Balancing the Dominance of Market Driven Theories

cafecultureThis article is based on a speech given by Dr Richard Grayson at the Urban Café, Newcastle upon Tyne on Monday 2nd February 2009 (event hosted by Cafe Culture North East).

Here, Richard sets out what he believes are distinct limitations to the market. Richard will assert that there is still a very clearly designed role for the state, one that is creative and enabling, rather than centralising and stifling.

I’m going to try to tackle three broad issues this evening. First of all, how recent events have affected views of the state. I then want to look at how social liberals approach the state, and finally consider what a social liberal state would be like.

In terms of recent events, I think one word illustrates how far debates have shifted. It’s a word we used to hear a lot about, but had largely been consigned to the history books.

The word ‘Keynesian’ was rarely heard in public debate in a positive sense. Today, faced with global economic meltdown, politicians of quite diverse shades have embraced some of the interventions which Keynes argued for. The word ‘Keynesian’ has been almost absent from political debate for two decades. Even where people have advocated job creation schemes, they have been shy of describing them as being influenced by an approach to political economy that the orthodoxy of the 1980s and 1990s had trampled under foot. Now it is on the lips of many, though sometimes only partially accurate, to describe the interventionist approach which governments are taking in the current crisis.

This, I think, shows how far current views of the state are in a state of flux. More fundamentally, as another co-editor of Reinventing the State, David Howarth, recently put to me, the fundamental realisation which many are making now is that where we once believed that key aspects of the market economy operated freely of the state, they now in fact rest on the state in more ways than we have imagined.

That does not just mean the state maintaining a basic framework of law which provides, for example, a framework for consumer protection. I am talking about the extent to which business people who, in usual times, want government to stay out if their daily lives, now plead for government to bail them out. The rhetoric of entrepreneurship, bemoaning the burden of the state, seems strangely hollow now. We are not quite in the 1970s, with every major employer the possible recipient of state aid, and we will not get there, but the mood music has certainly changed.

I hope that against the backdrop of that new mood music, people will come to realise that the best way to come out of the current crisis is not by pursuing policies which will just take the country back to exactly how it was beforehand. If government pursues policies which simply restore levels of growth, salaries and property prices to the levels they were until recent times, it will in my view have failed. If we restore rampant consumerism, materialism, and obscenely unequal salaries, we will be doing no favours for the long-term sustainability of the economy and our environment. If we encourage people to believe that collective action only needs to tae place at times of crisis, and do nothing to engage people in the political process, then we will do nothing to create to kind of co-operation which needs to guide our future.

This will must mean a role for the state, because government is one of the methods by which people come together to tackle their shared problems. But the state as it currently exists is deeply flawed and we must take the opportunity to recast what we mean by ‘the state’. I think those who can articulate a coherent and resonant view of the state, can shape debate for a generation to come.

How do I approach this? Well, I am a Liberal Democrat parliamentary candidate, vice-chair of the party’s national policy committee, and a former Director of Policy of the party, as well as having written as an academic on aspects of liberalism. More specifically, I should say that I approach this question from a social liberal perspective. To explain how that might differ from other liberal perspectives, I want to bring in some history, which will no doubt be familiar to many but worth recounting.

There was a decisive change within liberalism around the turn of the last century. Prior to that point, the liberal view of the state had been quite limited. It rested on John Stuart Mill’s view, published in 1859, that ‘The sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection.’ In practical politics, the liberal approach to the state as practised by Gladstone was focused on political rights. It involved expanding the rights defined by law, and much of that flowed by a belief that in so far as at the state had affected individuals, it has been a largely negative influence, at times tyrannical. There is a clear line between the arguments of the radicals of the English Republic and liberal beliefs in the nineteenth century. This line involved circumscribing the powers of the state – so that it could do less rather than more. For nineteenth century Liberals, the state was more often an enemy than a friend.

That is not to say that Liberals were averse to collective action. Far from it. Liberals pioneered a local government role to tackle problems like poor housing and public health. Joseph Chamberlain’s Birmingham in the 1860s and 1870s was the radical centre of this – Chamberlain himself used the phrase ‘municipal socialism’.

Yet the Liberal Party nationally was divided over the extent to which such measures should translate to national politics. This might have split the party, but it was instead split by Irish Home Rule in 1886. This drove Chamberlain into the arms of the Conservatives. It is ironic that it was the Conservatives, not the Liberals, who established county councils, long a radical Liberal demand as a way of expanding collective methods of tackling shared problems. It is hard now to think of county councils as a radical triumph, but they represented a significant stride in the 1890s, and allowed education to be publicly run in a way that was unimaginable without a uniform local government structure.

Despite the loss of many radicals over Home Rule, the Liberal Party radicalised at the turn of the century. It was the Liberal Party, between 1906 and 1914 which laid the foundations of the modern welfare state, and a new philosophical framework was provided by L.T. Hobhouse in his 1911 text, Liberalism.

Two sections sum up his approach. The first relates to the shared ground between the pursuit of freedom – the cause of all liberals – and the pursuit of greater equality. Hobhouse argued:

… the struggle for liberty is also, when pushed through, a struggle for equality. Freedom to choose and follow an occupation, if it is to become fully effective, means equality with others in the opportunities for following such occupation. This is, in fact, one among the various considerations which leads Liberalism to support a national system of free education, and will lead it further on the same lines.1

Hobhouse was right in his prediction for this approach led social liberals to advance the cause of public services throughout the twentieth century.

Meanwhile, in Hobhouse’s struggle for both liberty and equality, the state was a weapon. He did not believe it was the only source of collective action and described it as ‘one form of association among others’. But he had little to say about the other forms of association, and was clear that it was on attitudes to the state that New Liberals ‘stand furthest from the older Liberalism’. He argued:

… that the “positive” conception of the State which we have now reached not only involves no conflict with the true principle of personal liberty, but is necessary to its effective realization.2

Although Hobhouse believed that the concerns of classical liberalism should inevitably lead to endorsement of the state, his own overt statement of distance between ‘new’ and ‘old’ liberalism showed how far Liberals had travelled from the days of Gladstone to those of Asquith and Lloyd George. This conception of the state has underpinned key developments in Liberal thought since 1911: the contemporary work of the Asquith government; Beveridge’s proposal of social insurance; and Liberal Democrat enthusiasm for public services, especially education.

To some extent these views of the state dominated the politics of the post-war era. So when that system collapsed, I think that one of the problems the Liberal-SDP Alliance had was, as it has been said before, that it simply promised a better yesterday. Essentially, the party was offering the same state system but run better.

Yet the dominant view of the state in British politics, at least dominant for the last twenty years is the neo-liberal state. On the fundamental issues, Labour has not challenged the basic tenets of Thatcherism about the role of the state in the economy. Indeed, at the core of the Clinton-Blair-Schröder ‘Third Way’ was an acceptance of them. That is not to say, that Labour has failed to use the state with some success in public services. It has done that in one way: without challenging the framework, it has invested massively in health and education. There are some who say that this has made little difference, but I am not one of those. Admittedly, some of the money has been swallowed up by higher salaries, but many public servants were relatively low-paid, and simply improving morale among them is significant. On other issues, you only have to look at hospital waiting lists to know how much change there has been.

But those successes are also accompanied by huge public dissatisfaction over their lack of voice in public services, and that boils down to failure of the central state. The experience of many individuals and local communities is one of being completely unable to influence the big decisions on public services. That is something that I have seen at close-hand in my local area where despite the extra investment, we are steadily losing hospital facilities as they are shifted to hospitals elsewhere. Meanwhile, the standard narrative of many public servants is of being weighed down by bureaucracy.

What do we do about that?

Within the Liberal Democrats, there are broadly two approaches. A minority view, that sees little reflection in party policy, but which has attracted much media attention, is the school of thought associated with the Orange Book, published in 2004. It is a view which suggests that we need to emphasise ‘choice’ in public services, tends to see the state as ‘nannying’ and believes that the way forward is to treat individuals as consumers and offer them choice through insurance schemes.

Less eye-catching to the media is the social liberal approach, which tends to influence party policy much more.

What does a social liberal state look like?

It starts from view that the state has the ability to advance individual freedom. It takes the view that such freedom is often best advanced by collective action. The state should not only step in where markets fail, but that there are areas where markets will always fail to deliver progressive social goals.

However, and this is the crucial difference between the social liberal approach and the Labour approach, it is impractical for state to be so centralised, and also risks thew intrusions about which liberals are concerned.

I think there are three priorities for greater state action: the environment; equality and redistribution, and public services.

I want to focus today on public services, particularly the NHS, and use an example from another country, of how things could be done differently: Denmark.

Why Denmark? Principally because it has high levels of satisfaction from the public.

There are some crucial differences between the Danish and UK health services.

They spend more than us – both per head and as a percentage of GDP, and they have done for many years.

They also have a recent innovation whereby if state cannot deliver within one month, then the state pays for them to go private, although the system is currently suspended due to pay disputes

But their system is also radically devolved.

Since 2007, the governance of the health service has focused on five regions, ranging in population from about 600,000 to 1.6 million, thus making them analogous in size to English cities or counties rather than regions. There are also municipalities below that – 98 of them.

Regions are responsible for:

  • Hospitals;
  • Psychiatry; and
  • General practitioners.

Municipalities are responsible for:

  • Preventive treatment, and non-hospital care and rehabilitation; and
  • Treatment of alcohol and drug abuse.

The State is responsible for:

  • Planning for specialist treatment; and
  • Follow-up on quality, efficiency and IT usage.

Approximately 80 per cent of each region’s funding comes from a national health contribution, amounting to a rate of around 8 per cent on income tax. The rest is essentially from variable local taxes.

I think we need this kind of radical democratic decentralisation if we are not only to devolve decision-making in the NHS but to create the kind of devolved government in England that is enjoyed in the rest of the UK. Such radical reforms should be centred upon cities or counties, which are historic units of England, and many of which encourage strong feelings of local identity. Moreover, the last thing the public wants is another level of government, as was discovered in the north-east in the referendum on a regional assembly.

There are two options for the way in which such devolution could be achieved to provide local people with the voice that they lack. The quickest and simplest way might be to give Primary Care Trust and Strategic Health Authority commissioning powers to existing city/county-level authorities. The great advantage of this approach is that it could have positive effects on the quality of government beyond the NHS. By giving city/county councils significant powers over the NHS, counties would become more directly comparable to the devolved bodies in Belfast, Cardiff and Edinburgh. This would help to answer the ‘English question’, which is increasingly a factor in debates on the power of Westminster. If an effect of that was that people who are ambitious to wield power in their area stood for city/county councils rather than Westminster, the overall quality of decision-making at a county level would be greatly increased.

An alternative option would be for each city/county-level local authority to choose whether to run the local NHS itself, or to create a Local Health Board with powers to vary local taxes in much the same way as unelected police authorities do. Such a Board would be directly elected by local people at the same time as local elections, on the basis of manifestos put forward by local parties or independents. The advantage of such an approach over submerging NHS functions into wider county-council matters would be that there could be a very clear focus on NHS-related issues at election. All the evidence suggests that this is the primary concern to voters, so why not give them a chance to have a separate debate over how to run the NHS? This would allow clear choices to be made over, for example, additions to the NHS budget in return for maintaining a local hospital ward, rather than confusing health matters with the broad range of issues tackled by local authorities. It would also allow those with specific expertise of the health service, such as retired doctors or nurses, to get involved in the running of the local NHS, having put their case to the electorate. Their expertise could greatly inform manifestos and invigorate local debates on health care.

Underpinning these changes in decision-making must be one crucial change on funding. Core funding has to remain at the national level, as it does in Denmark, to maintain fairness across the country and so that poorer areas do not have under-funded health care. Yet local decision-making cannot be effective unless there is local flexibility over funding. So aside from having the power to make those decisions currently made by PCTs and SHAs, local authorities must have the ability to support those decisions with necessary funding. Only by having the ability to raise extra funds can authorities truly respond to local needs because more often than not, local demands for services will have a price attached. Thus, authorities should be empowered to raise funds for the NHS through additions to an NHS Contribution, based on National Insurance, and distributed using current formulae.

Within such a national framework, a reformed local NHS can flourish. But it can only do so if the existing bodies are scrapped and given to democratically accountable local people with wide-ranging powers. Those could be existing local authorities on a county or city basis, or they could be new Local Health Boards. But without one of these reforms, people will not have a voice over the local NHS and will be continually frustrated about their inability to influence decision-making in the areas of the NHS that most affect them.

Without local power, local people will be continually asking for health care that is not on the menu, and for which they have not been given a price.

Without local power, people have no chance to pay for the quality they want, and monitor the quality of local services.

Radical devolution has happened in Denmark, and it works.

The challenge in England is to sweep away swathes of unaccountable local bureaucracies and give their powers back to the people through elections in which local health care can be thoroughly debated.

As regards the NHS, that does not mean reducing the overall size of the state, but relocating it to create the real voice and real choice which market-oriented alternatives cannot provide.

  1. L.T. Hobhouse, Liberalism, (first published 1911; New York: Galaxy Press, 1964 edition), p. 21. []
  2. Hobhouse, p. 71. []
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10 comments on “Balancing the Dominance of Market Driven Theories
  1. David Heigham says:

    I decline to leave a “reply”. I am happy to leave a comment.

    Markets are useful horses. Like all good horses, they need to be calmed and controlled so they do not panic. Vince Cable has the best view on that.

    You keep good horses to get you to where you want to go. When we want to go to diverse places, as free people do, markets are usually the best means we have of reconciling our individual aims.

    When there is an element of collective choice in our setting of aims, we reach that collective judgement by means in which market mechanisms can only have a restricted role. We must set those aims through social or political processes.

    Markets then come to be an aid in pursuing those aims cost-effectively. Monopolistic suppliers of any service have a strong tendency to build in inefficiencies. This applies to public as to private monopolies. Where you can keep open the possibility of real choice between suppliers, that is worthwhile. Introducing real competition to run bus routes, for example, has improved bus services to the public. However, I wonder if the service might be even better at lower cost if there were publicly owned enterprises competing with the often narrow range of private tenderers. I remember an old municipal adage. ‘It’s a funny thing; competition between builders looks just the same whether there is or is not a municipal building works department who could tender. The only real difference is that tender prices are about 15% lower where there is a works department.’ Similarly, there were US studies which suggested that in refuse collection it paid to keep about 20% of the contracts in house.

    Privatisation for privatisation’s sake is not likely to be the most efficient solution for delivering public services. The other side to that is that the possibility of competition from the private sector always seems to improve the conduct of a public monopoly. Presumably that is one factor behind the Danes idea of a right to private health treatment if the public system does not deliver. In Denmark, when I last looked, a large part of the fire service was privatised; and one reason the rest was not was that the possibility of localities choosing public provision kept the private side on its toes; and vice versa. In Sweden, the possibility that outsiders might start schools and attract public educational funds if they attract pupils seems to have improved the public system.

    In taking collective decisions , where we want to go summarises as:

    • the closer our collective decisions are to us as citizens,
    • the more local they are and
    • the more we citizens are involved in the collective decisions, the better.

    This agenda calls for political action. There is no way any other mechanism will deliver it. Once we have radical decentralisation, how far to use market forces and disciplines to help deliver local decisions can and should be left to the local deciders.

    A final point. The distribution of funds between regions and areas in our health service can still only be explained if you bring in historic differences when the NHS was first established. The Danes allocate funds between regions more, not less, equitably than we do in our centralised system.

    And if there is evidence that proves me wrong on any of that, I will change my mind as a sensible Liberal does.

  2. Andrew says:

    First a minor note: References. If you are going to say things such as

    Approximately 80 per cent of each region’s funding comes from a national health contribution


    Regions are responsible for:

    Psychiatry; and
    General practitioners.

    then I would like to know where you got this information. The Steve Webb and Jo Holland post has done this (although not all the links work) so please, if you want me to take you seriously, get into the habit of doing this. I can just google “Healthcare system Denmark” but I shouldn’t have to.

    This serves another more important function also. When you say:

    Approximately 80 per cent of each region’s funding comes from a national health contribution, amounting to a rate of around 8 per cent on income tax. The rest is essentially from variable local taxes.

    and don’t reference it, I have to go and find similar numbers. When I find in this report from the Interior Minister:

    Of the total expenditure on health care in Denmark in 2000, public expenditure constituted 81% and private expenditure approx. 19%.

    Then I think “Is that the same 80%?” and if so, why didn’t you mention that the other 19% comes from private health contributions? Of course, it may well not be, but without a reference I am none the wiser, and immediately suspicious. I wonder why you don’t mention the insurance systems in place. Again, maybe you have better information than me, but without your sources, I’ll never know.

    A criticism of a free market economy is the problem of asymmetry of information. David Howarth mentions it in his Reinventing the State article. Yet here you show that a political system also has this problem. You have chosen only to give the positive (in terms of a social liberal standpoint) side of the Danish Healthcare system, presumably purposefully because you are trying to ‘sell’ it to the party. Again, from the report from the Interior minister:

    * There is a co-payment system in place for some specialities
    * Women have a higher mortality rate in comparison to other EU countries
    * The budget is very strictly controlled

    Why didn’t you mention these things?

    Also, you wrote:

    They also have a recent innovation whereby if state cannot deliver within one month, then the state pays for them to go private, although the system is currently suspended due to pay disputes

    yet, from a civitas report:

    In theory, patients can go private if public hospital cannot provide care within a given period. However, DRG [Diagnosis Related Groups] payment is to be the same, and as a result, so far, no private providers have signed contracts – all complaining that payments would not cover costs.

    which seems to suggest that the scheme never got started because the government wouldn’t actually pay for it. But again, without your source, I do not know whether you have better information than me.

    The same report also suggests that Denmark is moving away from the decentralized structure. Any ideas why?

    Happy to debate ideas like this with you. The healthcare system in the UK needs major rethinking and all ideas are welcome. But don’t be a hypocrite.

  3. Andrew says:

    One more thing. From the ministry of interior and health report:

    In the publicly integrated model those providing health services are civil servants receiving a fixed salary. The integrated model with budgetary restrictions and fixed salaries gives budget security, but in itself it does not give the staff any intrinsic incentive towards efficiency. Efficiency must be ensured through other mechanisms such as professional ethics and good management.

    Essentially, the current system of paying through the nose for health care professionals wouldn’t apply in this model. How will you get round it?

  4. Richard Grayson says:

    Regarding comments from Andrew, this text was a speech and because of the way it was prepared, I did not include the references. However, full references are contained for the detailed chapter in ‘Reinventing the State’. The key document for the structure of government is: Ministry of the Interior and Health [Denmark], The Local Government Reform – In Brief (Ministry of the Interior and Health, Copenhagen, 2005). There is a copy at;

    For patients going private, see:

    Andrew asked: “The same report also suggests that Denmark is moving away from the decentralized structure. Any ideas why?” As I say in my RtS chapter, there was a sense that the system was not as efficient as it could be. Moreover, in a relatively small area, there were difficulties in coordinating between a large number of decentralised authorities. However, note that the system introduced on 1 Jan 2007 is still radically decentralised compared to England. Counties were replaced five regions, ranging in population from about 600,000 to 1.6 million, thus making them analogous in size to English counties rather than regions. The 273 municipalities were replaced with 98 on revised boundaries.

    So-called ‘health insurance’ is talked about in the English translation of the Danish documents. However, this is misleading as the ‘insurance’ is simply funded by taxation, and is not a form of insurance as understood in the UK.

  5. Richard Grayson says:

    Regarding the “one more thing” point from Andrew, I am not proposing to alter the way in which we pay healthcare professionals in England.

  6. Andrew says:

    But isn’t that an important part of the budgetary controls in Denmark?

  7. Andrew says:

    Thank you for the references Richard

  8. Richard Grayson says:

    Re Andrew on “But isn’t that an important part of the budgetary controls in Denmark?” Yes, but incentives can be important for efficiency, and as they have had problems in that area, perhaps this is one of the few things they can learn from us!

  9. Andrew says:

    Can you clarify that Richard.

    Do you mean incentives for doctors? In which case, how do you measure how doctors are doing in order for them to get said incentives without continuing on with the current, much decried, ‘target culture’?

  10. Richard Grayson says:

    I certainly don’t mean just for doctors. Any efficiency incentives for staff should apply to anyone who can have an impact on efficiency. There are lots of ways of assessing performance, and assessing whether it is above the ordinary expectations. For example, throughout the public and private sectors managers do it on the basis of formalised individual appraisals, which need not involve things that are quite as mechanistic as ‘measurement’ might suggest. That might include some targets but if they are locally (even individually) set, in full knowledge of the local system, then I think that is not necessarily themselves. I don’t believe that targets are inherently wrong, just that many of those currently set are blunt tools.

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