The right cats to catch the right mice

The right cats to catch the right mice

by Eben Wilson
article from Wednesday 25, October, 2017

JIM SILLARS puts forward socialist notions with eloquent objectivity.  What a change from slogans and vituperation about “Tories” conspiring to dreadfulness.  His thoughts deserve a similarly ameliorative response – if not full agreement – in the cause of raising the tone of Scottish debate.

We could agree on a number of things – the role of profit to drive investment for one, although I would add the role of losses; for businesses need to learn how to do their trade.  I would also offer support that proselytising about “free markets” can become a slogan equivalent to the embedded distaste for profit among socialists.   I avoid the phrase; it raises the hackles of the left and, as he suggests, without proper analysis of any specific market it does not help understanding of the interplay of interests in real world political economy.  Incentives and interests matter in economic choices and they vary widely between sectors.

Jim Sillars understands that economic liberals and political socialists are seeking to resolve the same issue; how best to add value and who is to gain from that value added by human endeavour in order to improve the lives of everyone, not just producers.

He clearly rejects the Marxist view that you take over all means of production; the historical and contemporary evidence of Soviet Central Europe, North Korea and Venezuela is too visible to think any other way. He also recognises that private enterprise is more adept at adding such value but, as a socialist, he cannot bring himself to accept this view when it comes to specific industries such as the utilities and key public services and so seeks a new “model”.  

I see a number of issues with his thinking that lead to unhelpful consequences.  

The first is in over-valuing the advantage of natural resources. His is a political view based on the fact that the right of access to these assets, when monopolised by the state, allows the state to raise revenue as a landlord to use for its own, socialist, purposes.  

Economically, however, natural resources are only potentially useful, because while you may have them, making them valuable is a different matter. Oil reserves a mile down beneath choppy waters West of Shetland or energy from hillside wind turbines offer economic advantage, but organising their exploitation involves complex management, hard work and a lot of cash.  

It dismays me when such value is presumed “in the national interest”. Who defines or decides this interest? Well, the state that has taken a monopoly over access! The temptations to over tax and use these funds for politicised purposes serving vested interests are very high. Indeed the SNP agree, repeatedly telling us that the UK government has been abusing oil tax rates and misusing revenues.

Adopting such collectivism about resources for essential industries is in reality arbitrary. Socialists do not generally claim rent on foods or textiles created by land ownership.  Technical industries such as electronics, or media, or engineering operate on resources of knowledge and talent; but these are more hidden, ephemeral and mobile and so a lot more difficult to control and tax.

So we need to ask why the state should own businesses that exploit those resources; a task that involves dealing with complex variable production costs and overheads that are difficult to organise.  My concern here is practical, not ideological.

We have a great deal of evidence from auditing the losses of the coal, steel, gas and electricity industries as they were privatised.  Inefficiencies had emerged over a long period; collective worker interests and poor management with little incentive to improve its methods had combined to generate vast losses and multi-layered bureaucratic administration. Yes, this is in the past, but the interests and incentives that generate such lack of productivity are always with us; and we see the same today in health, education and welfare.  There is every reason to suppose they would re-appear, particularly if the revenues above were seen to be soft money for producer and worker interests seeking “investments” to their own benefit in higher wages, better employment terms, general empire building – plus bail-outs of failing entities.

Since the privatisation of these commanding heights, economists have begun to understand how prices can be used to incentivise and develop plural markets or quasi-markets – using wholesale auctions, contracts for difference, feed in tariffs, and other tools that allow more efficient economic choices to be made.  Crucially, they also allow plurality of both suppliers and supply methods to emerge, curtailing monopoly producer power on behalf of consumers.  Utility profits have been declining across the years and increasing competition will accelerate this trend.  We have more cats and they are a lot leaner and more agile.

In a recent piece for Think Scotland I said that I thought it likely that Ms Sturgeon’s new energy company would perform badly but rather than being disbanded would obtain new missions. Well, it seems to have taken only a week for Jim Sillars to come forward and suggest the creation of a monolithic energy company; a very fat single cat straddling multiple sectors.

This would operate counter to all the pluralising developments we see above. That’s a big mistake – is Jim Sillars really suggesting that big oil, big gas, big systems engineering is the future for energy production? This runs counter to numerous technical advances underway.  The danger from such a collectivist approach is it inevitably has a producer focus and always ends up creating multiple objectives which introduce complex and usually politicised agendas. Good business practice demands the opposite; keep it simple, keep it focussed, get it profitable and by doing so benefit consumers who buy more of your product.

Among his objectives Mr Sillars offers “learn about the business” and “partner with the private sector for expertise”; so opening the door to the self-interest of private corporates in lining their nest.  He then creates a magical milch cow that will “profit from oil”, “re-invest profits”, “provide cheap energy” and “collect taxes”.  And all this from a few percent of dividends?

The “profound influence on economic performance and the lives of people” emerges from the inefficiencies that follow from having one multi-coloured cat with too many mice to deal with.  Nationalisation, price caps or not-for-profit productions and all other follow-up attempts to dupe the price system are all in essence price controls; price controls always ration output, they must be always be avoided because those that they ration are always the least powerful.

Accepting that a multiplicity of objectives is to be avoided is the key to where we should agree on a way forward. If the state stays away from the role of producer, it can concentrate properly on the needs of the consumers; the 900,000 people in fuel poverty. 

If we have an energy market that allows only relatively low profits (we do) and allows new entrants to compete with dominant players (we do) and yet we still find many families unable to keep themselves warm and make hot food (we do), the state should concentrate on that last issue alone – using money re-distributions to help those in need.  This has the added democratic advantage of offering transparency to all as to what re-distributions are being made and how effective they are.

The prize here is large, because it is true that Scotland has a lot of diverse natural resources. Jim Sillars has been brave enough to suggest that we should get on with fracking gas. Another cat to catch yet more mice. He’s right, but we can do more; if we get the policy mix right and release energy producers to do their job in competition with each other and keep the state out of production, we can help those 900,000 people by generating new jobs and regular wages through lower energy prices.   Markets are beneficial if you allow them to be free.

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