Why neo-liberals ask the wrong questions

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I have noted the extensive discussion on one of my blogs concerning the value of public services.

A PWC director named Gary Taylor is challenging the idea that more public services necessarily create better value for society. I think that’s a fair question, although the way he’s going about the issue suggests a somewhat dubious grasp of the nature of evidence and of his ability to both read and interpret it, as both Alex Cobham and Howard Read (to both of whom I offer my thanks for their invaluable commentary) have shown.

I think it fair to say as a result of their interventions that Gary Taylor has conceded that it is clear that spending more on government in developing countries does add value. I’m pleased he has. He argued otherwise , based on PWC’s very dubious methodology that was once included in the World Bank’s ‘Doing Business’ project — but from which the World Bank has now withdrawn it, I suggest, for good reason.

But that leaves the question, which Gary has repeated and which I paraphrase as “how do I know that more spending on government services will add value to society”.

So let me say straight away, simple maths, correlations and statistics will not answer this question. Of course it is true — as Gary has accepted — that it is possible to say that developing countries do not have enough government and could benefit from more. But it is not possible to say that, by definition, 42% of GDP spent on government services is necessarily better than say 39% spent on government services. Just as Gary seems remarkably confused about many aspects of tax — not appreciating for example that tax paid is not a simple function of tax rate, but a complex equation of tax rate multiplied by the tax base having allowed for the loss to the tax gap — so he also seems confused about many aspects of fiscal management.

A simple example provides clear illustration (and I quote the numbers from memory, but they’re near enough right). The UK spends a little over 40% of GDP on government services. About 8% of GDP — or about one fifth of government spending — is on health services, and the private contribution in addition to that is small. The US on the other hand spend about 29% or so of GDP on government services but the government spending on health is low whereas overall 16% of US GDP is spent on healthcare, for outcomes that are rarely better (which means occasionally they are) than the UK (which means for many they are worse). So add US government spending and healthcare spending together and they come to more than UK government spending including healthcare provision. Who is better off? I’d clearly argue we in the UK are. Who on earth would want to waste 8% of GDP on healthcare admin as the US does for no health benefit? It’s ludicrous. Very obviously state healthcare provision works better than private healthcare provision. Economies of scale and the opportunity to eliminate monopoly profit (and yes — healthcare abounds in it, from the need to be qualified, and the requirement for a licence to sell drugs and on and on and on) abound in a state supplied system — where such monopoly abuse is contained for public benefit.

So there is proposition number 1 on why the state is the best supplier of services — that it is a very efficient supplier of those services where there is a natural monopoly in supply and where in the absence of the state the consumer would be exploited by monopoly profit. Services where this can happen are commonplace: medicine is far from being their limit. Access to legal services is another such area; accountancy another, and education given that access and supply is (quite appropriately) regulated are others. Professions do, in other words, have capacity to exploit precisely because they are granted privilege by the state. That’s why legal aid and state education are essential as countervailing supplies: it’s why HMRC advice centres, now disappearing fast from a community near you are also vital as a mechanism for ensuring the opportunity for excess profit is not exploited.

But education is part of the crossover into another type of service where state supply is essential: where universal supply benefits all and would be very unlikely to exist in the absence of state intervention for two good reasons.

Firstly, some no doubt could not (I stress could not, not would not) access the service if it was not supplied by the state. The 25% who do not access private medical insurance in the US are example of this.

Second, some would not have opportunity of access. The obvious fact that some parts of the country will be effectively denied access to the postal system if Royal Mail is privatised as the ConDems are suggesting is example of this. The market chooses not to supply some people — and only the state can then supply, doing so most effectively through cross subsidisation rather than merely picking up the marginal and costly extremes.

Thirdly, it is very obvious that we cannot afford to duplicate many services. There is only room for one water system, one gas supply network, one national grid, one health service, one education service, one rail system, one road network and so on, and on, in the UK.

Of course I know that some of these services have been privatised but under strict terms of regulation in each case, and with the facade of competition that results in some cases (but not water, for example) being just that: a mere facade. Such competition does, in fact, take place within very tightly regulated parameters in the electricity and gas markets, for example, and the result is a public utility paying an excessive price for its cost of capital when compared to the rate at which the state can raise equivalent funds — imposing as a consequence an additional cost on most people which represents a regressive redistribution of wealth upwards in society to those who own that over-priced capital — including the minority in our society who benefit from private pension funds. Such is typical of the whole drift in capitalism over the last two or three decades — where innovation has been largely foregone in favour of the sole remaining idea of capturing the revenue of the state for private benefit.

As for private schools — they serve a small part of the population (well under 10% of children) and their much lauded model is not replicable for society as whole unless we are willing to devote substantial significant resources to schooling — which only the state could do. Remember the cost of educating a child in the private sector is much higher than in the state sector — suggesting that actually if there is a productivity issue to consider that it is the private sector that needs to worry. So called excellence comes at a considerable price, and when selective factors are excluded may just look like hopeless inefficiency. To suggest the private education sector provides an alternative model may, therefore, be extremely unwise.

Next, some state services can, candidly, have no real private alternative. I am well aware that there are people — free market thinkers — not far removed from the ConDems and their friends in the Taxpayer’s Alliance — who propose private police forces, even private law, and privately run tax services, and private armies, and private pensions (with no state alternative) and on, and on. But we don’t have those things for good reason. We have one law, one judiciary, one police force (yes, it’s split regionally, but it’s still one police force for one area), one army and so on for one good reason: anything else results in the breakdown of law and order. And we have a state pension because it was really quite uncomfortable to continue with the work house (although the two systems overlapped until the end of the Second World War when it took a Labour government to provide some dignity for those in old age). And we need a state pension because nothing else works. As I’ll be showing shortly, private pensions are probably the biggest waste of money in the entire state spending pantheon.

But of course that leaves some grey areas. Like old people’s homes, which with suitable regulation can be in the private sector. And it may be true that some services can be outsourced — but when that has to date been almost solely on the basis of undermining the reasonable employment rights of those working in those sectors, I candidly doubt it. I’ve always aspired to the best: I see no reason why I should do so though at expense to others. If that is the sole model on which the grey zone works then I know that actually this only happens because of the hidden subsidies the state supplies to the private sector business and without which most of them would fail as their cost model is dependent upon the internalisation of that subsidy in their model of profit.

What are those subsidies? The supply of trained staff, for nothing. The supply of healthy staff, for nothing. The supply of enforceable property rights, for nothing. The supply of the infrastructure for trading (limited companies, etc.,) for near enough nothing. The supply of standards and regulations that ensure there is a level playing field upon which honest traders compete — by eliminating as far as possible the rogues, for nothing. The supply of transport infrastructure at marginal cost. The supply of the safety net in the form of benefits and old age pensions that mean employees can afford to take the risk of working for companies that cannot offer guarantee of continuity of employment without demanding the risk premium within their wages that this would otherwise require. Again, I could go on, and on. But my point is this: the benefit of each of these services is at least partially captured for private gain by the private sector business, and its profit model is dependent upon doing so. Cut the supply of these services and the private sector private model becomes very vulnerable.

And that’s not the only way it is exposed. As the whole privatisation model shows, much private sector growth of recent decades has had nothing to do with innovation, entrepreneurship, flair in the supply of new services, but an ability to capture the legislature so that it delivers public surplus for private gain. That is all the privatisation model has done.

This is widespread though, even without privatisation. Let’s go back to medicine again — because it’s something I know a bit about as I live with a doctor and get to reads things like the British Medical Journal on occasion as a result. Gary Taylor — who initiated this train of thought - has sought to argue that the King’s Fund have shown that productivity in the state supply of medical services has not risen as a result of extra spending. As with much else he has written, his acceptance of this argument seems dependent upon a remarkably linear view of relationships within the supply of complex services, and a complete lack of appreciation of what those services really are.

Medicine has changed dramatically over the last fifteen years: maybe a little longer, but not much. At one time patients arrived with an illness, which is an issue they perceive to be a problem which has symptoms they can identify (even if it is only ‘tired all the time’). In time gone by those symptoms could either be connected with the pattern of a known diagnosis, in which case they were considered to have a disease (treatable or untreatable, they now had a diagnosis) or they were sent empty handed away as the medical model provided no known answer — which may happen, even now, in 30% of cases.

That’s the way things were, and drug companies and medical suppliers made a lot of money as a result.

And then the supply of diseases that could be easily treated by identifiable drugs began to diminish and so returns on private sector investment in pharmaceutical development declined. Put simply, not enough people had diseases to ensure that profitability could continue to grow.

As a result two phenomena arose. The first was the invention of new diseases — if I have a pain in my arm through typing too much it’s now called Work Related Upper Limb Disorder. Now I’m not suffering an illness — I have a disease. That creates opportunity for treatment and as a result for profit. The obvious fact that I should change my posture is ignored: let the money flow.

More significant is something else. And that’s the fact that pharmaceutical companies realised there was substantial money to be made in extending treatment beyond those with disease to those with risk factors for disease.

At one time people lived with high cholesterol. And they lived with hypertension. They even lived with class 2 diabetes inducing glucose conditions. And so on, and on. But then big pharma persuaded the public that life could be extended if these risk factors — I stress not illnesses in their own right — were proactively managed to mitigate risk of a diagnosable disease developing. The timing for intervention changed from the onset of illness to a moment or long time before that event might ever happen.

This changehas, of course, meant the prescribing of vast quantities of drugs. It has engaged vast quantities of tests. And enormous numbers of GP appointments. Armies of specialist nurses are engaged to run clinics. And yet — and this is the key point — these interventions are likely to be effective in less than one in twenty cases. And that’s a top end estimate. In other words twenty people might be needed to be treated for cholesterol to prevent a stroke — and maybe many more. This prevention process is at cost to the state. It is at cost to NHS productivity — which has of course appeared to go down as a consequence. But absolutely every one of those interventions is effective for a drug company, without exception. For the patient they might actually be negative. Is it, after all, worth treating someone over age 85 for hypertension when all interventions have risk of side effect and when the best outcome from successful treatment of hypertension is a slow lingering death from dementia or cancer when the option of a quick heart attack might be better for most? And did anyone ask the patient this?

What’s the net outcome of all this? A claimed fall in productivity in the NHS and a significant rise in private sector profits. That’s not chance. That’s by design of the private sector who have imposed demand for this activity on NHS practitioners, some of whom at least are willing to stand back and say “does this make sense” in the face of political pressure to do all big pharmaceutical companies say is possible.

Why raise the point? Because this is a discussion about what the state should, or should not do. Because that debate has been set by the person raising it on this blog — a director with PWC — in numerical terms. Because that questioner seems to think that somehow tax collected is related solely to the rate, not the rate multiplied by the base. And because the reality is that tax is as much dependent upon the base as it is the rate. So too in the case of public services. To argue that NHS productivity has fallen when much of that fall is the logical consequence of public pressure quite deliberately manufactured by pharmaceutical companies in pursuit of their own profit is absurd. When the consequence of that private capture of public funds is to increase demand for services, especially at the end of life, where the inevitable outcome will always be death, then I’m not saying it’s wrong to provide that service — far from it - but I am arguing that the base demand for services from which there will never be any productivity gain (as measured in deaths avoided, for example) because either the service supplied is by definition very poor at doing that or because the vast majority of patients treated would never have died anyway, or because the cost of treating a person prior to their death rises as a result of the treatment is a burden at least in part imposed on the public purse with primary objective of increasing private profit.

These are not however issues capable of being measured purely quantitatively. To seek to do so, to even ask the question quantitatively is actually absurd. These are questions that can only be answered either qualitatively or ethically because the question of whether some might have access to services that may extend life because they have financial means and others are denied them because they do not is clearly an ethical question.

So the point is — to view the world from a neo-liberal perspective, to think that the market can make decisions on these issues, or that the crude (and I’ll tell you — they’re crude) measures that accountants and economists can come up with on productivity give any real insight into these issues is absurd. They can’t.

In other words, the question I’ve been asked is simply the wrong question. To answer the question about what the right mix between state and private services is has relatively little to do with proportions, or affordability even (we can afford all the services referred to if we want them —we just have fewer flat screen televisions instead). Rather the question is about health versus flat screen televisions: education versus holidays in far off places, law and order versus home makeovers, and so on.

And if people want health, education, law and order and so on then we have a mechanism for saying so. It’s called the ballot box. It’s not perfect. Right now the LibDems are, within months of an election delivering outcomes the exact opposite of what they campaigned for in the general election — and I sincerely hope the electorate remember that fraud for a long time to come. But a democracy made up of two elected chambers (a weakness in our system now), elected on differing systems, with an executive held accountable by that legislature, with a strong judiciary and a fully functioning free press is the best basis for discerning the reality of this demand. More effective by the way than the market when the latter is so distorted by advertising, PR and more, I suggest in very many cases.

And remarkable consensus arises as a result — a consensus now being challenged without a mandate by the ConDems. And in doing so they’re doing something worse than that. They are trying to see this as an issue of finance alone and are ignoring the ethical and qualitative issues that the changes they are imposing raise. Unsurprisingly ministers are finding now they’re in office that things aren’t the same as Gary Taylor of PWC envisages them to be. That black and white don’t exist. That quangos - so hated in opposition are actually doing really useful things that would require the quangos to be reinvented if they were abolished. And that cutting is not some spreadsheet exercise. And that balancing an economy even is not just about money — indeed, that’s it very far from balancing money. It’s about using the resources the economy has to best effect to meet the needs of those who live within it. And the strongest, best and most effective of those resources is the people who live in a place. And the most important objective of government is to have those people working. And the way to balance the books is to have them paying, thorough their taxes on the wealth they are generating, for the choices they make within the public sector.

That’s what is possible.

That is why Keynes said if you deal with unemployment you deal with the budget deficit.

That’s why this ConDem policy is wrong.

That’s why the question Gary Taylor asked is so very wrong.

The fact that he could ask it is indicative of how far removed the understanding of so many so called experts is of what really makes out economy work.

And the need for change is evidenced ever more strongly every day that those so ignorant of what we need to do stay in charge of the UK economy.

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