Pragmatism has driven privatisation

It was almost inevitable that privatisation would provoke heated exchanges during Britain’s election campaign. Sadly it is to be expected that all sides should make misleading claims. Perhaps more surprising is that, despite the vociferous debate, the protagonists share so much in common.

So far the discussion has focused on the NHS. Labour has for several years accused the Conservatives of encouraging “creeping privatisation” of the NHS which the opposition party claims was ushered in by the Health and Social Care Act 2012. However, Ed Milband, the Labour leader, was made to look uncomfortable in the 2 April television debate when some of the other party leaders pointed out that the last Labour government itself privatised some NHS services.

No doubt some readers will see this topic as one of social policy rather than economics. But before such a hasty dismissal it is important to remember that in England alone the NHS employs about 1.4m staff and it spends roughly £100bn, equivalent to £2,000 per person. That is a huge slice of the economy that represents a key customer for many private sector companies. The purchasing power of its staff is also a substantial component in consumer demand.

In any case the discussion of privatisation extends well beyond the NHS. Historically it was linked to a broader debate about economic revitalisation. This reached its peak in the second half of the 1980s when Personal Equity Plans (Peps), the forerunner of Isas, were introduced by the then Conservative government. Privatisation and wider equity ownership were together seen as prompting a renaissance of popular capitalism.

To understand the debate’s implications it is necessary to dig deeper. There is a pervasive misconception that privatisation is primarily driven by ideology. Critics, such as Naomi Klein, typically portray it as part of a malevolent free market drive to roll back the frontiers of the state. Supporters, perhaps most famously Margaret Thatcher, have often described it as a way of reducing the deadening hand of socialism.

The overlap between the two apparently conflicting views is striking. Both see privatisation as the application of free market ideas. A closer look shows this shared assumption is flawed. Support for it was always driven more by pragmatism than ideological zeal.

In this respect a paper presented by Adrian Williamson, an academic at Trinity Hall, Cambridge University, to the Economic History Society’s recent annual conference is helpful. A key part of his argument is that support for privatisation did not suddenly appear in 1979 with the election of a radical Tory government under Thatcher. On the contrary, it gradually emerged in the earlier period under both main parties.

For example, as far back as the late 1960s the then Labour government was demanding a higher rate of return from nationalised industries. State-owned enterprises were expected to start acting more like commercial firms. In 1976 the Labour government privatised part of BP, back then state-owned, then in 1978 it supported a radical plan of cost reduction at British Steel, a state-owned enterprise later privatised by the Tories.

It is also striking that the Conservative election manifesto of 1979 said little about privatisation. It was only a few years later that the denationalisation process got underway. Even then it was driven more by a practical desire to make the government’s spending figures look better. Older readers may remember the Thatcher government achieved this goal by using the neat trick of counting the proceeds of state asset sales as negative spending. The Conservative’s gloss on privatisation as an economic liberator only emerged later on.

Sadly the privatisation debate is like so many of the election exchanges. Clouded by misconceptions and misleading statements on all sides.