Andy Burnham’s Manchesterism offers no respite from state failure

AS WHAT APPEARS TO BE the chalice of political death passes to yet another leader, perhaps we need to examine the revitalising potion – or revolutionary poison – it contains. And we should do this not from a partisan position, but as Adam Smith’s impartial spectator. There are lessons here from Scotland for the entire UK.

With respect to Andy Burnham, his utterances so far have combined wobbly positioning with multiple smokescreens of vagueness. Indeed, some people say he doesn’t have any real opinion on his objectives and does not actually know that he doesn’t. It is even possible that he can’t be bothered to find out how to achieve them.

That does not bode well for a leader faced with the UK’s urgent need for reform.

He does, however, have a context in so-called Manchesterism. This seems to mean the ending of “neo-liberalism” and a realignment towards a “neo-socialism” that puts water, energy, transport and housing back under public control while otherwise staying “comfortable” with markets. A lot of Scotland’s power-holding class will nod at this stance.

As a classical liberal, I fear we are about to keep on keeping on with the deluded policies of interventionist “social democratic control” that are gradually eroding the affluence of Scotland and the UK as a whole – all while claiming to be able to promote growth.

Neoliberalism seems to mean, “I hated Thatcher”, and a hostility to the ideas used by her and her supporters to create economic growth. Again, many left-wing Scots adhere to this prejudice. Essentially, it means denying that free markets, technical change and entrepreneurship might have much value in making people better off. It’s really a vituperative slogan without meaningful content or any sensible historical context. Adam Smith begat Thatcherism via a legion of historical social thinkers from Böhm-Bawerk via Marshall to Friedman and Hayek. Hardly a neo-thesis.

Nothing restricts access to good value capital as much as price controls

Built on this prejudicial foundation, however, comes a vision of a unicorn. The call to assume “control” of our utilities is, once again, a slogan. The central state already does have control over our utilities. We are swamped with executive agencies that perform sector-based strategic planning, then adopt and manage price controls for water, energy and public transport. In housing, land development is effectively state controlled while environmental regulators massively distort the prices of the building process.

So, what might control lead to? One problem here is access to capital that might improve the performance of utilities. Nothing restricts access to good value capital as much as price controls. Indeed, sector plans that favour specific outcomes distorted by political targets tend to encourage capital supply and allocations that are manipulated by financiers. Think PFI, train leasing companies, nuclear power stations and so on. Offer a non-commercially focussed set of objectives and those who supply you with funding will write you a contract that makes sure your goals are met, almost always at high cost, ensuring that they profit from being “helpful”.

It is notable that Burnham’s feted Bee Network for transport in Manchester still uses the franchising model to run its buses. Price control is used to garner public approval and votes using a non-profit business model. The costs to Manchester are high, local Manchester councils contribute a total of £216.6 million, central government provides more than £140 million, these pay for buses obtained through private capital sources. It’s a state-corporatist cabal, and you can be assured that the salaries and prices involved are inflexibly high as no-one is constrained by the right of every business to make a loss.

This is where calls for “nationalisation” of utilities are empty. Strip a utility down and you will always reveal a planning service, an employment service, a product infrastructure supply service, a maintenance service and a billing service. The skills used across these specialisms are also multiple, but specialisation of effort is, as Adam Smith explained, the source of productive gain.

The historical failures of nationalised services can be seen and measured in the way they tend to crush specialisation through planning sclerosis, managerial lassitude and employee militancy. Product supply and maintenance become slow and unwieldy, direction management becomes process administration, unionised workforces exploit the urgent need of customers for the provided service. The entire edifice stutters into inefficiency in a welter of internal memoranda, keeping the integrated whole busy with its procedural rationing. Losses mount.

I am well aware that most utilities have monopoly characteristics, but a lot of work was done in the 1980s to make sure that organisational structures were kept stratified and under separated incentive schemes to ensure some competition internally across functions and externally across market sectors to make things happen relatively fast. Even Scottish Water has competitive elements for business customers, although it is struggling with ageing plant. Its corporatised structure has allowed it to focus on the separate elements of its business to build operating profits and source new capital investment.

The UK does not have a cost-of-living crisis – we have a cost-of-government crisis

If Burnham adheres to the 1970s model – fully integrated public monopolies, integrated across specialist elements, priced controlled and, today, facing add-on “green” objectives – losses will mount and the taxpayer will be the only available source of bail-outs. One irony might be mentioned here: before Brexit some of the integrated state-controlled state-centric procurement practices that re-nationalisation would entail would have been disallowed under EU competition rules.

Unicorn thinking about state entities is not surprising given the immense concentration of public sector experience and focus within both the Labour Party and the SNP. It is the combination of this meaningless delusion about “public control” with the political claim to be able to solve a “cost-of-living crisis” that puzzles me. This unicorn apparently has wings to transport us to a high-growth heaven. Scotland has been promised this trip for nineteen years, with no take-off point yet visible.

The UK does not have a cost-of-living crisis. We have a cost-of-government crisis. We are emerging from a period of inflation above ten per cent. We have energy costs vastly higher than they need be; we have taxes higher than they have ever been; we have not taken – and are now reversing – action on the opportunities of Brexit. These are central state failures that need radical reform.

Burnham claims to be “comfortable” with markets yet again and again he favours price control. The central purpose of a market is to let prices adjust to clear dealings between buyers and sellers. In reality, those adjustments are anything but comfortable, particularly for suppliers. While consumers may balk at high prices, they can decide not to buy, but suppliers lose their livelihood if they do not adjust.

A key function of markets is to incentivise adjustments, with the advantage for consumers that suppliers have multiple ways of improving their offer: innovation in resources used, improved and often cheaper design, changing production methods, constraining sales-channel costs, and adjusting borrowing costs.

The central state, with a captured consumer, does not need to do these things. Its incentives are to charge the consumer more while providing their services in the same way as they have always done. What taxpayers need in Scotland and the UK are policy measures that introduce the competition in supply of services across the board, ensuring that public-sector providers face losses from any inefficiency. That is the exact opposite of what neo-socialists offer.

There is only so much that wealth creators can do if the sweep of tides being generated by interferences and losses generated by the state make it too difficult to make any margin. I have many friends in business who say they would no longer start one again. Every time the left declares that making a profit is a moral sin, they need to be challenged as to whether making a loss is an equal sin when taxpayers’ money is being used to provide a service.

That taxpayer funding comes from margins. Unless our so-called leaders allow and increase the liberty to create those margins, the UK and Scotland will not just be broken, but bankrupt. Like the present consensus within the Scottish state, Manchesterism offers no answer to the core issue: the British people want more and better services provided at lower cost in taxes.