The Trouble with Market Forces...

It’s now more than thirty years since Margaret Thatcher’s landslide election victory of 1979.  Unusually for the UK, power has only changed hands once more in that entire period – in 1997 when Tony Blair won a landslide for Labour.  In fact though, in many ways nothing changed at all in 1997.  One of the main themes of British politics since 1979 continued under Labour:  the enthusiastic divesting of publicly-owned industries and companies, and the attempt to introduce the rule of market forces in industries which it isn’t possible (either politically or practically) to divest.

First in the early 1980s we had the privatisation of government-owned utilities, car manufacturers, coal mines, steel mills and everything else that could be got rid of.  The whole process came as a shock to many.  I was practically a babe in arms in 1980 but I remember asking my father why the new government was taking so much trouble and spending so much money on separating-out the telephone section of the Post Office.  The answer shocked me:  “so that they can sell off the phones.”  At the time this was such an outlandish idea that I simply didn’t believe it.  But thirty years later, what was once the phone section of the UK Post Office now operates in 170 countries, and it’s impossible to conceive of British Telecom doing almost all of what it now does, had Thatcher not come along and shocked us all.

On the other hand, it never even occurred to Margaret Thatcher to privatise the Royal Mail, the other half of the Post Office.  And yet this is exactly what the current Labour government wanted to do, until they ran out of parliamentary time and political capital.  What would have been too Thatcherite even for Thatcher had become Labour policy.

Meanwhile under both parties a year never goes by without some new scheme to increase the influence of market forces (either real or ersatz) into education, health and every other sector where the state still has some kind of control. 

Recently it emerged that London Metropolitan University has been fraudulently maximising its income by neglecting to notice when students left its courses.  Since all universities are now paid per student from public funds, this amalgamation of former polytechnics actually benefited from its own lax procedures, to the tune of at least £36million.  In other words, in this case the attempt to introduce market forces in education – which even today most would agree should essentially be a public service – has had the opposite effect to that intended.  The reward of a flat fee for every student attracted to its courses was meant to encourage London Metropolitan, and every other university, to improve its standards of education, accommodation, and everything else that could attract students.  Instead, the incentive actively encouraged universities to become lax in their monitoring of which students continue to turn up.  Usually where genuine market forces apply, an organisation is eventually punished for its inefficiencies.  In this case, the opposite has taken place.

Until very recently there was a clear consensus in British politics that it’s necessarily a good thing for governments to minimise their own involvement and oversight wherever it's possible for a sector to be run by blind market forces.  This assumption is lazy economics and lazy politics.  Thankfully, it's now being challenged – it was, after all, one of the causes of the banking crisis.  Perhaps it should now be challenged elsewhere.  

We study the problems of trying to impose market forces in Module 1 (Introduction) and Module 11 (Economics) of the Mini-MBA.