‘Marketisation’ has become the main slogan driving public policy towards many public services from hospitals to prisons, from nursery schools to care homes for the elderly. The public is invited to welcome the introduction of markets as the advent of freedom of customer choice. Yet the process of contracting-out that typifies this agenda bears few of the characteristics of true markets, and public service users do not even become customers.
Privatisation in public services takes the form of government and other public authorities awarding contracts to a few private providers. The customer here, possessing the rights of freedom of choice, is the public authority: users are simply users, putting up with whatever provider that authority has chosen. And the contracts themselves necessarily run for several years; there would be chaos if firms had to bid to run a town’s hospitals or schools every few months. The market therefore operates only at those rare moments when a contract comes up for tender.
Further, the number of firms entering these pseudo-markets is relatively small, mainly a charmed circle of corporations who have learned how to play the contract game. That game is their core business, not expertise in the services they then run. How else can we explain the fact that firms starting out in the defence sector end up in primary education? Social Enterprise UK, which represents small social enterprises hoping to work in and around the state, has argued that government has become so dependent on some of these corporations, like Serco and G4S, that if they did not continue to win contracts, parts of our public services would collapse. It is certainly surprising that although some of these firms have been fined large sums for various misdemeanours in their conduct of public contracts, they continue to be awarded major new ones; like the banks, they have become ‘too big to fail’.
If a corporation has become too big to fail and has to be propped up by the state, it is not part of the true market economy, as the failure of an individual firm must always be a possibility in efficient markets. ‘Marketisation’ is a complete misnomer for what is going on. It is a cosy game of handing out contracts to firms that have become buddies of government. The top managers of these firms receive remuneration packages far more generous than those of their peers who stay in the public sector, while many of the staff delivering services on the ground start to suffer the low pay, zero-hours contracts and other characteristic miseries of the contemporary labour market. In this way pseudo-marketisation makes its contribution to the growth of inequality that is such an important feature of our times.
Most large corporations see their business as being the management of financial assets; the actual activities that provide the profits for this task are rather secondary. In many parts of the economy this might not matter – for example, if some major shareholders of McDonald’s are successful in getting the firm to think more about real estate investment than the quality of its fries. But when the hedge fund managers who own children’s homes pursue a real estate agenda by locating these homes in parts of the country where property is cheap, uprooting many children from the places familiar to them, it is a different matter. Hedge funds may act with more financial efficiency than a straightforward public service, but that is often because the latter are working with a wider range of criteria; there is more to running children’s homes than making a profit on the land they occupy.
The central problem is that markets function well only under certain conditions. In many of the current public service applications either these conditions cannot be met, or some can be achieved only at the expense of others. The market of economic theory requires many producers and many customers, otherwise choice cannot operate and prices cannot be determined. We have seen how this does not work well with public services. A complete privatisation, so that users bought such services as education, health and police for themselves, would run into other problems. Markets work well only if customers can easily acquire adequate knowledge of what they are buying; this is very difficult with many aspects of health and education. In the market all relevant value of a product has to be captured in the individual customer’s purchase: the market cannot cope with wider public benefits. It therefore performs poorly in allocating finances to policing, and many aspects of health and education.
The market can similarly operate effectively only where there are no negative external consequences (like pollution) that it cannot pick up itself; and where inequalities of income that affect people’s ability to be customers can be regarded as relatively trivial. In these circumstances the market can work very well for the production of clothes, furniture, restaurant meals and very many other things – though even in these cases there is usually some need for external regulation, mainly because of the difficulty for ordinary customers in obtaining full knowledge of what they are buying. But for major public services it is reasons of this kind that force attempts at privatisation to make many compromises of the free-market ideal. All but the most doctrinaire rightwing governments hold back from regarding hospitals, schools and police forces as no different from garments and restaurants. But the compromises they need to make are producing an oligopoly of contracting corporations in an unhealthy relationship with public authorities that offends equally believers in free markets and believers in genuine public service.
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Colin Crouch is a professor emeritus of the University of Warwick and external scientific member of the Max Planck Institute for the Study of Societies at Cologne.
This is a chapter from Finding Our Voice: Making the 21st century state, published by Compass