The Glory of a Mixed Economy

Between 1950 and 1972, Britain boasted of its Mixed Economy. Then, in the 'seventies, the misapplication of Keynes's principles by the self-styled NeoKeynesians combined with the OPEC cartel to create an inflationary spiral that threatened to destroy the economy. That situation, in turn, made the opportunity for Thatcherite Monetarism and the 'free markets' dogma to be installed: with apparent temporary success and long-term ruinous outcomes. I have issued sufficient jeremiads about the latter state to give it a rest for the moment, and to pick out instead the features of the economic policy [broadly pursued by both Labour and Conservative governments] that prevailed beneficially under the generic description of the Mixed Economy.

During World War II the coalition government published the Beveridge Report, which promised a universal, compulsory social insurance scheme that would provide healthcare, unemployment insurance and old-age pensions for all contributors and their dependents. Both the major parties in the coalition were committed to implementing the scheme, and though the costs - especially of the national health system - always exceeded the income of the national insurance fund it was hoped that a time would come when those books would balance and a subsidy from general taxation would not be necessary. The National Health Service, in particular, was immensely popular and it delivered massive benefits to the entire nation.

Labour won the 1945 election, with a clear mandate to nationalise core infrastructure services and the 'commanding heights' of the industrial system. Under the infrastructure policy, the clapped-out railways, the partially-derelict canals, the major bus companies and the biggest road haulage companies [with their depots and other support facilities] were nationalised. The railways already owned some ports, and major hotels near stations, and these were taken into state ownership as well. For the first decade of nationalisation there was an attempt to support all of these facilities; but with the rapidly rising popularity of private cars and the consequential demand for the state to provide an appropriate road network the aggregate costs became too great. The slow death of the canals continued, and the subsidy of railways became excessively burdensome until a Tory government appointed a 'technocrat', Dr Beeching, to manage the railways. He just adopted a slash-and-burn approach, reducing the system too much in an orgy of destruction that is pretty universally regarded with hindsight to have been absurdly excessive. But the core railways system was preserved, to become a success eventually: and the motorways were built.

Coal and steel were among the 'commanding heights' of the economy which were nationalised, reorganised, and subject to massive investment and modernisation: which worked beneficially for a couple of decades. Electricity and gas services were nationalised, with massive investment in new power stations and the creation of the national grid for electricity and the beginning of a similar system for gas distribution. Telephones had been developed as a state monopoly, under the Post Office, and their availability increased immensely. Television had been suspended for the war, and it was reintroduced [BBC only, at first] to become massively popular.

The state managed all these things, while making good the massive destruction that had been effected by German bombing during the war and the massive wear-and-tear on all types of plant and equipment that had happened while concentration on war production had meant that maintenance and repairs had been minimal. Perhaps the greatest achievement was in housing. Private builders were enabled to develop private estates while the state sector built hundreds of thousands of houses. So great was the success of that programme, that under a Conservative housing minister in the later 'fifties 400,000 houses were completed in a single year. By contrast, the pathetic shower who govern us now cannot orchestrate the 'market economy' to provide so many as 100,000 homes in the face of desperate need.

Not all was perfect in those years; but things felt better than they do now because there was a feeling of common national purpose with significant objectives being achieved by the public and proivate sectors of the economy working in concert.

The Taxpayer Cheated - Again

The sale of the 'good' successor of Northern Rock to Virgin Money is just the latest in a long series of cases where the institutional incomprehension of the Treasury has played strongly against Britain's national interest, to the disadvantage of taxpayers. A 'price' of some £750 million has been set on the sale, of which roughly one third will be plundered from the company's balance sheet; and a comparable additional sum has been supplied by an American business venturer. So for a net £300 million - or rather less - an asset that cost the taxpayer well over a billion pounds [and over a thousand people their jobs] Virgin have gained a profitable business that will repay the investment in a couple of years. Bully for Branson! The Treasury excuses this outrage by asserting that the European Union requires the sale, according the a set timetable.

Eurorats are arrogant, but they are not idiots: they know how unpopular their vampire squid is to the British public, and they would surely have been willing to accept the deferment of a date that is anyway months in the future; especially in the knowledge that if the UK had simply told them to 'sod off' there is very little effectual that they could have done about it. The blame for the sale must fall on the Chancellor of the Exchequer, in whose name the decision was announced, and on the civil servants who advised him. Blame does not attach to the bankers who advised the Treasury, as such consultants normally deliver the advice that the customer wants. The incident may lodge in the mass memory, alongside Gordon Brown's idiotic sale of gold reserves at the bottom of the market. But there are other aspects of the situation that can be used to illustrate a long running saga of misreporting.

There is no gain to the economy from this sale. The country has 'lost' more than half a billion poundsworth of 'value' from the national balance sheet, because around £500 million has gone from the 'value' of the banking sector and a further £250 million has been taken over by a foreign investor. The national accounts should be adjusted to show these facts: which amount to negative economic 'growth' of around £750,000,000.

I have been a connoisseur of this sort of misrepresentation for many years. When Dr Beeching was axing thousand of miles railway, nobody was interested in the extent to which the value of national assets was being diminished. All attention was focussed on the running-costs of infrastructure that was abysmally ill-managed. To my best knowledge, nobody but me was pointing out that to construct a mile of railway - even of rural branch line -  even then cost many millions of pounds. So the opportunity-cost of every mile closed should be deducted from that year's GNP  [Gross National Product] figures and from future estimates of the 'value' of the nation's assets. Any cash returned by UK-based buyers to British Rail or to the government from the sale of rails, sleepers or land was an internal trasfer: it was turnover within the year but it was not an addition of value. Any structure built on the site, or with the use of former railway materials, was a subsequent addition to the nation's assets: but in very, very few cases was the 'value' of replacement land use the same as its occupation by a railway. Similar considerations can be applied to dockyards, airfields and other assets that have been sold at knock-down prices, often after large expenditure by the government on site clearance. Although such assets require large expenditure on routine maintenance, and intermittent upgrading, they are of permanent value to the state; especially when they are constructed to support the national defence. Military technology changes, so assets to support the current shape of the forces must constantly be adapted, but the gaderene rush that has taken place since the second world war to dispose of assets that would be useful in the event of war long ago passed the point where the competence of the state to defend its people was devastated.

Industrial plant such as a steelworks can be kept running for a century or more, if it is properly upgraded; but it is eventually in a position where newer technologies make it comparatively uncompetitive. At that point it should be decommissioned; and its 'value' as a national asset should be written down over the years so that its net worth is recorded as zero even while it is producing output. Then the real and the notional loss to the national asset register can both be recorded as zero. Most industrial plant lasts much less time, and is written-off accordingly; and IT equipment and software is normally depreciated over a very short term. In most routine situations in business and in the public sector accountancy is effective in recording and reducing asset 'values' in a sensible and comprehensible manner. But strategic assets, such as the whole defence estate and infrastructure such as railways, roads, IT networks, power grids, reservoirs and flood defences stand outside the easily-accountable business arena; even if they are administered for the public by business corporates. The fact that they are enabled to exist only by legislation [or by legislatively authorised decree] and are regulated in their pricing and operations by criteria quite separate from those that are applied to 'normal' business shows that the state is fully aware of the distinction, of the public interests that are involved, and of the political sensitivity that can arise from mismanagement.

The Northern Rock incident is relevant to this whole discussion because the crisis of 2007-8 [and its long prehistory] shows that banks are quintessentially strategic assets, albeit they are in the main appropriately run as business entities. The whole world community, led by the G20, is busily setting new rules for the banking sector: and is unnecessarily drawing insurance into the same regulatory framework. But this has not yet tackled the issue that is exemplified by the sale of Northern Rock. What is the 'value' of a bank to the country in which is is domiciled? How is that 'value' calculated, reported and adjusted? It is a key part of the wider question as to how strategic assets are recorded and revalued in the computation of national assets and net national income. These are vital matters and I will revert to them in the coming days.

I will also return to the reason why I put a single inverted comma around the word 'value' in this [as in some other] postings to this blog. The issue is vitally important to any right understanding of the economy and it is a major underlying theme in my Personal Political Economy; see the link from this site.