The end of the road?

By Calum Paton

As more roads become virtually undriveable because of widening and deepening potholes (and the occasional repair of only a small minority with cheap and useless substances), maybe it’s time to revisit the great John Kenneth Galbraith’s concept of ‘private affluence, public squalor’ – except that now, in the failing state known as Britain, public squalor is eroding the fruits of private affluence except for the hyper-rich set with helicopters and private jets. (Watch this space, mind you, for the latter will help to destroy the planet…or rather don’t watch this space, as you’ll be dead, but your grandchildren won’t.)  

Another sign of the times: after the wettest eighteen months on record (with the last six months the wettest, it seems), Thames Water warns that one of its reservoirs is less than 90% full with a dry summer on the way. It couldn’t use the Thames to fill it, as the water was too filthy. It’s filthy because of a record high in sewer overflow discharges by…Thames Water.  

Isn’t it time that we revisited how we finance and provide public services? And isn’t it a sign of the times that the one political party in England, other than the Greens, which wants to take energy and water into ownership by the public (50%) and pension funds (50%) is…Reform UK, the Farage mob rebranded? As for Labour, I still harbour hope as regards their proposal for a green public energy company, Great British Energy…but only half the hope I used to have, following Labour’s cutting of their green investment plans in half. 

There are of course two issues here: how much public utilities cost (i.e. how they are priced), and who owns them. On the latter, it’s absurd that our utilities are dependent on foreign ownership (and sometimes foreign state ownership). On the former, we need to revisit some basic welfare economics which should not be a matter of dispute across the political divide. The problem is that the Tory-Labour consensus on ownership of utilities generally is the wrong consensus, as both accept private ownership. As the Pet Shop Boys once sang about Tony Blair’s love affair with George W. Bush, it seems that Labour’s stance on this is ‘I’m With Stupid’.  

Marginal Cost Pricing.  Dust off your welfare economics notes., comrades! Marginal cost pricing maximises welfare. That is because the marginal cost of a product – the cost of producing one more, or another increment – signals not  only the cost to the producer but also the relative cost to society, to the public, of investing in more of that product, especially in the case of public services. 

Under perfect competition, profit maximisation (i.e. where marginal revenue equals marginal cost) is also where marginal cost equals price (since price, which is average revenue, is the same as marginal revenue, as there is only one price at which a product can be sold.) [Revisit your Richard Lipsey or Paul Samuelson –  or, for specifically micro-economics, your Anna Koutsoyiannis – for the pertinent diagrams!] Of course ‘perfect competition’ is an ideal-type. No markets are perfectly competitive, and in any case, under perfect competition, profits are zero. (That incidentally was why some socialist economists in the 1930s said that only public/state ownership could achieve the textbook benefits of perfect competition.) 

Now, forget perfect competition, for when it comes to public utilities (let’s add in the railways as well as energy and water), there ain’t none. In fact, barring some pedantry, there ain’t competition at all other than via some gerrymandered contracting system which isn’t worth the paper it’s written on. 

Let’s add in the assumption of economies of scale – a very reasonable assumption in the provision of public services (and here we might add in large NHS hospitals too, in certain circumstances) That means that as volume supplied increases, the marginal cost of the product falls.  

Now if marginal cost is falling, then pricing at marginal cost means that a loss will be made. That is because, as the marginal cost is falling, the average cost is going to be higher, as average cost means, ipso facto, the average of costs at each (previous) level of production as well as at the present level of production. So, since profit or loss is calculated by taking average revenue (otherwise known as price) and subtracting average cost, then if we price at marginal cost, this is negative i.e. a loss is made. (Again, look at a microeconomics textbook to see this diagramatically, if you have not studied economics.) 

Note that this loss is nothing to do with inefficiency. If we want to use the price system to signal the opportunity cost of investing in a product (i.e. benefits foregone; benefits which would have derived from investing in something else), then pricing at marginal cost does this.  

So for either public goods in the strict economic sense (everyone benefits whether or not they buy) or public services in our sense here (utilities, transport, some health services), it does not make sense to make  a profit. 

Where, then, does the money come from? Taxation or other public revenues, of course. 

Now there is a potential problem here (beyond predictable howls of pain from private investors who want to make rip-off profit from supplying public services.) Obviously society cannot subsidise (through taxation et al.) an unlimited amount of product where the revenue from consumption (based on price) is increasingly low as marginal cost falls. Even if it is economically possible so to do, we have to make it politically possible. We have to decide how much of a ‘utility’ we want to provide through public funding (e.g. the NHS) – or, if it is to privately purchased (e.g. energy), what price we have to charge to prevent unlimited consumption with the state picking up the bill (if marginal cost falls very low.) That is, the public purse cannot subsidise unlimited amounts of a product, nor can goods be publicly-provided ad infinitum simply because marginal cost falls towards zero. 

That is where non-economist ‘trendy lefties’ such as Aaron Bastani (writer of Fully-Automated Luxury Communism) or journos such as Paul Mason (Post-Capitalism: A Guide to our Future) lead us astray: they think the mundane concept of diminishing marginal cost is the key to utopia which was lost when Marxism failed to open the door.  

They underplay initial fixed costs and recurring fixed costs: for example, a hospital can show economies of scale until new buildings are required, after which economies of scale may again kick in. Now of course all this could be paid for communally, in theory, but that marginalises the politics of who pays for what.  

Just because a society of equals under common ownership is theoretically possible does not mean that ‘technology’ will take us there when politics has signally failed to do so. And worse:  ‘fully-automated luxury communism’ will not be very luxurious if the perennial questions of productivity, incentive and human motivation are not solved. People work for themselves and their families’ betterment, most of the time. Public services are a shot of altruism in a cocktail of self-interest, and of course they are also, often, the structure which underpins enlightened self-interest. (Pothole-free roads, anyone?) Assuming that we will be happy living as if permanently in a communal picnic, stimulated by the mundane fact of certain goods incurring low or zero marginal cost, is faintly absurd. I am reminded of the late G.A. Cohen’s view, against inequality, that if we collaborate in preparing and enjoying a picnic, then why can’t we live like that? (Er…because a picnic is a break from normal life, Jerry? ) I’m sorry, but Aaron’s fully- automated luxury might end up looking pretty much like an amalgam of the creaking technology which hums in the background in Orwell’s 1984, on the one hand, and the Soviet Union of the late 1980s, on the other hand. 

Neither do the likes of Bastani and Mason solve the perennial problem of the allocation of goods in line with individual consumer preferences. Bastani seems to think he is aping Keynes, who pointed to a future where automation could lessen our workload. And it is true that automation as we know it is bringing very uneven benefits (riches for some; terrible jobs or unemployment for many.) Hegel and the ‘young Marx’, long before Keynes, made similar points even in their day. But this was idealism, not economics. (The older Marx was an economist, but not one interested in the perennial problems of micro-economics…and in any case, even as a macro-economist, he was but a ‘minor post-Ricardian’, in the provocative phrase of  Keynesian Nobel laureate Paul Samuelson!)  And Keynes would not have shirked – and did not shirk – the hard analysis of what would be necessary to allocate resources, which were best provided publicly and where the market worked well etc. etc. 

So – back to the mundane – there has to be a limit to the political use, in public policy, of marginal cost pricing. As with most principles or guiding ideas, it has to be moderated, in the case of pricing and funding public services, through political decisions as to how much is invested in them and how (in the case of marginal cost pricing where economies of scale apply) deliberate loss-making is handled. But it is a good principle nonetheless. 

And one thing is clear: where we want to use welfare principles such as marginal cost pricing for the likes of railways and energy and economies of scale pertain, then privatisation is both inappropriate (and impossible unless the public purse is used to give them the profits which welfare-economic-rationality makes impossible.) 

As for hospitals and healthcare, if we price at marginal cost (even if only through shadow pricing in, say, a publicly-financed national health service), then contracting for specialties or cases through the price mechanism (including, for example) private providers tendering) is inappropriate (and impossible if done properly i.e. without creating the basis for illegitimate profit.) Even within the public sector, contracting on the basis of average cost pricing (as happened with New Labour’s ‘Payment by Results’) is inefficient. Better to scrap contracting and fund pragmatically yet taking welfare economics into account. 

So I have ‘dissed’ the right-wing (and economically illiterate) Thatcherite and post-Thatcherite abuse of public services through privatisation, inappropriately-high pricing and under-supply. I have also ‘dissed’ a utopian-left alternative. Which leaves me at a destination which it has taken a good chunk of my lifetime to reach… a belief in a compassionate mixed-economy in which the fruits of technology should be used to lessen the burden of the many, not the few…but where hard choices still exist and the politics of getting there are not to be waved away with a lofty Corbynista flourish in a seemingly-modern but actually dated technological determinism. 

A good start in reversing the Thatcherite consensus on public utilities and the management of public services, which mainstream party politics still accepts far too much, would be to return to the principle(s) of welfare economics as outlined above. If we do not map a future where we take back the public utilities into public ownership, then we will under-supply them where economies of scale pertain, and under-supply them further in order to allow the leakage of resources into private profit (PFI, anyone?…with cuts in bed numbers to service PFI contracts). 

This brings us to where I came in. We ought to have a vision which tells the public that if we want to have not only decent ‘core’ public services (health; utilities; railways) but also driveable roads and no hosepipe-bans the summer after the wettest winter on record, then we are going to have to give up that extra increment of ‘private affluence’ which leads not only to ‘public squalor’ but even to squalor in the public infrastructure which underpins our private activities (e.g. roads.) In other words, we are going to have to pay for it, in the name of enlightened self-interest. 

I understand why Labour shies away from driving us right to the end of this road in one single manifesto. It is indeed ironical that some good ideas in this direction got associated with the car-crash that is Corbyn. But we are where we are.  

Moreover, we cannot simply re-nationalise public services (such as water) without compensation: we academics in particular should be careful, since our pension scheme invests in Thames Water. So rowing back to sanity from the wilder currents of Thatcherism is neither easy nor cheap. Maggie’s advisers did indeed try to make sure, when they sold shares in public services, that there was ‘no turning back’. It is therefore nifty of the populist right-wingers of Reform UK to propose joint ownership of utilities by the public and by pension funds. I have not swallowed Reform’s populism, by the way, in case you are worried for me as I age: Reform says the utilities would still be privately-run…how would that work; what private companies would want to run these services without serious profit? It would be a bit like asking private companies to come in and run NHS services – they all disappear when they see the tariff (Virgin, anyone? Centene, anyone?) So nice try, Ticey (Richard Tice, the Reform leader) – you need to tell us more. But one cheer for stepping outside the wrong consensus, and actually suggesting one positive use for Brexit amongst all the hassle it has caused… that it can be used to reclaim national ownership now that we are out of Single European Market rules.  

Back to the roads. We are now at a point in the UK where we have underinvested in public transport both nationally and locally and road use is at a premium; yet we are allowing the roads to disintegrate in front of our eyes. The rational capitalist state makes adequate infrastructural investment to underpin the private economy. This capitalist state is currently run by a bunch of weak Tories who are so frightened of their crazed Trussian alter ego that they are incapable even of enabling a half-decent means of distribution and exchange. We are nearing the end of the road, literally.  

And if the Labour leader does not signal that he wants to follow a different road when circumstances allow, then he will in effect be signalling that I’m With Stupid. 

About the author

Calum Paton is Emeritus Professor of Public Policy at Keele University, UK. He was Editor-in-Chief of the International Journal of Health Planning and Management between 1998 and 2019. He has advised UK politicians and various international agencies. He has authored ten books and numerous articles on health policy and politics. He chaired a major NHS hospital board in the UK from 2000 to 2006.