I often prepare a speech for such events and then don’t give it; at least not in the precise form I wrote it. This was one such occasion. But it seems a shame to waste a good speech, so here’s near enough what I said:
Thanks for asking me to speak
I have only a few minutes to speak this afternoon at an event sponsored, I note, by organisations with which I have little political or economic sympathy so let me set out my argument up front in case I don’t get time later.
Fist of all I make the vital point that as a chartered accountant, a successful entrepreneur and director of quite a number of companies over many years nothing I am going to say this afternoon should suggest I have a problem with much of what happen in the market in the UK. I don’t. I have specific criticisms of certain aspects of that market but the market is and will be in any future I can imagine a fundamental and essential part of the UK economy.
But let’s be clear: the market I’ve worked in is nothing like the one that right wing economic think tanks think exist. It’s nothing remotely like that think tank world, at all.
Like democracy we tolerate the market I know because it’s the best of the worst options we’ve tried for meeting some of the needs of people in this country and elsewhere.
It’s highly imperfect.
The data it uses is terrible.
No one profit maximise.
Monopoly power is far too prevalent.
Far too many consumers have little or no power to exercise choice because of limitations in their economic circumstances and so they are exploited. Market outcomes for them are distinctly suboptimal, whether with regard to employment, consumption, saving or access for anything else.
And the regulation that is fundamental to making that market work is seriously deficient, not least because that regulation assumes that the market that exists is nothing like the one that is out there.
The result is that in the real world – the one in which I have worked – the idea that the market is able to deliver optimal outcomes for the people of this country is rightly treated as pure undiluted nonsense. That outcome can only happen when we have a perfect market. And we just don’t have one.
The result is that whilst the market is great it’s absolutely lost unless it has the foundations of a strong state on which it can be built. Let me put it like this. Think of a cappuccino. The cup is society. The black coffee is the foundation on which society is built – and that is the state. On top of that is the white frothy milk of the private sector and what really confuses us, because in reality the coffee and frothy milk have to mix together to deliver the product, is that what we see is the froth on top, and most especially the hot chocolate or nutmeg.
That stuff – the stuff we see – the stuff that’s exciting in life – is provided by a small part of the private sector but it is only in that area, where most of us have very real but severely budget limited choice on how we spend the small part of our income over which we really have much discretionary control, that we think we see the real market at work. That leads to the myth that markets are great, create choice and deliver all good things.
The impression is a myth. Underneath that froth there’s a state that works in intimate partnership with quite large parts of the private sector.
The state creates the property rights that allow there to be a private sector.
And it should at the very least properly regulate these sets of property rights – such as the availability of limited liability and its abuse – abuse that is such a feature of current market failure.
As we also all now know, the state is also guarantor of last resort: the financial crisis proved that.
But these are fundamentals. More important is the positive role of the state. Like it or not we live in a time when the private sector is to very large degree not innovating. Indeed it’s pretty much not investing at all either. That’s because Keynes’ ‘paradox of thrift’ is ruling the roost out there right now. In this situation the state has a dual role. It is the inspiration of much innovation in the economy. By saying it wants reform the state stimulates the private sector to spend. Alternative energy for example would not happen without it, for example, or nuclear power come to that.
I genuinely believe that right now is a time for lots of new regulation for that reason – it delivers real reform that stimulate markets. And we certainly need that stimulus.
That’s because the sad fact is that Keynes rightly said in the 30s that markets can settle on equilibrium where there is also unemployment. That’s where we are and I suspect across left and right and for different reasons maybe we all agree that the current level of unemployment is unacceptable.
But we have to recognise that this failure to employ people is a market externality: a cost of market failure like so many costs of market failure that I feel it is beholden on the state to address. And in this case it can address that problem: it can and should borrow and spend now. Yes I mean that: it is the one and only way out of our recession. That and changing pension regulation to require that 25% of all pension contributions be invested in job creation could deliver all the stimulus to economic activity this economy needs to get us out of the mess we’re in.
But let’s add some more functions for the state in that case. It doesn’t just correct for the externalities of the market – such as failing to invest. It has to deliver some services that we simply could not afford that the market deliver. Heath is the perfect example. The UK simply cannot afford competition in health care. All the costs of admin which have burdened the NHS so heavily are the result of the introduction of spurious market systems in the NHS creating massive costs that have not delivered front line gains. And the only thing worse than that faux competition would be real competition.
Real competition requires two things. One is excess capacity to allow for choice. The second is the option for failure.
Well, we spend 8% of GDP on health and if we want to create lots of excess capacity to allow for real choice then we’ll have to substantially increase that percentage – all of which will, be wasted because it will be excess capacity. That’s a cost we can’t afford. A cost of duplication.
And we can’t afford failure either: failure in the NHS will always hurt real people first. Organisations will fail second.
So the conditions for a market in heath care for all I the UK simply don’t exist, any more than they do in education, transport infrastructure, social care, pensions and quite a lot of other things too. So the state has to supply. It is the only efficient supplier there is within the resources we have to commit for the benefits we want. The recent Commonwealth Fund report on the US revealed that. The US delivers worse outcomes at more than double cost to the UK.
So the state is actually the most efficient supplier of many services that the people of the UK want and if it opts out of supplying them all it does is grant a quasi monopoly within a regulated environment to a favoured corporate entity that has only upside gain and no real down side risk: whatever else you call that it’s not delivery of the benefits of the market for the consumer.
So we have and need a strong state in this country. Not only a strong state as the foundation of the cappuccino of an economy we have – but one which has a good saucer too – because that’s the welfare state that makes sure people don’t fall through the system – oh and democracy too because that’s the spoon that determines the final mix and adds in the sweetens that make the whole thing palatable to so many.
But there’s a pre-condition of this. It’s the existence of a courageous state. A state populated by politicians who believe in the merits of the government that they’ve been elected to run, of ministers who believe that they add to human well being and do not harm it as so many of the existing team seem to do.
That’s why The Courageous State the title of my forthcoming book – which will be out for the party conference season. And it’s, in my opinion, the only salvation available for our economy, but most importantly too for our markets – where right now the milk is threatening to crowd out the coffee and deliver us something which is far removed from the democratically controlled mixed economy that the people of this country desire.
You can deny that if you like – but if you do I stress one thing: you’re not living in the real world out there. And when policy isn’t based on reality that’s when the problems really begin.
It went down well – with me alone I think as I’m afraid to say the left were somewhat under-represented at this event which turned out to be a right wing think tank love-in with even Jesse Norman appearing to be a left winder to this audience.
But I certainly delivered broadsides when it came to my answers to their questions, except that is for the ones that neither Jesse Norman oir I could understand – and there were one or two of them.
It was odd to find myself siding with a Tory against the right – but then, when faced with those who argue that democratic government has no legitimacy when it comes to creating regulation which should be made competitively by the market without mention of accountability then you realise you are up against a very real threat to society itself.
And that’s why all democrats have to stand up against organisations like the Institute for Economic Affairs that promote such ideas.