So how about the second assertion? Well, the public sector did bail out the banks, but that didn’t bring the world back from the brink of ruin. Rather, it took the time-bomb that was about to go off, hit the ‘snooze’ button and tossed it into a munitions dump.

It has become apparent that anyone with any actual knowledge of economics has long since abandoned the sphere of government to an invading force of lobotomised, trust-fund babies who devise economic policy by finger-painting on the state’s official letter-headed paper. O.K., the Americans allowed Lehman Brothers to go down but apparently the person who was taking care of the Yankee trust-fund babies during this time was subsequently called away, and so they resumed their default lobotomised behaviour by dropping whopping great quantities of cash onto the balance sheets of Bear Stearns, AIG and Goldman-Sachs. In the UK we appear to have been without the benefit of a carer at any point – our lobotomised trust-fund babies opted to add the cost of bailing out such institutions as RBS, HBOS and Standard Chartered to the national credit card. And, in pretty-much all countries, the spiralling debt from bailouts has been compounded by vast ‘stimulus’ programs initiated under the absurd lobotomised-trust-fund-baby belief that via the construction of pyramids we shall increase the quantity of bread.

The full consequences of the housing-bubble have been deferred and expanded by inflating a gargantuan ‘government-bond-bubble’, which, incidentally, will probably implode as interest rates rise in response to, either, the realisation that there is just no way that the West can honestly repay its titanic debts, or, China’s economy overheating. (China’s economy would overheat, at least in part, because of its massive housing bubble – China has essentially constructed entire cities which are massively overpriced and consequently without residents to artificially boost its GDP; another monument to the effects of government intervention.)

So Mitchell’s assertions seem ever so slightly inaccurate. Nevertheless, the left has never allowed annoying little things such as reason or truth to get in the way of their message – and their message is clearly present in Mitchell’s article: Subjecting state-funded universities to capitalism will only damage them. Why, he says, look at the railroads: “When our railways were in public hands, they were shabby, unreliable and loss-making. In private hands, they still are but public money ends up in the hands of shareholders and the tickets cost vastly more.” Or, perhaps, observe the NHS: “The NHS is the most efficient health service of its peers despite having, up till now, much less private sector involvement than they do.” Still not convinced? Well, think about our armed forces: “The armed forces remain in the public sector and people seldom have cause to criticise their efficiency or commitment.” So, returning to higher education, introducing the profit motive, if only into administrative areas, would introduce a conflict of interest: “One half wants to run a good university, the other wants to make money. If a marriage is a partnership, isn’t this like getting hitched to a hooker?”

Since I don’t want to turn this into a full-blown treatise on public services, let me just note in passing that Mitchell’s claims regarding defence, health-care and transport are certainly open to question. (But I’ll say a little more about trains later.)

Instead, I want address a common confusion in leftist thought: We proponents of capitalism do not assert that the private sector is always more efficient and always provides a better service. What we do assert is that firms in the private sector which do not attract customers will go bust without a helping hand from government. The helping hand can take many forms, none of which are socially beneficial – letting inept institutions go bust is always the better option. For example, preventing the railways from going bankrupt is not ‘good’; it does not somehow prevent all the tracks, carriages and engines from being mysteriously zapped from this plane of reality. All the actual stuff would still exist, but the tendency would be for ownership to be transferred from the inept to the competent. But when government steps in and bails these losers out, what actually occurs is a perverse arrangement where wealth is redistributed from the competent, who are taxed, to the inept, who are bailed-out with the proceeds of tax.

In fact, this is the crucial difference between private and public sectors – private sector agents need to attract the voluntary interactions of other agents. Public sector bodies need not give an airborne fornication about this. I’m not saying that all state institutions are staffed exclusively by obnoxious, incompetent twerps. I simply want to point out their survival depends less on their competence at achieving the purpose they were set up to achieve than it does on their ability to convince their superiors to continue granting them funding.

Because the left fails to fully understand this distinction they are condemned to repeatedly confusing the failure of government with the failure of markets: If a firm goes bankrupt it is not a market failure but a market success; if a firm is bailed out, subsidised, granted monopoly privileges, protected by tariffs and quotas and embargoes, chosen as the provider of government services, granted favourable regulation, or supported artificially in any other way, then this is not a market failure but a government failure. This also is why Mitchell is led to make that odd claim about the trains – he fails to appreciate that firms which participate in ‘government failure’ are not pure private sector for they are supported artificially (i.e. via non-voluntarily obtained funding), and nor are they pure public sector (i.e. they are not bureaucracies).

Universities are clearly within this category of ‘blurred institutions’ and I suspect I’m right in saying that Mitchell knows this, but because of their charitable status (i.e. they pay no dividends to their owners) and their reliance on state funding, he includes their staff members under the category of ‘public sector-workers’. Irrespective, his central claim is that universities should get their houses in order “without holding hands with a profiteer” (a profiteer presumably being the landlubber equivalent of a privateer) who is “untroubled by conscience.” I think two points need to be raised in response to this, and both concern the concept of ‘profit’.

Firstly, related to the above, it is nonsensical to claim that the private sector has a single minded pursuit of profit at the expense of the services it provides. Rather, the extent of a firm’s profit indicates how well they are doing at supplying their services. It’s crazy to suggest a butcher that decided to cut costs by getting rid of all his refrigerators and just leaving his meat out the back would see his profits rise sustainably – rather, people would stop buying his rotten meat and he’d go bust! Equally, if universities hire a firm to perform administrative functions which doesn’t do a good job, it’s slightly nuts to believe that the university would continue to use them! If the privateer – sorry, profiteer – does a bad job, wouldn’t they see bankruptcy?

Secondly, ‘profit’ has far less relevance here than Mitchell thinks. It’s true that within a firm, shareholders receive dividends – but so too do employees receive salaries. Both are benefitting, and that’s important, especially since public sector workers are also salaried employees and thus also profit from their jobs. To imply, as Mitchell does, that state-funded workers are unconcerned about profit and simply concerned with running a good university is hopelessly naïve. Because of this, outsourcing administrative functions is no more evil than employing a bunch of administrators to do the task directly. In fact, calling outsourcing “ruthlessness” and the “prioritisation of profit” makes no more sense than accusing a family of ruthlessly prioritising profit because they are buying food at a shop instead of employing someone to grow it for them.

Furthermore, if the profiteering firm that is performing university admin is fired for being inept, I think we can all agree this is the way the world should be. So… shouldn’t this same principle apply to currently employed administrators?

Finally, if such outsourcing saves money then surely this is to the public good? The saved money can be pumped back into the university and hopefully used to fund more research or increase teaching hours or perhaps even bestow scholarships. After all, plenty on the left argue – quite correctly, I think – that society is enriched by the existence of universities. But I never hear anyone argue that society is enriched by the existence of university administrators, and I suspect there’s a good reason for that.

9 comments to When it comes to the crunch, the private sector really does know best

  • connor

    Wonderful article

    Reading the Guardian has become bad for my health. That people still exist that so hate free markets and so love the state is a scary prospect…

  • “There’s no denying that this is the story that the media’s running with. But is it true? Well, if by ‘The private sector caused the credit crunch…’ Mitchell means a government-owned institution, run by government-appointed staff expanded the money supply at a lunatic rate in response to government-set objectives according to government-defined measurements, generating an artificial boom and allowing unprecedented government-borrowing, before government-bailouts were used to rescue failing institutions which had lent, as per government-regulations, over thirty times the quantity of their actual deposits, then, yeah, I guess Mitchell’s first statement is true. But – and please feel free to call me a sardonic reproductive organ – I somehow feel that this isn’t what Mitchell was getting at.”

    Brilliant paragraph.

    As for the “overkill,” I wouldn’t worry about it. As long as the MSM prints the drivel, someone must refute it.

    How are you finding your Austrian ideas received at Durham? I too went there and most people simply glazed over at any mention that endless money printing and 0% interest rates could possibly have a negative effect.

  • Alex

    Hi Tyler,

    Thanks for the kind comments. When it comes to Austro-Libertarianism, I guess I have one advantage within Durham – I’m not in the economics department! When I speak to the staff in the economics department they are always pleasant and interested to find someone who studies Austrian theory but none of them (that I know of) teach it – and when I was part of the department during my undergrad years I can’t recall ever hearing the term ‘Austrian-school’. But there are two encouraging things:

    First, Brian Snowdon is at Durham at the moment and although seems to be part of the mainstream Marshall-Keynes-Friedman tradition, the latest edition of his massive book on Macroeconomics featured a chapter on the Austrian school written by Roger Garrison.

    Second, more encouragingly, it’s going down well amongst many of the students who have seen the Keynes/Hayek rap battles and have been inspired to look more into Hayek’s theories, which of course they have heard virtually nothing about. (Needless to say, I’m hoping to establish the Austrian perspective more firmly within the Uni next academic year!)

    Alex

  • Standard Chartered? Are you sure you don’t mean Northern Rock?

  • Thanks, this was hilarious and so true!

    The comments on Mitchell’s article are just astonishing! The people of Britain seem to be — well — mesmerised. It’s a shame that they’re closed, could have linked here…

  • Tom Boardman

    I hope I will be forgiven for speaking up in the lion’s den, as it were: there is no sense in preaching to the choir, and ‘ill-informed’ dissent from the stalls, I hope, is preferable to ‘ill-informed’ silence.

    I shall be honest from the start that I come here without a degree in economics- indeed, with a Labour party membership card in my back pocket: I posted the original article on my facebook wall. But what I write here is as much in the spirit of curiosity as debate, and I hope it is treated as such.

    Pre-emptive defense establised: what did I find so thunderingly wrong with Alex’s post? Well, he begins in likening his argument to “an Apocalypse Now-style airstrike”, and for me this comparison is entirely apt; as the American army failed in the Vietnam War in attempting to destroy ideas with napalm, so Alex commits a similar category error in trying to dismantle an ethical argument by economics.

    That free markets eventually but inevitably lead to a more effective ‘invisible hand’ (a proposition that does not a priori seem likely to me- possibly more on that later) is neither here nor there when great social ill is possible, even likely when the reins are loosed.

    Take the train example. When NR was privatised in the nineties, a gaggle of idiot right-wing fingerpainters (you’re team has them too, I promise!) privatised it *badly*- I mean *BADLY*. In order to make more money (oops, there’s Mitchell’s point, back for round 2!), the government sold off the different asset classes separately: a different chap owns the trains to the chap who owns the rail networks, with rail networks granted exclusive use of routes. The beauty of this system is not only the complete lack of competition providing no motivation for lowering prices, it is that if South West Trains went belly-up tomorrow, *the trains in question could actually disappear* as anyone buying out SWT would not be buying their rolling stock and would likely cut back on regular expenditures like carriage rental. And that is to say nothing of the armageddon scenario in which the belly-up is sudden and catastrophic- £50m GDP down the toilet at least if a single line went down for 2 days.

    Now this would all (possibly) balance out in the long run, even my doomsday scenario could be such a lesson to all of the other poorly-privatised rail companies that it would never be risked again- this may eventually lead to a lean and limber private rail network of startling efficiency. Eventually. But in the meantime I don’t want it to be *my* network that goes bust for two days, I don’t want cutbacks on trains or sudden ticket hikes. I don’t want my trains fully privatised and cut loose- they are something I must be able to depend on, and with (and this is the linch pin) a nod to Rawls, so must everybody else.

    Likewise I do not want what may be my son going to a university where the structure of the administration is subject to the whims of the market, whatever they may be.

    I could go on but instead, to set the cat amongst the pidgeons (and perhaps learn a thing or two thereby), it is a similar argument that colours my, albeit naive, perception of economics as being a necessarily intrumentalist discipline. Although the appearance of an ability for design in economics may turn out to be an illusion: so long as it is a possibility, ethically we *must* try to steer the economy at large.

    Alex; by all means, bring the rain.

    • Good Evening Alex,

      We have no political affiliation , so we welcome comment from all types interested in honest debate.

      Railways:

      The railways were made by great visionary profit seeking Victorians with no state financial support. They were made with the owner laying the track at his risk. They were privatised not from whence they came, but in a bossed eyed way based on some neoclassical illogical idea of perfect competition (must have competition on the lines). For some odd reason, the track was viwed to be a public good, this is a good not provided efficiently by the market. This is a very odd view as the railways were build by the market. This as a Labour Party supporter, I would think you would have supported (the illogical view). The Labour Party sadly holds these views. The Conservative Party at the time also did. Why they were not replaced back into the private sector as they were taken from their rightful owners, such as the Great Northern, Great Eastern etc with rolling stock and line + stations owned by private capitalist who know what they are doing, is beyond me.

      Thnking of Tesco, I would happily have them get involved in the supply of education. They might listen to what the consumer of it wants and the employers of the consumers. More traditional education for the sake of learning and not utility could then also be bought in addition to what I have just described. Why take your money via tax, create a sub standard system and then provide it to you for “free?” Real hard up people can be provided for by charity , scholarship and even a levy on all who can by the providers would do the trick. Give you back your money extracted from you via taxes and you have more than room temperature IQ and can buy education with it. Why the State with random central planners has to get involed again is beyond me. Release the creative talents of people to provide education solutions and like with all things privately provided , where there is no state messing it up (like the railways), then you will get better provision.

      Humans act, they act purposefully. To not act is to not be a human. We rank our most uergent actions be it eating, reading a book, buying some food in order of preference. This sets for all times and in all places the downward sloping demand curve. This is all derived from the first axiom. Supply is set via the entreprenurial process making best judgement on satisfying the most urgent needs of people. The profit motive guides this. Note , profit is not just money profit as profit is always what is left in the mind of each transacting party when they exchange otherwise they would not exchange anything or do anything if they belived they were going to be worse off. All your actions are guided by the profit motive . Your a profit motivated capitalist and you do not know it!

    • Robert Sadler

      Tom,

      Why wouldn’t you want your son going to a university where the administration was “subject to the whims of the market”. Lets say the administration dept was fired for incompetence and replaced – why would this be bad?

      I received my professional qualification from a private organisation (with private admin, exam proctoring etc.) and in my view it carries far more weight in my industry than my degree from a university. The content and rigor is again (in my opinion) far more relevant to what I do on a daily basis. There are also other, private qualifications (notwithstanding actual work experience) that will get you far further in life than your average university degree, many of which, in my view, are a waste of the three years spent getting them.

      Trust me, the less the Government is involved in your son’s education, the better off he is.

  • Samuel Eglington

    My question and it applies to any government department looking to outsourse services is this. How can you be so bad at providing this service that you can pay somebody less to do the same job and they make a healthy profit from it.

    My objections to privitisation are the same now as in the 90s firstly state owned monopolies are badly run with insufficeint re-investment therefore any company taking one on will require susidies in on form or another to stay affloat. That company will also have a monopoly and the subsidisation will prevent competition from other business.

    Dont blame companies for wanting to make money; blame our government for being badly run.

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