Monday, January 31, 2011

Caveman economics

Caroline Spelman got duffed up on the Today programme this morning over her plans to sell-off the nation’s forests. “You’re going to have to back down on this, aren't you?”, asked nature-loving interviewer, John Humphrys.

We can only hope he’s right. But whatever happens to our woods, Spelman’s justification for the sell-off highlights a worryingly backwards approach to economics from the government.

Officially, the problem with forests is that their custodian, the Forestry Commission, is also the country’s biggest logger and therefore has a conflict of interest. I had no idea this was a problem but presumably it could be dealt with by splitting the Forestry Commission’s logging activities into a separate entity, without a mass sell-off.

The leap to privatisation appears to come from a Conservative ideological preference in favour of private ownership and fundamentally free markets. It probably helps that forestry is one of the fastest growing alternative asset classes and the Treasury is short of money, but a sell-off seems out of all proportion to the problem.

This 1980s-style love of free markets also lies behind the planned NHS reforms. David Cameron writes in today’s Times that the NHS “will sicken” if it is not reformed to meet funding and demographic challenges. That’s true, but why is privatising the provision of NHS services the answer? All the evidence points in the opposite direction; that private provision will increase costs and reduce quality. When the NHS needs more funding and better management, the government deliver a red herring. The NHS reforms seem to be another case of ideological piggy-backing.

To be fair to the government, there is a deficit to reduce and it is true that most things work better under private ownership. But not everything...

Railways, defence, financial regulation, fish quota management, strategic oil reserves and national health, are some of those that don't. What they have in common is that they all provide a public good, something with a high social value but no market price.

This is not news. A whole branch of economics is devoted to solving the “tragedy of the commons”, in which self-interested individuals rush to deplete shared resources. National woodlands are an almost perfect illustration.

The government could recognise this without resorting to modern-day enclosure. It could work up some practical solutions, such a better management systems for the NHS or a better structure for the Forestry Commission. Instead it is playing the economic caveman and hoping the market will take of the commons. It won't.

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