On the productive state

Public ownership of utilities is a good idea - but is politics a place for good ideas?

What is the most appropriate form of ownership for a business? This is a question which the private sector asks all the time - which is why we get so many IPOs, management buy-outs, private equity purchases and takeovers. In politics, though, the question is off the agenda - which is yet another example of how politics is so unbusinesslike.

In this context, I’m pleased to see a great paper by Matthew Lawrence and Alex Williams, The Productive State: A Framework for Manchesterism.

To see its virtues, let’s start from a basic fact - that in several industries private ownership has failed. It has given us energy prices which are among the highest in the world, and water companies that are in effect pollutants who funnel cash from customers to bond-holders. We have, they write:

The worst of both worlds: price distortions, excess profits, regressive distributional impacts, and chronic underinvestment, matched to cumbersome but ineffective public oversight.

The notion that this could be solved by better regulation is centrist utopianism. As George Stigler (no leftist!) noted back in 1971 (pdf):

As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.

Instead, say Lawrence and Williams:

The fundamental problem is ownership, not conduct. It is impossible to regulate away a problem created by ownership.

The solution, they say, is to have new public corporations to own and control key utilities. These would have big advantages over private ownership. One is that, because they have state backing, they would have a lower cost of capital. This, allied to their longer time horizons (not being accountable to shareholders who are focussed on quarterly earnings) would encourage longer-term investment. A second would be that they would be accountable not to discredited regulators or to ministers following passing whims but to workers and communities.

The precise composition of their boards should vary according to context: only fanatics believe that there is a one size fits all solution to questions of ownership and control.

Herein lies what for me is a great strength of this paper - the recognition that context is indeed so important.

One thing that matters here, they recognise, is the potential for productivity growth. Where there is such potential, private ownership can often achieve it. This isn’t because such ownership is necessarily more innovative: as Mariana Mazzucato has shown, state-run entities can also be innovative. Instead, it’s because competition drives productivity improvements by forcing inefficient units to close (pdf) and facilitating the opening of newer efficient ones; a well-functioning market rather than ownership form is essential to productivity gains.

But, but, but. Genuine productivity gains aren’t possible in many industries. We’ll not find a much more productive way of producing and distributing water or even of running trains. What matters is capacity more than efficiency, and this is better achieved by public corporations that invest more than the private sector by borrowing cheaply and having longer time horizons.

And, add Lawrence and Williams, the same is true in some services sectors:

Care work, education, and healthcare require human presence, time, and relationship; their quality depends on exactly the things that resist productivity improvement. In these sectors profit serves little productive function — it cannot incentivise efficiency gains that are not available.

In such industries, “productivity improvements” are often just managerialist bullshit, a cover for increased exploitation, rent extraction and service degradation. In such industries, there’s a case for public rather than private ownership.

Equally, they say, public ownership might be better where essential needs are involved such as water, housing or energy or where there are essential policy goals to be achieved, such as decarbonization.

So far, so good. So, what are the problems with this?

It’s not that such corporations would take on too much government-backed debt. Balance sheets have two sides - a fact our silly fiscal rules don’t acknowledge. The profits from such corporations could cover interest payments thereby actually strengthening the public sector balance sheet.

Which brings us to what is an issue. There’s a trade-off: corporations could pursue social goals such as reducing the cost of living; or they could maximize profits. Only rarely will these goals coincide. There is a case for them doing the latter: Nye Bevan, for example, advocated the socialization of profits as a means of financing public services and reducing the power of capital. But we need to be clear which we want.

Herein lies a common objection to such public corporations: as we saw in the 70s and 80s, ministers will sometimes use them to pursue their own political projects such as the crushing of trades unions. Lawrence and Williams think this can be avoided by having workers and community representatives on boards to achieve “arm’s-length independence from day-to-day ministerial control.” How likely is this? Pessimists will reply that ministers don’t like giving up power; optimists that we have a precedent for such an arrangement - the Bank of England.

A further problem is one they recognise but which is for me (for now) important - the real resource constraint. Why don’t we have (say) more building of social housing? Yes, it’s partly because of silly ideological objections. But even with the most sensible politics, we’ll not be able to build many houses quickly for want of builders and materials. The point broadens. Yes, public ownership will change management incentives. But to paraphrase Harold Abrahams’ coach in Chariots of Fire, incentives can’t put in what God left out. They’ll not be able to magic up a solution to the UK’s decades-old problem of a lack of quality management. So we shouldn’t expect utilities to become very much better run. There’ll always be a great deal of ruin in this nation.

There’s another issue here. Lawrence and Williams are very intelligent guys with great ideas. But is there any place in politics for these? We’ve been here before. Their paper echoes John McDonnell’s attempts to promote (pdf) more diverse modes of ownership as a (partial) solution to low investment and stagnant productivity. Those attempts failed not because they were proven to be mistaken by intellectual effort - they weren’t - but because they were unacceptable to the more reactionary elements of capital that had influence over the media and Labour party. Why should these good ideas prove more implementable than McDonnell’s good ideas?

Politics is not a neutral arena in which the best ideas win: if nothing else, Brexit taught us this. Instead, it is an arena of power. The challenge for technocrats of all parties isn’t to have good ideas. It is to foster the conditions in which such ideas can triumph. In this context, this requires the mobilization of workers and customers* to actively support Lawrence and Williams’ ideas and to oppose failed private ownership.

Such mobilization must be for life, not just briefly. Even the best-designed modes of empowering workers and customers and disempowering ministers can be overturned by a future government. Worse still, public ownership, even if it works well, gives a future right-wing government assets which it can sell-off cheaply to their cronies to finance tax cuts for their clients. An overlooked issue for sensible policies is the challenge of how to future-proof them against malicious and stupid governments?

* Do we want residents to be mobilized? Yes, if the issue is one of polluted water, but no if it is about mass-scale housebuilding. Which speaks to a problem with democratic ownership (and democracy generally!); giving people a voice can mean giving the wrong people a voice.