makeshift

In public at least, the collapse of the financial system marks the end of an ideology. In 2008, even Alan Greenspan, in many ways the 1990’s figurehead of the free-market paradigm, went as far as to express “shocked disbelief” that “self-interest” has turned out to be anything but a productive force in creating value for society. 

VOID

But if the Milton Friedman worldview of ‘pure’ economics is now dead, what’s strange is the absence of a political worldview to replace it. What has been left behind is an ideological void which still somehow holds the shape of the obsolete model. As the major political parties set about patching and propping-up the old system (whilst simultaneously working hard to give the appearance of slapping bankers’ wrists for being too self-interested) they find themselves wielding the policies and language of a bygone era. As economist Robin Murray puts it: “The first great economic crisis of the 21st century has been met with the economic theory and instruments of the 20th century.”

Not least of these is privatisation. Far from having been diminished by the banking crisis, the headlines have been filled with debates over the further privatisation of state services and assets as a means of resolving the government deficit, ranging from motorways, the BBC and royal mail. 

THE MYTH

Intuitively, quite a lot of us are against privatisation – but largely for what we’d think of as sentimental reasons rather than calculated ones – whether founded in bad experiences of train travel, or simply a mistrust of Big Bad Wolf .plc who is interested only in its profit margin at the expense of ‘people’. These criticisms are not superficial: the policy of privatisation has been comprehensively discredited on a moral basis by writers such as Naomi Klein, Polly Toynbee and even advocates of ‘triple bottom line’ accounting, for its tendency to be chronically short-termist; to exploit workers and resources. Behavioural economists meanwhile have pointed out that the reliance on the consumer to make fair and rational choices and thus drive true competition is also totally unrealistic. Yet despite this there seem to be very few ways to rationalise this moral awareness into anything which challenges the established policy consensus – to challenge the structural assumptions that underpin privatisation. 

The established wisdom still seems to be that subcontracting or privatising a service introduces competition, and as a result increases efficiency.

And it does.

But efficiency is not the same as effectiveness, and it is that distinction (and our difficulty in understanding it) that exposes the false-logic behind universal privatisation.

Efficiency is really a financial ratio – it is not necessarily based on any kind of real world outcome. Most importantly, the increases in efficiency that can be measured in an account book do not take any notice of where the extra value derived as profit actually comes from. It simply takes it for granted that as long as it is coming from somewhere, the organisation must be doing well. The fundamental, fatal assumption behind the belief in improved ‘efficiency’ through privatisation is that in the handing over from the public to the private sector, the end service or commodity remains essentially unchanged -  it is simply delivered in a different way. If we look at privatisation not from a political or financial perspective, but rather from a design perspective – looking at the properties of the whole system, and changes to the products or services themselves, then we can quite logically see that this assumption is far too simplistic, if not profoundly wrong.

A NOT-FOR-PROFIT BUS NETWORK

Let’s take, as an example, the design of a bus network, which covers both densely populated urban areas and less dense rural areas. When operated on a not-for-profit basis, the network’s operators have only three aims: to provide the widest possible service, for the minimum possible ticket price, whilst ensuring its own long-term survival.

This means that is that any given time up to 49% of the network can actually be running at a loss – and it doesn’t matter – that is simply what webs to: absorb shocks and distribute energy. As long as all the employees are well paid, the buses are safe, and money is being put towards future innovations, it doesn't matter if one half of the system subsidises the other. The routes running at a loss are counted as gain, because they are maximising the real output.

A PRIVATISED BUS NETWORK

When this same bus network is run for profit, its operators (acting entirely rationally and morally) very quickly realise that half the network is running at a loss. Given that their ultimate goal is to maximise the profit margin for the shareholders, their logical course of action is to shut down all these loss-making services, so that the surplus value which was previously being used to subsidise them can be taken as profit.

The result is a dramatic gain in efficiency (since shareholder profit has been maximised) but at a catastrophic cost to the overall effectiveness of the system. Financial value has been optimised but the overall ability of the system to create end value has been massively reduced. 

CONTRACT

In fact, this is more or less what did happen to a great many regional bus networks over the course of the 1990’s. As they were privatised, rural routes were closed down and there was intense competition for busy urban ones. But that is not quite what happened. The 'third way' approach is that any part of the service which is deemed to be obviously of public interest, but would not be catered for by the market, is written into the original contract as an obligation. In the case of bus or train routes, this might mean specific obligations to provide a service to certain places, at certain times of day or for a capped price, regardless or whether or not it is profitable to do so. The same phenomenon can be found in almost any privatised public service: whether as regulated fares for train operators or Section 106 agreements for housing developers – they are all instances of essentially the same idea. As far as the companies themselves are concerned, they are effectively little more than a non-monetary tax; a calculated loss which comes out of their profit margin. They would rather not have to pay it – but will do so as long as the overall venture remains profitable.

Throughout the 90's and 00's, this method has been the bedrock of 'the third way': to encourage markets to perform almost every role, and then to create social value as a form of tax.

The crucial flaw in this method is that the contract is being used effectively to defend the end user from the system which is supposed to be employed to serve them.

As you would expect, this places an almost impossible load on that contract, not only because conditions change over time and the contract is fixed, but also because, as sociologist Émile Durkheim once observed, “so much that is contractual is not in the contract”. Public value ends up being produced by organisations which are intrinsically designed to gain advantage by reducing it. If the contract insists on a ‘bus service’, a provider will (over time) seek to reduce what is meant by ‘service’. If the contract insists on ‘2 bedrooms’, a provider will have a motive to constantly reduce what is meant by ‘bedroom’. So when the construction sector announces better-than-expected performance during a recession, most people would instinctively interpret that as good news: but in fact it is probably an indication that the actual end product is poorer - not better. 

‘MARKETISATION’

Far from simply delivering the same product or service by a different means, privatisation profoundly changes the nature of the product or service itself, because it changes its ultimate purpose in terms what kind of value it aims to create, whether through architecture, mobility, infrastructure or public services. The simplistic narrative of ‘efficiency’ is insufficient to understanding this. Although both models are looking at the same basic transaction, they're seeing fundamentally different things. A private company will look at the transaction and ask “how can this be designed to maximise profit?”, whereas a not-for-profit organisation will look at the same transaction and ask “how can this be designed to maximise value?”. Even in purely quantitative terms, these are not the same.

Moral Philosopher Michael Sandel makes a related point (albeit in a much broader context), in discussing how the ‘marketisation’ of all social exchanges fundamentally alters their nature, and the social norms around them. He uses the example of the blood supply, studied by Richard Titmuss, which was observed to become measurably poorer in quality when the transaction was shifted from an altruistic norm (blood donation, as in the UK) to a market norm (blood selling, as in the US). 

VALUE SYSTEMS

This is not to argue that all private markets are flawed – far from it. Neither is it an advocation of a return to centralised / nationalised structures. There was, undoubtedly, a huge amount of wastage and inefficiency in some nationalised services, but our reaction to that has been vastly disproportionate, and listed in favour of a particular economic ideology, which has now been exposed as false. Many innovators and policy makers are now arguing for a much more significant role for ‘third sector’ community enterprises and not-for-profit organisations. The individual design of these needs to be driven by an awareness that no blunt, one-size-fits all approach can any longer be applied to all situations without a more sophisticated (and in fact rational) whole-system approach – and a worldview which can consider how specific systems alter, exchange or create different forms of value through the human interactions within them. Rather than harness old mechanisms to grudgingly deliver forms of value they were never designed to, we need to develop new mechanisms which are purpose-designed to want to produce more value; regardless of whether that value is always financial or not.