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Embracing a serious analysis: a response to Nicol

Andy Tarrant and Andrea Biondi

10th October 2017

Read Tarrant and Biondi's original article and report here and Professor Danny Nicol's response here.

We enjoyed reading Professor Nicol’s polemic. We note that he does not disagree with our legal analysis that the specific proposals in Labour’s 2017 manifesto are compatible with EU state aid or other rules. His criticism of EU rules, and by extension our article, is that they prevent a further move towards socialism. In his view the latter comprises of an economy including national public sector utility monopolies. He suggests that we make a number of economic, historical and political errors. We think these are worth discussing, as resolving these arguments may be important in determining attitudes towards Labour’s future European policy.

There is such a thing as the social market

Professor Nicol argues at the outset that the “social market” is an oxymoron and cannot exist. This is clearly wrong. There is a vast political economy literature on the “varieties of capitalism” which analyses differences between liberal Anglo-Saxon economies and continental social market economies and their outcomes. A major difference between post-war reform in the UK and in Germany, for example, was development in the latter of rules requiring industrial democracy. From 1952 onwards workers in any form of business with more than five employees had the right to form a workers council with rising levels of representation on the management board of the company depending on the number of employees. In companies with 2000 employees or more, almost half the board members have to be employees. On average today, more than 75% of these representatives are trade unionists. Boards with this kind of composition do not prioritise the needs of financial markets and they do not like cutting domestic investment because it determines future employment.

This feeds through to general policy; “neo-liberalism” is not much of an explanatory tool if it lumps together responses to the Global FInancial Crisis in the UK and Germany. In the UK, once a Conservative-Liberal Democrat government took over, private and government investment was cut, leading to a public deficit which the state tried to rapidly close through massive welfare retrenchment. Amongst other measures in Germany, government spending via state aid through a state investment bank was provided on a huge scale in order to reflate the economy.

Key features of the social market, including finance for industry from state investment banks and worker participation in management have also been mainstays of Labour policy under both Ed Miliband and Jeremy Corbyn. There are justifiable criticisms to be made, in particular, of Germany’s promotion of austerity in the Eurozone. But criticism of the Eurozone and German foreign policy is not relevant to the question of whether the European single market should now be acceptable to British socialists and social democrats.

This brings us to Professor Nicol’s curious aside concerning the far-right Alternative für Deutschland:

Do we really wish to model our vision of socialism on a capitalist country so happy with itself that it now has 94 members of the Alternative für Deutschland strutting around the Bundestag?

We struggle to see why the 60 year old institutions of the social market economy can be held responsible for the party’s recent entry into the German Bundestag. Analysis of the AfD by the Bertelsmann Stiftung suggests that supporters’ motivating force is hostility to the newly-arrived Syrian refugees. In recent federal elections, there was support for the party across the income spectrum and across Germany; indeed, support was higher in the wealthy south than it was in post-industrial (and ethnically diverse) North Rhine-Westphalia. This, alongside the actual content of the AfD’s campaign and policies, makes it difficult to argue that support for the party is a straightforward consequence of any supposed failings of the German economic model. It is more plausible to understand it is a transparently racist reaction by predominantly older, male voters against Germany’s comparatively humane refugee policy.

We note in this context that the constitutional social market also affects welfare. German governments cannot impose UK-type welfare benefit levels because German courts applying social market principles say benefits must allow recipients sufficient income to be social participants—including for asylum seekers. It is arguable that the relative strength of the German welfare state is a factor explaining why Germany has been able politically to absorb a million unemployed refugees in one year, whereas the UK has found itself incapable of offering refuge to even a few thousand children or supporting rescue efforts in the Mediterranean.

Misunderstanding European regulation

We now turn to Professor Nicol’s specific objection to EU rules relating to utility monopolies. The assumption that state-owned enterprises require a legal monopoly in order to compete is, we argue, miscast. Professor Nicol suggests that private enterprise can get to cherry-pick, taking the profitable customers and forcing the state owned operator to become uneconomic because they are left with the rump of unprofitable customers. This is the crux of his objection to the EU rules in the utility sector. It is also wrong. Unsurprisingly, the Member States of the EU, with their large number of state-owned enterprises, did not agree regimes which could bankrupt their own enterprises and worsen their national fiscal positions. Instead, the EU utility regimes allow Member States to either force private enterprises to share a requirement to offer a service to uneconomic customers, or to divide up the costs of the state-owned enterprise serving uneconomic customers and make private enterprises contribute to the costs of the state owned enterprise.1 There are no prizes for guessing that the UK did not always deploy such rules —but that’s an issue for UK politics, not a reason for leaving the EU or the single market. A new British government can require private enterprises to pay social costs to a new nationalised operator if it wishes to do so.

The argument that state-owned enterprises require a legal monopoly to survive is also unduly pessimistic. State-owned enterprises are not bound to be inefficient, nor should they be permitted to be so except for defined social purposes. We regret that the UK’s Green Investment Bank has recently been sold to the Australian investment bank Macquarie rather than kept in state hands, but we do not suppose that Macquarie paid £2.3 billion for a failing activity.

Professor Nicol argues EU rules freeze in place whatever level of state ownership was present in the 1990s. This is not correct either. And indeed empirical observation in the UK, even under the Conservatives, falsifies this claim. The Green Investment Bank along with the Business Investment Bank and NEST—a mass workplace pension scheme now serving almost 5 million members—are all examples of new British state owned enterprises which began operation during the last seven years. As we noted in our original report, all state aid elements for these new public enterprises were cleared by the European Commission.

Needless to say, we cannot agree with Professor Nicol that

…in the British context any ‘public ownership’, to be lawful, would have to take the form of establishing a new company with no tradition of consumer loyalty attached to it.  This is not nationalisation in any way, shape, or form.

This is, categorically, an incorrect statement and the title to his blog is simply wrong. Under EU law, the British state can nationalise any company it chooses, including any company that has previously been privatised. In addition, the EU has no requirements regarding compensation for nationalisation. Influence on compensation levels set by a British government would be drawn from British courts applying the European Convention of Human Rights. Confusing the EU and ECHR is a standard trope of right-wing tabloids, and should not be embraced by the left to further a nationalisation agenda. 'Value' in this context is, of course, market value. But the market value of any property right is a function of profitability, which is in turn is also affected by the general regulatory environment. The latter is a matter for a British government, not the EU; boxing clever is always an option.

Misremembering 1945

Professor Nicol argues that the kind of public monopolies created by Labour in 1945 offer a model case of socialist economic restructuring. Actually, the historical record shows that they were just a bolt-on to the underlying liberal model of the UK economy. The leading historian of the 1945-51 Labour government wrote of Labour’s nationalisation model: “it has been condemned for offering only technical or superficial change in the traditional forms of private ownership, replacing an irresponsible board of private capitalists with an almost equally autocratic board of private capitalists.”Similarly, in Thompson’s analysis of Labour’s political economy, he writes of the nationalised industries, “They became in effect industrial fiefs with rulers pursuing their own essentially commercial agenda. As a result many of the erstwhile advocates of nationalization were to be disappointed.”2  Unsurprisingly given the above, there is no evidence that nationalisation lead to any particular changes in the dominant form of economic production in the rest, and majority part of the economy. What economists, historians and political scientists instead usually consider as marking out the 1945-51 government from its predecessors was its use of fiscal and monetary policy to deliver full employment, allied with a massive expansion of the welfare state.3 These are tools that the UK remains free to employ under European regulations.

The place of (European) regulation in socialist restructuring

As discussed above in the German context, an observation that can be drawn from the European experience in industrial democracy is that legal regulation can be an effective way to require social outcomes. This could be married up with the further observation that since the 1980s we have also seen a development in the UK of highly specialised and resourced regulatory agencies directing micro-economic outcomes in the private regulated utility sectors. Powers vary significantly between the different regulators, but their focus has tended to be directed by law towards achieving lower consumer prices (to greater or lesser effect, depending on the powers given to them). There would be nothing to stop the state deciding to legislate to direct these institutions to pursue additional ambitions, such as increased investment, improved wage differentials, or worker representation. And indeed, meeting such requirements could also form part of tender requirements wherever the state tendered for franchises, as it is required to do in passenger rail.  One would imagine a state owned enterprise or workers’ cooperative might be better at meeting such requirements. Setting high regulatory standards is not a state aid under EU law and does not have to be notified to be cleared.

Concentrating political effort on what outcomes should be achieved and how the potentially competing interests of consumers and workers in the sector ought to be balanced might—on occasion—be a better use of political resources than nationalisation, which on its own only postpones finding answers to those particular questions. This would avoid what happened in 1945-51 when, according to Alec Cairncross, the leading economic historian of the period, “Endless parliamentary time and much political capital was expended in moving a number of industries from the private to the public sector without much of a notion how to run the public sector.”5 Elements of the political right have always feared that the left would turn sectoral regulators into a more easily achieved form of intervention than nationalisation, but without any need to pay compensation. And this is of course why they dislike the EU itself, as it uses regulation to import elements of the social market including workers’ rights and environmental protection into UK law, and thereby interferes with UK property rights.

We also think any socialist or social-democrat proposing a return to national public sector utility monopolies because they were a good idea in 1945 needs to deploy the good Marxian tool of examining economic structures. In 1945, UK manufacturing production was entirely domestic and its exports were orientated to a captive imperial market that was forced to buy British (or build up unused sterling balances).6 At that time, the geographical coverage of a national monopoly mapped onto all the production sites of producers. In 2017, UK manufacturing and services are highly integrated into EU supply chains. They require utility inputs that can be put together to create virtual pan-European networks on a cross-border basis. A serious economic argument for legal monopoly would in most utilities now need to argue for a pan-European legal monopoly, not a national one, if it were to be consistent with actual existing production. Professor Nicol does not even attempt to deal with the examples we provide showing that legal national monopolies would be bad for UK production using energy, rail freight and telecommunications inputs. We would, for example, seriously question the assumption that any supposed gains from a return to a British Telecom national monopoly would outweigh the losses from being unable to put together the cross-border digital networks which are the central nervous systems of cross-border businesses located within the UK such as Airbus or Toyota. And of course BT would also lose a great deal of business since it uses open access rules to the incumbent networks in France, Germany or Belgium to provide services across Europe. We suppose that most Brexit and Lexiteers are unware that BT currently provides pan-European telecoms services to, amongst others, the EU Commission and NATO. The commanding heights of the economy look a bit different today than they did in 1945, and they do not run through one country alone.

It is not sufficient to oppose this analysis with a claim that the EU acts on a purely ideological basis, as Nicol does. This would make it impossible to explain why the EU seeks to ensure open access to national networks in areas where production requires pan-European utility networks and does not do so in a public monopoly utility area such as water, where these kinds of cross-border services do not and cannot exist.

No, we are not Hayekians

Professor Nicol suggests we may be unwitting acolytes of Hayek. In fact, we remain persuaded by Hayek’s intellectual opponent Keynes, and the other centre-left economists who helped build the post-war mixed economy welfare states and which delivered high growth and large-scale redistribution of wealth. We also think that the UK can learn from the European experience of industrial democracy and strong pro-social regulation. We have a suspicion that Professor Nicol might think any actual application of economics to politics is ‘neo-liberal’. While we do not subscribe to the notion that economics is more than a social science, we do think that it can provide some guidance to reformers. Professor Nicol’s critique of EU state aid rules in his book The Constitutional Protection of Capitalism (2010) may be driven by his opposition to the EU’s prohibition of permanent aid to loss-making state-owned enterprises. As a generalizable model for an economy, this would by definition be unsustainable, since it means the economy would be consuming more in inputs than it would be producing in outputs. If it is intended not to be a generalizable model, but to apply only to a minority of industries which can then be carried by the rest of the economy, then equally, by definition, it is too restricted a sphere of activity to be a plausible route to a socialist society.

The more general suggestion implicit in Professor Nicol’s blog title—“kiss goodbye to nationalisation if we stay in the single market”—is that radicalism is thwarted if we stay in the single market. Given that we have established that Labour’s 2017 manifesto is compatible with staying in the single market—and that Professor Nicol does not dispute this conclusion—this requires him to argue that this manifesto is not radical. We disagree with this assessment.

The question now is what is the best route to implementing and further developing Labour’s successful election programme. This requires a balanced analysis of the costs and benefits of the range of policy tools available to the Labour party for the creation of a freer and more equal society. In this broader context, even the most one-sided and enthusiastic estimate of the supposed advantages of preventing open access to monopoly utility networks would still find that they are not a high priority. A macro-economic policy designed to achieve full employment (including people’s QE), government spending on the welfare state, spending on social housing, taxation policy, establishment of state investment banks, splitting private retail and investment banks, and general regulation on consumer and workers’ rights are all, by orders of magnitude, vastly more important than Nicol's preferred aim of re-instating national utility monopolies.

The price of protecting monopoly utility rights—exit from the single market—would be a prolonged and unpredictable level of economic disruption and stagnation. This would jeopardise the deployment of more urgent tools for the renewal of British society, and the political support of any government pledged to employ them. As ever, ‘the language of priorities is the religion of socialism’.

Dr Andy Tarrant is Head of Policy and Government Affairs at the People’s Pension, a not-for-profit workplace pension provider. Previously he was adviser to Labour shadow Europe and Pension ministers. He is an EU Competition lawyer by training and has held a range of corporate and regulatory positions in the telecommunications sector.

Dr. Andrea Biondi is Professor of European Union Law and Director of the Centre of European Law at King’s College London, and academic associate at 39 Essex Chambers.

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[1] For a comprehensive description of the universal service funding regime in France see Henry, C., Matheu, M. and Jeunemaitre, A. (eds.) (2001) Regulation of Network Utilities. The European Experience (Oxford: Oxford University Press), pp.158-166.

[2] Morgan, K.O (1989) Labour in Power, 1945-51, (Oxford: Oxford University Press), p.96.

[3] Thompson, N. (1996) Political Economy and the Labour Party,  (Abingdon: Routledge), p.144.

[4] See, for example, Newton and Porter, who critiqued the lack of British industrial policy and argued for much greater state intervention. They say of 1945-51 economic policy: “The unshakeable commitment to expansion, rather than a comprehensive system of planning, was the key to the fulfilment of the reconstruction programme.” Newton, S. and Porter, N. (1988), Modernization Frustrated: The Politics of industrial decline in Britain since 1900 (Abingdon: Routledge), p.112.

[5] Cairncross, A. (1992) The British Economy since 1945 (Oxford: Wiley Blackwell), p.86.

[6] Cairncross, ibid, p.83.