Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

Taken to its extreme, Public Choice theory, which derives from marginalism, calls for government to intervene as little as possible in the economy in order to minimize the risk of government failure. The public sector should be insulated from the private sector, for example to avoid agency capture – when a regulatory body grows too close to the industry it is meant to regulate.

Fear of government failure has convinced many governments that they should emulate the private sector as far as they can. The premise here is that government is inevitably prone to corruption and laziness because agent and principal are too close to each other. It is essential, therefore, to make public services more ‘efficient’. From the 1980s onwards, private-sector measurements of efficiency were applied to the public sector and in the process ‘marketized’ government. Even the very language changed: hospital patients, social-service beneficiaries and even students all became ‘clients’ or ‘customers’.

The logic of Public Choice theory resulted inexorably in government shedding responsibilities, reducing its investment in its own capacity-building, and eventually to privatization. Privatization can occur through the actual sale of a unit, as has happened with public banks. Or it may be indirect privatization through ‘outsourcing’, whereby a private contractor is paid by government to provide a service – such as publicly funded education, housing, health, transport and even prisons, road traffic management and benefits assessment.

The 1980s, when Public Choice began heavily to influence public policy, saw a wave of privatizations and outsourcing, first in the UK and the US, and then slowly spreading across much of Europe. It was also the decade when, as we have seen, financialization started to take hold. The idea (or ideology) that government control of productive enterprises was inefficient and wasteful became accepted wisdom. In the UK it chimed with the Thatcherite ideological purpose of creating a nation of asset owners, whether of shares or privatized council houses. These were the years of ‘If you see Sid, tell him’, the famous advertising campaign to persuade British citizens to buy shares in British Gas, which was privatized in 1986, and the privatizations of British Telecom and British Airways, the electricity and water industries and a host of smaller government-owned enterprises. The following decade saw the privatization of the railways.

Many other countries did not always embrace privatization with the same enthusiasm as the UK – the French electricity industry, for example, remains basically state-controlled – but it quickly became a worldwide trend. The IMF and World Bank often deployed their considerable weight to persuade developing countries to sell state-owned enterprises. Even in countries where the privatization wave has weakened – if only because most suitable assets have been sold – the idea that the state should not own but only fund (if that) is firmly lodged in the public mind. Today, few governments or politicians argue for wholesale nationalization and government ownership.

But Public Choice theory always ran the risk of throwing out the baby with the bath water. By insisting that government could not create value – indeed, was likely to destroy value – it shouted down the subtler but no less substantive debate about what value government did produce. There may be a strong case for retaining a significant public share in industries that have a natural tendency towards monopoly – essential utilities such as water, gas and electricity – in order to benefit from economies of scale in provision, and also to avoid speculative rent-seeking on basic goods needed. In more consumer-oriented industries, especially ones in which technology is transforming the market (mobile phones, for example), the case for a strong public presence may be less strong – though history shows that often a hybrid public-private form might prove the most interesting, as with French Telecom (which later became Orange).

The solution to the problem of natural monopolies was regulation. In the UK a series of regulatory agencies sprang up, each intended to stand between the public and industry. Regulatory capitalism replaced state capitalism. It was not what pure Public Choice theorists intended; indeed, regulatory capitalism resulted in exactly the kind of government cronyism and corruption that they had warned about.

Another consequence of Public Choice theory has been the rise of intermediary mechanisms to fund public activity. This has mainly taken two forms. One is private finance initiatives (PFIs), for example to build hospitals. The other, mentioned earlier, is outsourcing to private providers to run a wide range of services. In both cases, public activity is financed privately. Turning to PFIs in this way has been called ‘pseudo-privatization’, because the private firms receive their income not from clients in the ‘market’ but from government through a guaranteed profit margin. An outsourcing contract is in effect a type of monopoly which locks the government in as the sole customer. In the UK, moreover, the degree of competition between providers of outsourcing services is questionable: only a handful, dominated by Capita, G4S and Serco, account for most the contracts. 44

The aim of PFI financing is to share costs and remove from the government’s balance sheet the debt associated with large projects such as hospitals; however, it can be costly for the public sector because projects are financed with private debt and equity, which is significantly more expensive than public borrowing. Governments also pay private contractors an annual charge, running for decades and usually indexed to inflation, to cover the capital repayment plus interest and maintenance costs. So exclusive PFI contracts in effect create monopoly licences. The end result can be one where the costs to government are often more than if it had provided the service/s itself. We look at two examples below, healthcare and infrastructure.

Privatizing and Outsourcing Healthcare

In 1948, when the UK was still undergoing a long and difficult post-war reconstruction (public debt was well above 200 per cent over GDP in that year), British citizens received a leaflet on which was stated: ‘Your new National Health Service begins on 5th July. What is it? How do you get it? It will provide you with all medical, dental, and nursing care. Everyone – rich or poor, man, woman or child – can use it or any part of it.’ The National Health Service (NHS) was created that year, following the initiative of the Minister of Health, Aneurin Bevan. The following three core principles were behind its establishment: 45

that it meets the needs of everyone

that it be free at the point of delivery

that it be based on clinical need, not ability to pay

Over its almost seventy years of existence, the NHS has become one of the most efficient and equitable healthcare systems in the world, as recognized by the World Health Organization 46and also more recently by the Commonwealth Foundation. 47In the UK it is considered a national treasure, sharing its place in the pantheon with the Queen and the BBC. The NHS is also among the cheapest healthcare systems in advanced economies: according to OECD figures from 2015, 48health expenditure relative to GDP in the UK was only 9.9 per cent, almost half of what the US has spent (16.9 per cent) on its far less efficient semi-private system.

The NHS owes much of its past successes to its public mission and to its universality principle, translated into an efficient central provision of healthcare services aimed at reducing transaction costs. UK citizens have repeatedly recognized the importance of its public nature: currently, 84 per cent of them think that it should be run in the public sector. 49Even Prime Minister Thatcher stated: ‘The National Health Service is safe with us’ during the 1982 Conservative Party conferences, temporarily discarding plans for outright privatization set out by the Central Policy Review Staff within the Cabinet Office.