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Economics

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.