Britain’s economy is now almost entirely a private sector one. Government has withdrawn its state interest from most of the economy, and left it to the market to get on with it. Legislation, regulations and the current practice of minimal Civil Service oversight, minimal front-end decision-making and contracting-out, place Government in a weak position in pursuing the national interest in the face of the powerful corporations who, very often, are under foreign ownership.
There is a now a strong case for radically transforming the relationship between Government and the Private Sector, so that the partnership is much more one between equals, where the Civil Service is strengthened, risks are shared more equably, and societal objectives and national interests, not just private profit, take a prominent place at the front of partnerships and contracts with the private sector.
There was a stirring Editorial in the Observer:
Britain needs a newly serious politics. Our constitution must be reformed never to be exposed to such corruption and abuse again. Our capitalism needs a fundamental reset so that purpose, innovation and good business and employment practice are at the heart of our companies. Our public services must be rejuvenated and glaring inequalities redressed; levelling up must be delivered with the proper resources and to everyone, whatever their political hue. The drive to net zero must be uncompromising. Our relations with the EU must be repaired and access regained to the single market without which there is no avenue to sustained prosperity…..This agenda can be shared across all the opposition parties, liberating the tactical voting that is such a necessity in a first-past-the-post system. The Johnson curse has at last been lifted. Britain must strike out anew.
Observer Editorial 10/7/22
What is Capitalism?
Capitalism is the economic system under which most of the world operates. The clue is in the name, as far as the meaning of that term is concerned. Capital is a necessary (but not sufficient) resource required for the economic activity of most traded productive activities. This resource includes fixed infrastructure and input resources such as buildings, machinery and plant, and particularly the finance to acquire and operate these inputs. But no production will occur without the other inputs, which are Land, Labour and Enterprise.
The economic system is called Capitalism, rather than Labourism, or Land-ism, or Enterprise-ism, because Capital is deemed the ‘primary’, or first among equals, resource. While Land, Labour and Enterprise are entities which can be ‘bought’, as can Loan Finance, Equity Capital cannot be bought in the same way. Equity Capital has to be ’attracted’ to the operation by the potential for profit, albeit also carrying the potential for loss. And equity capital confers ownership on investors, and therefore full control, but will only be provided if the potential risk reward ratio is judged to be positive.
Under full-blown Capitalism, every productive activity is organised using Equity Capital, and every productive activity is owned by someone or some entity representing private, but mostly not state, owners. The overall system works, in theory at least and to some extent in practice, because unprofitable production is abandoned, and very profitable production attracts more equity capital and expands. Consumers shift their demands to products which maximise their satisfaction, and owners shift their equity capital to areas where potential profitability and risk/reward ratios appear greatest. The system is in constant movement, ie in dynamic equilibrium.
Limits or Restrictions to Full-blown Capitalism
Government intervenes for societal reasons to raise taxes to purchase and secure services which would not necessarily be provided under the full-blown Capitalism described above, such as pensions, education, health services , defence, and public works such as roads and lighting. Government also intervenes to set laws and regulations to govern productive activity, such as labour laws, health and safety regulations, company law etc. Government also uses its financial and legislative power to steer the economy, to influence what is produced or not produced and where, according to its understanding of what is or is not socially beneficial.
International Capitalism
There has always been International Capitalism, ever since intrepid travellers, traders and conquerors like the Romans and Vikings established out-of-country outposts and productive activities like mining, agriculture and fur trading. In the 19th and early 20th century Britain had the biggest overseas empire and owned huge overseas investments. An adviser to the Kaiser is alleged to have told him in 1913 not to wage war against Britain because Britain owned much of German production.
Now, the world is much more connected and international capital finance flows strongly between countries. Britain has ceded its once-dominant place to other big players. Because Britain was viewed from overseas, at least until recently, as a stable democracy governed by the rule of law and a place where international agreements are respected, much of Britain’s home production, critical infrastructure and services industry has attracted international capital and is financed from and owned abroad. Foreign investment into the UK boosts the economy in the short term, and can be beneficial in the longer term too, but has several potential downsides longer-term, not least of which is ‘control’. This was a big argument for Brexit (‘Take back control’, especially from the so-called Eurocrat bureaucrats), but this didn’t address the issue of foreign control over much of the UK’s now private-sector economy.
Some Serious Problems for Capitalism
The side effects and weaknesses of the UK’s Capitalist system are far too numerous to list. Here is a selection of some of the more important:
Financing. Most (80% in the USA and UK) financing goes back into FIRE (Finance, Insurance and Real Estate rather than into more productive uses. Only 10% of UK bank lending helps non-financial firms. This creates a debt-fuelled system and speculative bubbles which, when they burst, bring banks and others to the government for bailouts (the 2008 credit crunch). Profits are private, losses are public (austerity for 10+ years).
Excess profits. Under certain market conditions, such as monopoly or oligopoly, one or a few firms can corner the market, and raise profits beyond what might be expected. Consumers and other stakeholders lose out.
Natural resources. These, as part of the production process, often not paid for, can become degraded as a by-product – creating the climate emergency for example, Amazon de-forestation, sewage pumped into rivers, air quality diminished, agricultural chemical runoff into rivers, damage to wildlife.
Neglect of the long term. Investors are mainly interested in immediate profit, and companies may often prioritise short-term dividend pay-out over long-term investment.
Wider society objectives. In the search for profit, to keep investors on board, other more public potential benefits of the production process (positive externalities) such as spin-off research, labour opportunities, training, associated community impacts, may be ignored or wasted.
Unfairness and nepotism. Owners who control companies may seek to create a family dynasty with their appointments, contrary to the best interests of the company. Top managers can ‘capture’ the agenda of companies and place their personal interest above that of the company, such as through high executive pay, shares and other benefits.
National and international ownership in conflict. When critical national infrastructure or services are owned abroad, the ability of national Governments to exert control is lost. Where the company in question is a chocolate bar factory this is not important. When the company supplies energy, water, transport, defence, food or shipping services for example, this becomes important. The recent case when P&O sacked 800 British workers, and the Government was powerless to prevent it because the owners were based in the Middle East, is an example.
A Mixed Economy? The UK once prided itself on having a mixed economy, partly in the private sector, and partly in the state sector. But the prevalence of Conservative Governments since 1979 with a policy of privatisation in order to reduce the size of the state (and increase the size of the private sector) means that the state now represents a much smaller proportion of economic activity than it once did. The UK mostly now relies on the private sector to perform well. It is arguable whether it does.
Risk-sharing. When there are profits, the private owners take them. When there are losses, the private owners come back to the state for a bailout or contract concession or variation, or cry mea culpa, or go bust (Carillion, rail and energy companies). There are always societal obligations, like investing in enough sewage capacity to prevent river spillages (recent case), or investing in enough electricity supply spare capacity so that when a storm comes and knocks out electricity transmission lines, the company can limit delays and get supplies back quickly (recent case), or managing the rail network so that when customer demand and fare revenue drops, services can continue (recent case).
Government contract management. Too often, the privatisation is seen by Government as a convenient, responsibility-shedding outsourcing, leaving the Government itself without responsibility for the supply or service, with companies subject only to some, usually far too weak, regulator.
Social Responsibility. Government has relinquished responsibility for social goals. ‘Leave it to the Market’, or the ‘Market will get it right’. What Mark Thomas (99% Organisation) calls ‘Market Fundamentalism’, the aim of the extreme Brexiteers. So government abandons its own huge potential for ‘shaping the market’ (not just fixing market failures), encouraging innovation, encouraging, in partnership with business, the opportunities for achieving worthwhile social goals such as a Green New Deal, innovating for accessible health, narrowing the digital divide, UN Sustainable Development Goals etc.
Corruption risks. Recent experience during the pandemic showed how vulnerable Civil Service procedures were to political cronyism, and powerful political lobbying by vested interests in securing wasteful and unsuitable contracts. Coverups, lack of transparency, and procedural failures were frequent and costly to the taxpayer. Problems included a Civil Service vulnerable to political pressure, a degree of corruption among some politicians, and some in the private sector willing to push boundaries to exploit these weaknesses.
Inequalities. Such an extensive private sector puts power and money into fewer and fewer hands, and allows the rich, owners of capital, to get richer and the poor to get poorer. Also, big businesses can ‘crowd out’ smaller enterprises.
It has to be concluded that the nature and performance of the extensive privatised sectors of the economy are not for a variety of reasons performing well, and in the best interests of all citizens. There is much room for improvement.
Doing Capitalism Differently
The Professor in the Economics of Innovation and Public Purpose, at University College, London, Mariana Mazzucato, has written a new and profound book, Mission Economy, A Moonshot Guide to Changing Capitalism. She says:
The status quo is failing too many people and changing the planet in ways that will also fail future generations. How can we do what Armstrong and Aldrin asked for – to protect people on our oasis (planet), and to foster the common good?
Mariana Mazzucato, Mission Economy, A Moonshot Guide to Changing Capitalism
She goes on to argue that to solve the ‘wicked’ i.e grand challenges of today we need to reimagine government as a prerequisite for restructuring capitalism in a way that is inclusive, sustainable and driven by innovation.
Her inspiration is the way NASA organised the achievement and mission of putting a man on the moon in the 1960s. It was a very strongly-backed partnership, with enormous buy-in from the nation as a whole, Government and the private sector, between the Government’s representative (NASA), and numerous private sector companies.
The chief characteristics governing the successful outcome were, in the author’s opinion:
Leadership, vision and purpose. Government took risks to achieve its vision, provided the necessary funds, collaborated widely with the necessary organisations and companies, and inspired children to engage with science.
Innovation, risk-taking and experimentation. Hundreds of complex problems had to be solved, in the fields of rocketry, navigation, electronics, control systems, materials and nutrition. Some solutions worked, some didn’t. Basic research and widening use of existing technologies happened because of the close partnership between government and business, with a single over-riding purpose.
Organisational change, agility and flexibility. The success of NASA’s Apollo programme was down to its ability over time to develop a more nimble bureaucratic structure – top-down management with decentralised project execution and risk-taking.
Spillovers, serendipidity and collaboration. Progress in the solution of technical problems often acts as a catalyst by including chains of other reactions. NASA’s moonshot encouraged miniaturisation, silicon chips and many computing advances for example. The high cost of NASA was more than offset by the multiplier effect within the wider economy of benefits and employment and stimulants elsewhere.
Finance, and outcomes budgeting. President Kennedy called the Apollo programme an act of faith and vision, and thought that achieving the aim, and the spillovers from the endeavour, would be more than worth the cost and the risk – ‘we must pay what needs to be paid’. If the Apollo programme had been evaluated in the way that government departments evaluate projects today, using Cost-Benefit analysis, it wouldn‘t have happened.
Business and the state, partnership with a common purpose. The key roles of NASA were to define the mission, plan the programme, be clear on the guidelines, set the parameters, and then allow as much innovation as possible to create the product or service required. None of this could have been done without NASA staff having experience of the underlying science and technology. NASA used flexible procurement contracts to source innovative businesses, using direct relationships, not through intermediaries or consulting firms. A fixed price contract format was used, with incentives to improve performance, speed and efficiency, and a no-excess-profits clause. Certain functions were not contracted out, and there was much essential NASA internal capability to exercise control effectively.
Conclusions
The UK Government should be entirely re-thinking and transforming how it relates to the private sector economy. It should abandon its privatisation and outsourcing mantras and its impulses to pass the buck to so-called outsource specialists like Serco, and seek to work much more closely, pro-actively and intelligently in deciding what it wants, in terms of value-for-money from the private companies it employs, and in terms of the wider societal outcomes that are desirable and possible.
As part of this process, Government should abandon its absurd current plans to lay off one fifth of all civil servants and stop the fast-track route into the civil service for high-fliers. It should appoint staff with the necessary technical, scientific and industry knowledge which will allow them to manage Government programmes hands-on. It should entirely revise its contract procedures and embrace outcome budgeting, and accept some risk-taking, so that there are coherent, innovative, cross-sectoral, cross-department, cross-technology, cross-cultural programmes to achieve the major societal objectives that citizens need and are desperately calling for, such as levelling up, a new green deal, eliminating poverty and dire levels of inequality, and reforming the police. The national economy and productivity will improve from the environmental and innovation advances, re-training opportunities, and social welfare gains which result. None of that is happening at the moment. Crisis is upon us and the status quo is not an option.
I have drawn extensively on the Mazzucato book for much of this article.
