Capital Conscious Socialism

The state intervention versus free market argument has been raging for a while. It is an old debate about whether a large public sector chokes economic growth or whether there are issues of such importance that they should be decided by government and not left to private businesses. In the UK the three main political parties have adopted a lassie fair free market approach to capitalism but recently they have all been discussing the idea of ‘socially conscious capitalism’.

This is partly in response to the gross excesses of the financial services sector which lead to the several of the world’s largest banks having to be bailed out by their respective governments. Many feel that the banks owe us a debt for this beyond the amount of money spent propping them up. A lot of voters believe that there needs to be a change in corporate culture so that large companies become more aware of their debts to society and to their shareholders. Socially conscious capitalism appears to be the method of achieving this.

Socially conscious capitalism takes many forms but in general it entails giving shareholders more power to set board room pay and bonuses, the curtailing of bonuses for underperforming firms and greater transparency in terms of pay and bonuses for top earners. There are also general murmurs about working conditions and pay for those at the bottom of the pay scale but these are less and frequently ignored. Generally the later issues effects supermarkets more than banks as they have more employees earning minimum wage but a macro level it scales but to rising concern about business practices and noises from politicians that firms should be respectful of their stake in society.

David Cameron and the coalition government maybe in favour of socially conscious capitalism but I feel there is still a case for ‘capital conscious socialism’. This in essence is the case for government intervening in the market to prevent excesses, rather than encouraging companies to voluntarily behave in a socially responsible manner. Whilst the government is doing this it must remember that the private sector employees the majority of the people in the UK and is responsible for the lion’s share of our GDP. Therefore any inventions or legislation must also be in the interest of protecting jobs and growth.

In essence moral standards should be left to the government to enforce (who is accountable to their citizens) and private business should be responsible for providing employment and wealth to the citizens. This is similar to the means by which the government enforces safety standards. Would car companies have voluntarily agreed to seat belts and air bags were these measures not legally binding? The thought of simply encouraging car companies to include safety features or suggesting that the makers of house hold cleaning products put warnings on the packaging seems painfully week. Surely laws are the only way to protect the public and to ensure that we have the necessary information to look after ourselves. Implying that firms should be aware of their social obligations will have little success as firms are not compelled to alter their behaviour and there is no incentive for them to do so.

State invention is a harsh phrase that echoes back to the days of lumbering nationalised industries. I prefer to the use term ‘government planning’ to describe what is needed. The government should use its ability to legislate industry to plan our national finances to prevent economic collapse. This works on a micro scale, business and families plan their finances and set necessary controls to make sure they do not suffer financial ruin. However, the government’s planning of the economy must always be mindful that private business must thrive if we are to achieve a low level of unemployment.

A good example of government planning the economy is the proposed Tobin or Robin Hood tax; a small tax on finical transactions (that firms will not impose on themselves) the proceeds of which can be used to bail out companies that get into trouble and not leaving the bill to the tax player. The tax must be expectedly levied with the consultation of firms so not to cause harm to firms - which would restrict the amount of revenue generated by the tax.

Planning the roles of supermarkets in our economy would also offer a better social outcome. Supermarkets employee many poor and unskilled workers and offer a minimum wages which is far below what is needed to raise a family on. Reminding a supermarket that it has an obligation to consider wider society and the poor will do little or nothing to raise the wages and improve the working conditions of those at the bottom of the social pyramid. Government planning is needed to legislation a living wage that will ensure that families have enough money to afford essential. I do not see any provision or this in the coalition’s plan for socially conscious capitalism.

Placing the maintenance of society in the hands of private companies will not lead to optimisation of social goods. Socially conscious capitalism will not compel firms to be respectful of their stake in society. Capital conscious socialism will give government the mandate to intervene to the benefit of all whilst protecting private enterprise and our jobs.

Internships and Wealth Inequality

Internships have long been blamed as a means by which wealth remains concentrated amongst the upper classes. Most of the positions available at some of the UK’s largest and most prestigious firms to young people starting out on their careers are unpaid or come with a bare minimum of transport fees reimbursed. For young people looking to gain the vital experience necessary to secure a job, an additional source of income is needed to pay their cost of living during an internship which could last for several months. Firms expect an intern to be present during normal office hours which rules out most forms of employment and the long hours and demanding timetables frequently placed on interns also makes evening employment difficult. Generally interns rely on what has become known as ‘the bank of mum and dad’ meaning that only the children who have parents wealthy enough to pay their way can afford to take up an internship.

To a firm, having an internship is not only a desirable characteristic in a prospective new recruit but is increasingly become essential. In a government survey, one third of British firms said they would only hire a new recruit who already worked for them. The most obvious illustration of class perpetuation through internships is an annual Conservative Party fund raiser to which Mayfair based capital and equity firms donate internships which are then bid for by part donors, the proceeds going to the party. At this event, those who can afford to spend several thousand pounds to secure their child an internship at a top finical firm (as well as paying their children’s living cost during the internship itself) spend their money to guarantee one of their children will have a well-paid career.

The incentive for parents who can afford this for their children is clear. Not only is it a good way to give your child an advantage over the competition in beginning their corporate career but by ensuring your child has a well-paid position, parents are preparing for the retirement by providing their children with financial success. The net effect of the recruiters relying on internships to vet candidates at the beginning of their careers is the concentration of wealth amongst the privileged class. Only the wealthy can afford to furnish their children with the internships that are necessary to secure well-paid jobs.

Recently Nick Clegg and the coalition government have announced plans for major companies to offer more starting positions to people from less well-off backgrounds and to offer payment or living expenses to interns while they are working. Although this is noble in intent it fails tackle the root of the social inequity caused by the internship system. It is impressive that Nick Clegg has managed to convince so many large companies to agree to a scheme which offers firms little more than a PR boost, but by making the proposals opt-in rather than legally binding there is no incentive for most firms to alter their behaviour at all. An outright ban on internships would force firms to at least offer minimum wage to those gaining work experience which would go some way towards leveling the cost barriers to most young people taking up internships.

The plans are welcome news to those with an eye on becoming a senior corporate executive but hint at a fundamental flaw in the collation government’s approach the issue of wealth inequality; in that they expect private business to tackle the issue with government only very gently prodding the companies in the directing of socially conscious capitalism. Making internships more accessible to those who dream of vast corporate wealth is one thing but the issue at the heart of capitalism is the fact that regardless of how level you make the playing field, the majority of people will end up owning a small percentage of the wealth mean while a few people will own the majority. The question is what can be done about this and the answer the government suggests is ‘nothing’.

Reforming the internship mechanism may make it easier for those from poor backgrounds to get internships but will do almost nothing to tackle wealth inequity. It will also have a negligible effect on social mobility as there will remain a finite number of internships and even smaller number of people who reach the higher echelons of the corporate hierarchy. The people at the top of pyramid may vary slightly but this does nothing to comfort those at the base or those who question the virtues of a pyramid structure.

Hinting to large companies that they should be more socially aware will not solve the problems of a widening gap between the rich and the poor. Most of the coalition government’s austerity program is cutting the services that the poorest members of society depend upon. The government needs to do more to tackle wealth inequality rather than smoothing off the edges or implying that large firms should be readdressing the wealth balance themselves.

Should we spend away stagnation?

The Christmas period is traditionally a time for indulgence. Between company Christmas parties and drinks with friends one usually exceeds the usual level of food and drink intake. Most people also spend more during the holiday season. As well as gifts for friends and family, decorations for home and work there is the general spirit of excesses and the desire to treat oneself after a year of hard work. You would think that so many people letting loose with credit cards and Christmas bonuses would kick the economy into gear and begin the climb out of the stagnation that has dogged business since the end of the recession.

It’s logical but not always true. During last year’s Christmas period the British economy actually shrank for the first time since the recession official ended. Economists posted negative growth for the fourth quarter of 2010, two such consecutive quarters of negative growth constitute a formal return of the recession. So why did the economy shrink with all this over spending

There are a number of reasons for this. One was an increase in costs of production. Rising international oil and gas prices pushed up the cost of UK manufacturing and squeezed home’s budgets throughout the winter. Excesses around Christmas were matched by a cutting back elsewhere. The rise in production and transport costs restricted exports ultimate because our goods cost more and less money ended in the hands of the firms that produced the goods. When production costs are higher firms are unlikely to invest in new employees.

Not all of our present woes are the result of high energy prices. Partly it is the result of our patterns of consumption. Mince pies and turkeys are very pleasant but it is not the consumption of perishable goods that drives the economy. It is the purchase of consumer durables that drives growth and development. Although some people purchase fridges and television as Christmas presents this behaviour is hardly normal. If we are all perfectly rational in regard to the macro-economy in our Christmas shopping , we would all buy each other consumer durables. However in such a world we would all own too many fridges and have no food to put in them.

Politicians and executives of high street retain chains are keen to expose the values of spending away economic stagnation. As if the only thing prevent global economic recovery is austere Christmas parties. The solution to the problems of economic growth is not over spend now then have to cut back later. If you are especially concerned about growth rate of the British economy then consider buying a new car, television or computer system. Although in the current climate such purchases are out of the reach of most households.

The problems of our macro-economy require macro solutions such as investment in infrastructure to promote growth, guaranteed loans to business to encourage investment and programs to allow the unemployment access to jobs that go beyond simply slashing benefits. Encouraging the general public to over spend (especially financed by credit) is reckless and boost the revenue of Tescos but will not raise the long term trend rate of growth.

My advice to anyone during the holiday season is to reward yourself for a year’s hard work during difficult times but to remember that over spending is not the solution to your personal finical problems or the national ones. National problems require national solutions are not an increase in personal debt.

Immigration and the flexibility of labour

There are few issues in politics that are as deeply dividing as immigration. Everyone holds an opinion on the topic, how much is appropriate, of what sort, from which country, etc. Immigration is blamed for many problems in society from crime to traffic congestion but has also advanced British art and engineering. A case in point, the Mini, that British icon of style, was created by Alec Issigonis, who was born in Smyrna (now Izmir in Turkey). Perceived failures of immigration policy can have dire consequences for a government; case in point is the hammering Gordon Brown received in the 2010 after a perceived rises in immigration. Anti-immigration outbursts can be equally as ruinous to a career, for example Maurice Glasman suffered a fall from grace after endorsing a halt on immigration.

As well as the economic implications, it is generally viewed that the problem with immigration is the divisions in society it causes can culminate in either acts of terrorism or violence directed at immigrants themselves. Many also argue that the economic impact of immigration is at the root of the social divisions it causes. In this article I hope to show that the social disorder caused by immigration is a response to market inefficiencies and not a problem with immigration itself. In essence it is weaknesses in our economy which make both immigrants and the indigenous population poor and angry.

The market based economy does not allocate resources to where they create the most social good. Some areas of society have an excess of economic resources and some have a great lack. This is partly because not all resources are perfectly mobile to where they are needed or to where they can create the greatest good. A clear example of this is housing which cannot be moved to take advantage of where there is a shortage. Without state intervention there is no way to correct the uneven distribution of quality housing. These market inefficiencies and misallocation of resources will always mean that some lack essential goods and desirable luxuries. Those who lack resent other social groups who have been allocated extra. This has driven many of the poor all over the world towards Socialism and other left wing movements. However this resentment is not always directed at the cause of poverty (flaws in the market based system) but at those who it is perceived possess more and have not worked hard to earn it.

Amongst the poor white population this resentment can be directed towards immigrants when individuals feel that they have been allocated a larger slice of society’s scarce resources simply because they belong to a different social group. The same can be said amongst immigrants who can become resentful of an indigenous population who they feel find it easier to acquire essential goods and luxury items simply due to being born in a country. On both sides of the divide people with a specific agenda can harness the anger at society’s uneven distribution of resources to push the disaffected towards either terrorism or hate crimes.

This fact applies to both sides. The EDL and Muslims Against the Crusade are images of each other. Young, poor and angry. Politicians and community leaders are unwilling to tackle this issue partly due to the difficulties with effecting real change but also because they risk losing the support those who the current distribution of resources benefits. Following being let down by community leaders and politicians, the disenfranchised taking matters into their own hands. These tensions which occasionally spill over to acts of violence are caused by an uneven distribution of resources and a lack of political engagement with this issue which create poverty and fosters feelings of alienation.

If the government were to intervene in the free market to correct the uneven distribution of society’s scare resources, then there would be less poverty and less anger to exploit.
Those who speak out against immigration often cite the effect it has on the wages of indigenous people, especially those in the lowest paid manual and unskilled jobs. However this effect can also be explained by inefficiencies in the labour market. The immigration can lead to an oversupply of labour especially in these low paid industries. A rise in supply of labour reduces the unit cost of labour (in this case wages) as the jobless are forced to look for a wage lower than their desired wage to remain competitive in the more crowded labour market. When firms see that the labour supply is increasing they desire to reduce unit costs of production and thus lower the wage they are offering to new employees. They can expect to find applicants for the role as an increase in labour supply has caused a job shortage.

Wages fall as a result of immigration not because of the actions of immigrants but because in an unregulated labour market increased supply will reduce wages mainly because firms seek to reduce costs of production. Like housing labour is not perfectly mobile. People are tied to a certain area by family commitments or the cost of moving which prevents labour from being reallocated from areas of surplus to areas of shortage. Similar labour markets where there is a short of supply often have barriers prevent entry to these markets by immigrants and the poor - barriers such as expensive qualifications or many years of experience.

This effect on wages can also be corrected by government intervention in the labour market. Access to education can break down the entry barriers to certain labour markets, especially training for the long term unemployed. Also the introduction of a living wage would ensure that even when there is excess supply firms are not able to drive down the wage price to point where it puts people into poverty.

Society’s scares resources are allocated in large quantities to a small section of the population. This does not just apply to wealth and material goods but also access to important services like education and health care. This divide is growing wider and those who which society has allocated less resources are growing poorer and angrier. This anger is often directed at the wrong parties where it is the system by which resources are allocated at this at fault.

The government needs to do more to address labour market inefficiencies to tackle the social problems caused by immigration. One possibility is to consider a return to the objective of full employment and guarantee a living wage. Both of which will involve government legislating the labour market but will result in higher wages for immigrants and the indigenous alike.

Until these inefficiencies are tackled, immigration will still be an issue dividing both society and political debates. This divide will always be to the loss of the poorest members of society both immigrants and indigenous alike.

Is the IoD putting business before growth?

In the year and half since the coalition government came to power economic growth has been lacklustre at best. In the second quarter of this year the Bank of England and the Office of National Statistics put the UK economic growth figure at 0.2%. If the economy does not improve the government will face dire political consequences at the next election. In addition they risk not meeting their budget deficit targets due to the lack of growth in tax revenue associated with periods of economic stagnation.

The Institute of Directors (IoD), a professional members body made up of the directors many private businesses, has suggested several reforms to government policy that they believe will boost growth. I believe that economic progress is not at the heart of these proposals but making conditions easier is for private business is. These changes are steeped in the ideology that if markets are deregulated and taxes reduced then businesses will flourish and the economy will grow.

I could write an article on the motivation and the advantages or disadvantages of each of their proposals, but instead I will summaries and quickly evaluate each below.

Cutting corporation tax to 15% by 2020

This assumes private business is being suffocated under oppressively high corporate tax rates which it clear it is not. It also ignores the issue of where in their tight budget the government would find the money for such a give-away.

Improve labour market flexibility

This basically breaks down into making it easier for firms to hire employees (reduction in security checks and equal opportunities quotas) and to fire employees. In times of high unemployment labour markets become more flexible as jobs become scarcer. There is a limit to how flexible labour can be as there are ultimate restrictions of people’s job search such as being tied to a geographical area by having a family.

Ring-fence transport, energy and IT and telecoms spending

This does make sense, cutting government spending is having a negative effect on growth, especially during a time when business are being cautious and not investing. I have said before that infrastructure investment will suffer due to the short-termism of the government’s market reforms.

Ensuring that energy policy "does not sacrifice UK competitiveness for green credentials

The government commitment to investment in Green energy is one of their better ideas. It creates job and develops the infrastructure of the country. It could potentially lead to a whole new industry which we will be an international leader in. Also having “green credentials” attracts much needed foreign investment to the UK.

Expand free school provision with profit incentives

The profit incentive will not make our public services more efficient. See my previous article on this topic here.

End the £100,000 personal allowance taxation "anomaly"

This is the idea that those earning £100,000 a year are paying more tax then those earning £150,000. This is cover for cutting taxes on the wealth which is deeply unfair during a time where government cuts are hitting the poor.

Intensify competition policy, both domestically and within the European Union

Intensifying competition is synonym for privatisation. As I said have before, it is the belief that the profit maximising incentive can be used to harness the power of human selfishness to deliver efficacy gains which can create new inefficiencies through perverse incentives. Also some of the IoD’s members represent monopoly or oligopoly industries and if they want to increase competition in the economy they should consider breaking up the strangle hold large companies have on certain industries.

Carry out radical civil service reforms to promote deregulation

This is based on the myth that there are unrealised business opportunities that are blocked by cumbersome legislation. A lot restrictions placed on business can be for good reason, such as to protect public safety or prevent a single firm from becoming disproportionately powerful. Deregulation will only encourage firms that cut corners and will spur a ‘race to the bottom’. There can be net benefits for the economy by working within the existing legislative framework.

Reduce political influence over infrastructure planning

More deregulation. More privatisation. One would think that there had never been an economic boom in the past as private business is clearly wilting under oppressive government over-regulation.

Reduce public spending to 35% of GDP by 2020

This also means create business opportunities by cutting government services. If public spending falls then that means that some services will have to move to the private sector. Creating opportunities for businesses to deliver service is only one of the many roles of government. More important roles are providing essential services to the public and ensuring there is an eco-system that encourages economic growth. Cutting spending on the economy and raising unemployment does not create confidence in private business and can lead to a stifling of investment.

Repatriate key employer power rules from the EU

This is another by word for making labour markets more flexible which is also known as making jobs less secure and repealing employment rights.

It will come as no surprise that the IoD has also called for the scrapping the top 50% tax rate on income. This is itself a further example of the neo-liberal political agenda being pursued by the IoD above the needs of the economy. It is also worthy of note that a reduction in taxation will cause the budget deficit to rise.

Privatisation may seem like a good way to boost the economy in short term but in the long term it can lead to gaps in services which used to be filled by the government but are now empty as no firm can make a profit in these areas or delivering these services.

Degradation can be dangerous in certain industries where government oversight is seen as in the public interest. For example, in planning where rushing the approval of new construction projects can lead to unsafe buildings or projects being placed in the wrong location.

These changes are ideologically and not economically driven. They have the interests of the IoD’s members at their heart, i.e. directors of (mostly larger) private businesses, and not the health of the economy overall. The government would do well to avoid pandering to invested interests when economic stability is at stake.

Occupy the Economy

Much has been written recently about the rise of a new protest movement. A movement that occupies commercial space to protest against the global capitalist system which they believe to be steeped in inequality. They claim to represent the 99% of society that have suffered from the credit crunch, high unemployment, low growth rate and the government's austerity program. In New York this has taken the form of Occupy Wall Street where a camp of protesters has taken up residence in Liberty Plaza. Occupy Wall Street itself takes its inspiration from the Egyptian protesters whose occupation Tahir Square in Cairo was instrumental in the downfall of Hosni Mubarak earlier this year. In London a similar demonstration was planned to occupy Paternoster Square outside the London Stock Exchange. Upon finding that this square had been closed by the police, they instead have set up camp in the adjacent area outside St Paul's Cathedral.

These occupy movements are different from previous anti-capitalist protests in that they lack a central leadership, a core demographic of members and clear stated goals or grievances. They use a consensus decision making model to plan action across the myriad of different groups which have joined the protest. In many ways the Occupy Movement is The Culture of Resistance, although they do not represent all of the Culture which is an even more diverse anti-establishment group. But the Occupy Movement represents a subset of the Culture of Resistance that has mobiliaed to take direct action. The Occupy Movement is an expression of dissatisfaction with the current capitalist hegemony. It is not exactly a defined political movement in itself as it lacks set goals and memberships, which is also one of the defining features of the Culture of Resistance.

Technology has allowed these decentralised protests to take place. Social networks such as Twitter and instant messaging programs such as BBM have allowed the disaffected to communicate with each other and organise a protest without the need for a central authority. The new technology has allowed those looking to start a protest to connect with those who are feeling alienated by the current political and economic system.

Expressions of alienation and dissatisfaction via online social-networks have culminated to create an Ecosystem of Discontent within the social network. Heightened chatter in the Ecosystem of Discontent creates the feeling that the physical space is safe for direct action. In other words the more people discuss the Occupy Movement on a social network, and how alienated people are by mainstream politics, the more appealing the occupation itself becomes to members of the Culture of Resistance. The ecosystem just needs a single event focused around a specific action or group to begin the chatter. Unlike in the past, the vanguard that begin the chatter and created (sometimes without intention) the ecosystem are not necessarily the ones who shape its development into direct action. Any node in the ecosystem can influence its development and those involved in its creation frequently have nothing to do with the point when the ecosystem achieves the critical mass required to spill into a real world protest. It is the Ecosystem of Discontent and the connections to strangers possible through social networking that allow the idea of the protest to spread beyond the group who initially conceived it to encompass the huge variety of seemingly unconnected people found in the Occupy Movement.

The existence of the Occupy Movement is evidence of the growing mobilisation of the Culture of Resistance and growing dissatisfaction with the status quo. Unemployment, poverty and poor growth is drawing more people into the Culture of Resistance and technology is allowing them to become involved with ecosystems facilitating direct action.

The next question is, what can economists do about the situation to improve people's material circumstances and halt the growing tide of alienation. The answer is not the obvious one of getting the economy growing again as fast as possible, as the dissatisfaction currently felt has its roots in the recent decades of economic prosperity.

What economists can do to help is reexamine their thinking. The Occupy Movement is further evidence that current neo-liberal consensus is not working. Previously we believed that the best course of action was to grow the economy as a whole, and through the infamous Trickle Down Effect all sections of society will benefit from increased wealth. Although during the boom all sections of society where wealthier than they had been the past this did not make everyone content. Inequality between the rich and the poor has grown during the Thatcher, Major, Blair and Brown years. The divide between the rich and poor is greater now than it was in the late 1970s. Class mobility has decreased over the same period. If you are born poor now you are more likely to die poor than if you were born in the years following the Second World War. This situation has been created by our neo-liberal economic policy and huge sections of society are clearly not happy about this.

Many people in the Occupy Movement are middle class. The people who stand to benefit from the neo-liberal agenda but have grave concerns about the kind of society that we are becoming by following this agenda. To continue down the route we have been following is for the gap between the rich and poor to grow wider and wealth to remain trapped amongst a privileged few.

We need a new way of thinking about our economy which must involve a revival of the economics of equality and full employment. We need to do away with the attitude that by making it easier for private business we are benefiting all of society. Other new as yet unknown ways of thinking about economics will also be needed but I feel that certainly a good place to start is look at a commitment to greater wealth equality. The outdated neo-liberal view of economics is not working and people know it. Inequality will not stand and the best thing we as economists can do is find a way to more evenly allocate society’s scares resources.

Do not let John Nash ruin the government

The current government is pursuing a program of public sector reforms more aggressively than any other previous administration. This is more than an effort to balance the budget but is an ideological drive to put the mantra of choice at the heart of state provided services. This notion of choice is borrowed from the market meaning of the word as in competitions between different providers offering a range of services and products. In the market, the spending choice of the consumer is the feedback mechanism which determines which products remain on the market and which are withdrawn. When the government says choice what they actually mean is competition between providers with public choice acting as the feedback mechanise. Through their reforms the government intend to create a market for public services.

For those on the right these reforms represent an opportunity to inject market efficiencies into the ailing public infrastructure. For those on the left, this bill is seen as an attempt to privatise by stealth publicly owned industry.

The changes being put forward by the coalition government will allow private companies, charities and groups of private individuals to bid to run local services. Charities or parent groups can bid to run schools. Patient groups can bid to run hospitals. GPs will be allowed to choose which providers they purchase health care from. All of this is driven by the view that the competition created by a choice will make public spending more efficient. What I fear the most is that the coalition government’s plans will have the opposite result from what they intend, that their reforms will lead to a much more inefficient public sector.

The idea of introducing market based competition to the public sector is not new. It first emerged in the late 1970s as John Forbes Nash, Jr.’s economic theory became widely accepted. Nash posseted that individual’s selfishness will always undermine the success of government programs. He believed that competition for resources between departments and programs as well as competition between individuals for promotions would ultimately sabotage the best interests of government. The TV show Yes Minister is Nash propaganda. The struggle between Sir Humphrey and Jim Hacker usually ends up derailing both of their schemes.

Margret Thatcher was a big believer in both the works of John Nash and Yes Minister and dismantled the old consensus of government work as public service which Nash believed was impossible. In its place she and those who followed her have put the mantra of free market competition as the optimum method to distributed resources.

This legacy was continued by the following Labour government and now redoubled under the current coalition. The logic of Cameron is that the competition in state services will use the profit maximising incentive to harness the power of human selfishness to create the most efficient public sector. As in the private sector, costs to consumers will be driven down (in other words taxes will be lower) and output will be raised in the form waiting lists disappearing.

Rather than apply market efficiencies to public services, these reforms will fall victim to the very pitfalls Nash railed against. The powers given over the external bodies which will run our public services will effectively make them the new management class of the public sector. Instead of using their new powers to drive down costs, a perverse incentive to raise costs will be created by management’s selfish drive to maximise their wages and bonuses.

We have seen this demonstrated during the banking crisis. Unbridled self-interest was let loose on our finical markets in the belief that this will build a robust finical system through optimising the allocation of funds to where they were most effective. The motivation for optimum fund allocation was drawn from the monetary incentive offered to investment managers. However, the selfish motivation for personal wealth failed to create the most efficient banking system and ultimately led to a deeply flawed system vulnerable to collapse.

The government’s reforms will also cause public sector efficiency to suffer by reducing the quality of services provided to the public. This is because most of these external bodies outside government that will be competing to run our services will either be or function as private companies and will follow a profit maximising incentive. The incentive to increase profits will cause the external bodies to drive down the cost of delivery public services as the government has planned but this will not always be through a more efficient allocation of resources. In some cases this cost savings will take the form of reducing the quality of services delivered to the public. This behaviour will be reinforced by the profit maximising incentive of because the profits for these external bodies will be the remainder left over from our taxes after the external body has delivered the service. A good example of this process is the collapse in the nutritional value of school meals since the service was privatised.

Economic efficiency is not always a job done at the lowest cost by cutting as many corners as possible. Sometimes it costs more for a job to be done more effectively. A good demonstration of this is investment in infrastructure and training staff which can be expensive and drive up the costs of delivering a service; however, there are net gains for the whole economy derived from improved infrastructure and having a better trained workforce. Long-term investments such as these will suffer under a system drive by a short-term profit maximising incentive.

Much has been written about the perils of privatising public services at the lowest cost per unit. I will not insult the writers who can explain these problems much more eloquently than I by paraphrasing them here. I seek simply to debunk the idea that enlightened self-interest will lead to the most efficient economic system.

My message to MPs is not to let John Nash and selfishness run our public services. Headlines of waiting lists and rising costs might prompt radical change but once we open up a closed system to market competition it will be all but impossible to restore the values of government work as public service. Selfishness will not optimise state provided services but will instead provide new inefficiencies. We should think gravely about the consequences of opening the door to competition in the public sector. These reforms will offer the public a choice between a series of cost-cutting, bloated over paid private organisations. This is not the road to economic efficiency in public services.

We need to talk about gas

Gas is not a popular topic of conversation. When it comes to energy, most businesses or politicians prefer to talk about their plans to invest in green energy. This is usually steeped in the familiar rhetoric of reducing our carbon footprint or severing our dependency on the increasingly unstable Persian Gulf. We are familiar with the state of the public debate on energy and most people are tired of oxymorons about clean coal or the whining of NIMBYs about how unsightly wind farms are. However, I feel we need to talk more about gas.

Whether we like it or not we are a country addicted to gas. Most homes in this country use gas in their boilers and gas expenditure makes up a significant proportion of many peoples' household budget. We are so used to stumbling into the kitchen, bleary-eyed each morning, turning on the hob and pressing the ignition button to boil an egg that we scarcely give a second thought about where gas comes from and who’s hands we putting our hard earned wages into.

Like any other dwindling resource, the price of natural gas has risen exponentially as our demand has blossomed and deposits have been drained. The production and export of natural gas almost entirely props up the bank accounts of some of the world’s richest countries and people. Without the wealth stream generated by the West’s huge thirst for gas, nations like Qatar would simply be another Middle Eastern Emirate with an overbearing monarchy and alienated citizens.

The same is true in this country. The former state owned British Gas still controls a huge section of the British energy market and millions of people rely on the company to heat their homes in winter and provide their hot water. Each year British Gas and the other suppliers raise the cost to the consumer and then post record profits a few months later. This is partly due to rising costs from the firm’s suppliers but after a few years of price rises followed by increased profits one cannot help but draw conclusions.

Recently, British Gas announced that they will be raising their domestic gas prices by 18% in August and the other home suppliers are expected to follow with similar price hikes. This is alarming in the context of the BBC reporting that the division of British Gas which oversees domestic supply posted £740m in profit last year and, that for the same period, a 22% rise in fuel poverty was recorded.

Fuel poverty is when 10% or more of your budget is spent on heating your home. This means that a rise in gas prices whilst average income and other expenditure remains constant will cause the number of households who are fuel poor to rise. At Christmas this year over 4 million homes in the UK will be classed as fuel poor with obvious effects on personal health and comfort. If economics is the science of satisfying our material needs and wants then we are clearly failing to satisfy the need to keep warm of over 4 million families across the country.

Ballooning fuel prices also has a macro effect on our economy. Senior economists at the Bank of England have largely attributed the recent high levels of inflation (currently at 4.2% on the Consumer Price Index) to rising fuel costs. Energy prices push up the costs of production of our domestic industry which in turn is passed on the consumer in the form of higher retail prices. Transport costs and the cost of raw materials are linked to fuel prices and a clear pattern has emerged recently of rising inflation and rising price of oil and gas. Rising fuel prices also have a knock on effect on the cost of food. Food prices are highly sensitive to changes in transport costs and the Bank of England has stated that recent food prices rises are greater than to be expected. In the second quarter of 2011 inflation has fallen back from 4.5% to its current level on the CIP scale, although the Bank of England attributed this to falling high street prices and noted that fuel and food costs remained high for the same period.

It is mine and others' beliefs that the government and the energy regulator body Ofgem need to do more to curb the rise in gas prices. Run-away price rises are squeezing the budgets of too many households and pushing more families into poverty. Rising fuel costs are also pushing up inflation and stunting our economic recovery, this is partly due to foreign suppliers raising their price but a government subsidy could be used to prevent this rise being passed on to the consumer. Calling for government intervention in the domestic energy market will not be popular with the political centre, or with alarmists who will conjure up memories of the coal board, the 3 day week and poorly-run, tax absorbing state owned utility companies. That said, we cannot stand idly by and wait until having warmth in the winter becomes a luxury commodity while a former public owned industry continues to post record profits.

There are not many topics of conversation in politics that can be termed as sexy but gas surely is not one of them. Energy policy has focused on (the very important issue of) moving our dependency away from fossil fuels rather than how can we distribute the remaining non-renewable resources more fairly. In short we need to talk more about gas because, unpopular as it may be, it remains an important issue.