The mid-market restaurant business is apparently in trouble. Chains that made ill-judged investment decisions are losing money hand over fist, outlets are shutting down, a boom that attracted millions in private equity investment is turning into a crisis for the industry. But, really, unless you’re a shareholder, so what? It may seem trite to point out that the financial difficulties of Byron burgers don’t matter as much as those of Northern Rock or Carillion, but it’s true, and the reason why it is true in turn provides insights into the parts of our economy that we do worry about.
The story of these chains is the story of so many other industries within capitalist markets. Something becomes fashionable, investors pour in looking for the next big thing, the market becomes oversaturated and poor performers die out. Five years later only a fraction of the boom firms are still around. Some of this is down to good management, some to good luck, and it’s ferociously difficult to know which is which.
The theoretical underpinnings of why markets work say that we don’t really need to care that we don’t know whether bosses were good or lucky. The invisible hand of the market selects what works best, regardless of how it happened, and gets rid of the rest. The economist Joseph Schumpeter called this process “creative destruction”, and we tend to overlook the “destruction” part of it. The high-velocity churn of firms starting up and going bust is a good thing, within the context of a market economy. If it’s working as it should, then the only people who lose out are the overeager investors whose animal spirits led them to make risky bets – shares can go down as well as up.
But what if we can’t let firms go bust? Some firms are too big a component of regional or national GDP – think of the “post-industrial” regions in the north and Midlands, which tend to find themselves trapped in cycles of overreliance on one or two big employers which the local economy can’t cope with losing, and campaigns to attract the next major employer to the region. Other firms are too deeply intertwined with the rest of the economy, such as the banking sector in the late 2000s. Some industries tend towards a monopoly or monopsony structure – not enough buyers or not enough sellers – which distorts the normal workings of markets.
In such a situation, when the market operates as it should, we end up trying to use the heft of government and public money to put brakes on in order to keep the water on or the jobs in place, or to avoid the risk of contagion or systemic collapse. There are those who say that we simply shouldn’t, that we should let the market run its course, but we are literally doing it in many cases for the good of our health. Losing a major employer or a provider of necessary public services is devastating to economies and communities, and it’s by no means assured that the pitiless invisible hand which strikes down the inefficient company will replace it in a timely enough manner to ensure people don’t suffer.
Over the decades since we began large-scale privatisation of public services, we have engaged in a dance of regulation and risk management as we’ve tried to square the circle of capturing the gains of “private initiative” while insulating ourselves from the downside risks. In doing so we have also been insulating investors from the risks of bad management, in effect creating a convoluted Frankenstein’s monster of quasi-public firms which simply sit in an extraneous layer between government and public and siphon off money wherever they can.
While it is possible to set increasingly tight rules over how private firms can behave while competing for government contracts, to paraphrase Arthur C Clarke, a sufficiently regulated private sector company whose only client is the government is indistinguishable from a public sector body, raising the question of what the purpose of making it privately owned was in the first place.
We keep on with this strategy, despite its failures and unpopularity, because over the years the economic theories underpinning the privatisation experiment have become transmuted into self-serving philosophies which are unanchored from their origins. It’s not difficult to understand why a concept like “markets operate as selection mechanisms which produce positive outcomes by constantly weeding out bad choices” becomes “I, the noble businessman, am just fundamentally better than that grey-suited bureaucrat in the tax office”. But it’s also a dangerously flawed basis for making political decisions. The theories of rightwing, pro-market economists rest on more than “government bad, private good”, even if that is how they end up being mistranslated by politicians trying to think of a good reason to rebrand heart transplant patients as healthcare consumers.
For markets to work firms need to be risky endeavours. Labour’s proposals to end the experiment with trying to fit every industry into a market framework is simply a recognition that, for many of our vital public industries, we can’t afford to take the risk.
• Phil McDuff writes on economics and social policy
