Tom Miers: Scotland can offer the strategic alternative

Last month in The Scotsman Joyce McMillan wrote a superb article describing the curse of “Junk-Thatcherism”. It captured the widespread unease that pervades society in the wake of the economic crisis. Things have gone sour, and our political and economic elite seems part of the problem.

I agreed with much of the article, but not its analysis of the root cause of our dystopia, which was that we price too much and value too little. Instead, the current malaise is part of an older conundrum that goes right back to the beginnings of modern democracy.

We do indeed face a crisis of capitalism. Not only did the flaws throughout the financial system cause immense material damage. They also undermined public trust in market capitalism, trust that is eroded further with every subsequent scandal from insurance mis-selling to interest rate manipulation.

Finance now faces the brunt of public distaste. But unease has been growing for many years now at abuses in sectors as diverse as the railways, the utilities, care homes, and government outsourcing.

Such is public disillusionment that a major opportunity has arisen. An opportunity to redefine the structures of our society, not with the usual round of denunciations, public enquiries and regulatory tinkerings, but with a new agenda that could dominate politics for a generation.

The big question is: who will seize this agenda and make it his own?

But while Joyce McMillan’s denunciation of Junk-Thatcherism is compelling, this does not mean that market capitalism in general is fundamentally flawed.

On the contrary, markets, bound by the rule of law, are the secret of our society’s success. And it is worth restating here why that is.

People often portray markets as being all about self-interest. But self-interest is as essential part of the human character. Nobody is entirely altruistic beyond the immediate circles of family and friends. The great thing about markets – indeed the deeply moral thing about them - is that they harness and control self-interest to the benefit of all.

The essence of it is competition, in two directions, raising capital and finding customers. So long as investors can take their money elsewhere, businesses must strive to provide a return by becoming ever more productive. But so long as customers can shop around, businesses must continually reduce prices and improve quality. It is this dual tension, where self-interest is trumped by the free choices of others, that has driven our prosperity.

So the enemy of the people is not profit or self-interest, but monopoly. Remove the ability to choose, either as an investor or as a customer, and the natural self-interest of the producer turns to venality.

This is why the traditional state-owned model works so badly. As taxpayers we are forced to invest, and have no recourse if the concern does not provide good value. Worse, if the state protects its investment by forcing us to buy from it, then we cannot go elsewhere and the producer can exploit its monopoly twice over.

So the response to the crisis of capitalism must not be reactionary. A return to twentieth century socialism would be a material and moral disaster.

Instead we have to understand that the problem is not market capitalism per se, but the nexus between government and the provision of “essential” services. For when you consider the various scandals of recent years – involving the utilities, banks, train companies and so on, most of them have something in common. Each is guaranteed by the state.

And there are a number of other such “strategic” industries (if I may use an old phrase in a slightly different context) that are still fully controlled by the state. Health and education, some housing, planning. Each of these have had their fair share of crises over the years too.

The root of the problem we face is how to ensure that these industries serve the public interest with the state as guarantor. So far we have only found a partial answer. If the Thatcherites saw that state ownership was wrong, they did not know how to replace it.

The problem with privatised or outsourced industries where the state has a “strategic” interest is that it essentially underwrites the sector. We have a hybrid between government ownership and traditional capitalism. It doesn’t work because the essential discipline of competition is removed. Profits are retained while risk is transferred to the taxpayer. In other words the taxpayer has made an investment without really meaning or wanting to, but it only takes the losses when things go badly, while the profits go to the private owners and managers.

In other words the problem of state ownership is replicated – the producer interest has us all in hock.

We saw this most blatantly with the banking crisis. Of course, the banking sector was never nationalised. But it shares the characteristics of these other sectors because a democratic government is not prepared to let a feckless bank go bust.

Banks and the mortgage market have effectively been underwritten by government since the 1930s. So the current problem actually encompasses the whole era of intervention in the economy, including the various phases of regulating, underwriting, state ownership and privatisation. The problems of junk bonds and sink schools are two sides of the same coin.

By undermining the competitive dynamic, government intervention renders these industries inefficient at best and a downright liability at worst. That the state should be responsible for these industries may be regrettable. But it is inevitable.

Voters in a democracy expect the government to underwrite their basic economic security and politicians compete to bestow economic benefits on them. A party that refused to underwrite access to banking, healthcare, education and so on would be trumped by one that did.

The new agenda, therefore, is to find an acceptable and durable model for all industries where the state acts as guarantor.

What can be done? There is no one form of corporate governance that suits every “strategic” industry. But a first step must be for political leaders to articulate the problem more clearly and seek to define where the boundaries of government responsibility lie.

We then need an imaginative approach to reform. The remaining public sector should be more independent of government and much more directly accountable to the taxpayers who fund it and use its services.

At the same time we need to improve competition in the “strategic” private sector and find methods of ownership that prevent investors taking risks with taxpayers’ money.

The intriguing thing is that this agenda can be seized from either the tradition of the Right or the Left.

The Left could rediscover its 19th-century roots by reinventing the co-operative and mutual movements. The Right could draw up new principles of democratic capitalism or localism to achieve a similar effect.

And what better place to begin this revolution than Scotland? Not only is it the intellectual birthplace of both economic traditions, but the means and opportunity lie at our disposal.

By chance, institutions in all the “strategic” sectors in Scotland are ripe for reform. Our schools, universities and hospitals cry out for greater independence.

In utilities and transport, the Scottish Government has inherited water and ferry companies that are in organisational limbo. Our two biggest banks are nationalised and in disgrace, with their futures up for grabs.

Here is an exciting agenda for any political movement to seize.

Scotland could indeed become a beacon for the world. Not progressive, but pioneering.