After Carillion, Can Capitalism Clean Up Its Act? Or Will Marx Have the Final Word?

Yves here. While this article focuses on the Carillion and the broader failure of privatization and other Thatcherite fads, it is germane to American readers too. It describes how the demonization of the public sector and the insistence that private operators would do better was evidence free…and no one has been keeping tabs to see if the claims of improved performance came to fruition. There are plenty of anecdotes I can supply that would suggest not.

By Trevor Smith, co-founder of Democratic Audit and a Liberal Democrat life peer. Originally published at

Carillion’s collapse – and other failures such as privatised forensics firm Randox – show the limits of the managerial revolution. But who’ll take on the robber barons?

The Carillion bankruptcy is but the most spectacular illustration to date of the malfunctioning of the UK economy. Coming hard on the heels of the equally high profile failure of BHS, it has raised a fundamental questioning as to whether it is yet another one-off incident or symptomatic of a much deeper malaise. The public debate that has ensued has brought the ideas of Karl Marx back into fashion: does late stage monopoly capitalism contain within itself the seeds of its own destruction? Answers to that age-old conundrum are best left to the rhetoricians, but the latest corporate collapse reveals that more immediate and widespread practical reforms are now called for.

To state the obvious, Carillion occurred against an already very bad economic background. The gap between rich and poor continues to widen. Top executive remuneration packages now show that the difference between them and average pay packets amounts to a ratio of 120:1 *High Pay Centre, Feb 2018), while the gender pay divide remains at 20% according to ACAS. Other glaring inequalities include both ethnic minority life chances, widespread regional disparities and especially the North/South divide, and the stasis caused by social immobility. In addition, home ownership has been plunging and more people are compelled to rent, usually with short tenure and often in sub-standard accommodation.

A Short History of the ‘End of History’

Mid-twentieth century Britain appeared to point to a very different future. During the first half of the 1950s the Keynesian consensus, that went by the term “Butskellism”, seemed set fair to become a long-lasting paradigmatic formula for operating the economy. Looking back, it could have been seen as portending the coming of Fukeyama’s “the end of history”, though the “mixed economy” turned out to be a short-lived trailer for a story that wouldn’t last. It was replaced by Gaullist-style “indicative planning” under the Britain of the two Harolds (Macmillan and Wilson). These sequential consensuses gave way to the wholesale privatisation of the nationalised public utilities. Privatisation characterised Margaret Thatcher’s government but the actuality did not live up to the free market slogans she flauntingly employed in promoting it. Privatisation did not usher in extensive price competition – it merely created a new series of cartels that necessitated the recruitment of a vast number of allegedly “independent” agencies in an attempt to regulate their activities. Thatcherism’s main accomplishment was to firmly embed the notion that “private” was good and “public” was bad – this was to become the new consensus.

A major off-shoot of privatisation was the subsequent invention of the Public/Private Partnership (PFI). It was John Major’s innovation when he was prime minister and was first employed to enable the construction of the Heathrow Express from Paddington mainline station to London airport. The device was seized upon by the incoming government of Tony Blair and aggressively pursued by Gordon Brown as chancellor and John Prescott as deputy prime minister. PFIs became an extensive new industry providing the wherewithal for building rafts of schools, hospitals, prisons and other such infrastructural developments.

PFIs turned out to be too good to be true. Whereas the Heathrow Express generated its own cash flow that would both help repay its initial capital costs and cover running expenditures, the extensive New Labour programme would have to be repaid by the taxpayer, usually over a long period. Customarily, these PFIs were bid for by consortia of builders, financiers and others, secretly drawn up with little or no public scrutiny. The big legal and accountancy firms acted either for these consortia or for the government on each PFI which created a swirling “revolving door” rodeo with little or no regard for the conflicts of interest implicit and endemic in such commercial carnivals. Meanwhile, it quickly transpired that the senior civil servants were not at all well-equipped to oversee these PFIs or represent the public interest.

It came as no surprise (and, in fact, many commentators like Professor Alyson Pollack pointed it out at the time) that PFIs turned out to be grossly over-expensive and would become an immediate charge on the public purse when they failed- as, inevitably, some did. It also meant that the participants in the PFI consortia could not easily be held contractually responsible over the lengthy time spans of twenty-five to thirty years. Furthermore, PFIs were frequently sold on to others and a whole new secondary market developed to facilitate such deals. These schemes became a veritable financial quagmire, making evaluation and assessment extremely difficult.

Privatising the Night-Watchman

One very spectacular failure is to be seen in the private provision of forensic science services. The government-run Forensic Science Service examined most of the evidence submitted by the police and others until it was abolished in 2012. This activity, crucial to pursuing criminal prosecutions and inquests, was in future to be contracted out solely to private enterprises. This has resulted in long delays, extensive losses, the mixing- up of vital evidence and wrongful prosecutions. One firm, Randox Testing Services, was found to be extensively at fault while another, KFS, has had to be bailed out, at a cost of millions of pounds, by the police to prevent its liquidation and jeopardise “thousands of cases including rape and murder” according to The Times (31.1.18). Shortcomings such as these pose a major threat to the workings of the criminal justice system which, itself, is racked with other problems.

Worse still was to come with more extensive recourses to outsourcing both on the part of PFIs and more generally by central and local government. One difficulty was that outsourcing itself spawned a small group of cartel-like firms to cater for the new demand. It was all part-and-parcel of the “private-good/public-bad” consensus that dominated the practice of recent governments of all parties – Tory, Labour and Coalition. G4S, Serco, Capita and Carillion together held a firm, oligopolistic grip over the outsourcing of erstwhile government activities. Even at the height of the Victorian “Night-Watchman State”, it was always recognised that the defence of the Realm, the conduct of diplomacy and foreign affairs and the maintenance of internal home security would remain the monopoly of Government. Now, in all these three broad policy areas privatisation has made major inroads with a corresponding loss of direct responsibility by the Cabinet overall and ministers individually – the very conventions that were taken axiomatically as the very hallmarks of our parliamentary democracy. This widespread ministerial abnegation has in turn contributed indirectly to the rise of the populist politics that is now prevalent.

The present legal framework of commerce owes its origins to the Victorian age which codified the law in a way more comprehensive than anything tried since. It has been tinkered with as necessary in the intervening century and a half but no overall transformation has been undertaken.

So Much for the Managerial Revolution – The Return of the Robber Barons

Under the company law that has prevailed for so long, the shareholders in principle own an incorporated enterprise and nominally control its board of directors. This somewhat tenuous system of governance was given a longer lease of life by being mitigated later by the rise of the “Managerial Revolution” which brought about the divorce of ownership from control. This, in turn, it was argued had given way to the mutation of a more benign type of business executive. The modern businessman was now regarded as having wider concerns beyond that of mere profit maximisation, including the needs of the consumer, staff, suppliers and the wider society, including the environment. This assertion, propagated by Berle & Means in 1932, was later taken up and eagerly embraced by the leading Labour revisionist theorist, Anthony Crosland. In his influential book The Future of Socialism (1964) he asserted there was no further need for the nationalisation of major industries as the public good and the general consumer was now better served by the new cadre of company executive. However attractive this may have appeared at the time of his book, it, too, did not endure with the passage of time – the “Robber Barons” are now back with a vengeance.

The world-wide 2008 financial crisis specifically engulfed the banks and the financial sector more generally. For the most part, governments bailed them out with vows of “never again”. Numerous enquiries followed proposals for reform implemented to a greater or lesser extent aimed at securing this desired outcome. While many have questioned their practical efficacy, the problems shifted but did not go away. This is because they are clearly systemic and call for much wider and more far-reaching approaches.

Despite some increase in shareholder activity since 2008, particularly over the remuneration packages senior corporation executives award themselves, these are now showing evidence of diminishing. The position of shareholders has also been further weakened by the recourse to Electronically Traded Funds (ETFs) whereby large tranches of shares are traded in nanoseconds having been triggered algorithmically. ETF shareholders can have no role to play in corporate governance. This new situation has not been adequately addressed by any of the numerous corporate reviews of the past two decades.

Of Accountants, Regulators and Mandarins…

Three inter-related problems have emerged. The first arose from the conduct of the accountancy profession. The FTSE 100 companies- and many others employ the services of the “Big Four” firms – PWC, Deloitte, KPMG and E&Y. These comprise yet another cartel with all the attendant problems thrown up by such restricted market conditions which have led to unacceptable practices. For example, no FTSE 100 company has ever had its annual accounts qualified, a fact which at long last seems about to be investigated. There has been a steady growth, particularly overseas in the USA and recently in South Africa, of massive fines being levied on the Big Four for various acts of malfeasance. These dominant world-wide accountancy firms are not as pure as they pretend and their poor performance both sullies their reputations and, much more importantly, severely damages the operations of the capitalist system.

Exacerbating and compounding these deficiencies has been the emergence of the second problem – the very poor workings of the so-called regulatory agencies. Almost none of them has escaped criticism. The operations of the various “Ofs” – Ofsted, OfCom, OfWat, OfGem, etc, as well as the Quality Care and Police Complaints Commissions – and all the rest – have been seen to fall short, often very far short, of acceptable standards.

And thirdly, there’s the senior civil service, comprising the non-political arm of the Executive, which no longer attracts the prestige it once enjoyed. Partly this is because it has been down-sized, or “hollowed out”, since the Thatcher era. Consequently, “departmental memories, once an indispensable resource assisting the mandarins of Whitehall in their duties, have all but disappeared. Endeavouring to compensate for this memory loss, leads to further reliance on outsourcing the task of contriving remedies to management consultants; but their solutions, by the very nature of their authorship, are invariably short-term and non-contextual in character and thereby usually much inferior.

Accountants, regulators and mandarins now perform a very sub-optimal auditing function in the scrutiny of public policies and their implementation. And that all-important function, especially for a regime that purports to be a democracy, is yet further damaged by the practice of relying on recruitment by the “revolving door” process. Accountants, regulators, management consultants, civil servants, ex-MPs and the legions of insouciant, well-paid, technocratic hired-hands, have ceased to be the quite distinct entities some of them once were. They have all but dissolved into what aptly may be termed a new nomenklatura that would feel at home in the former USSR. The seal of omerta – of not shopping one another – is as firmly observed by this grouping of fixers as it is among the Neapolitan mafia.

The major problem with privatisation, outsourcing and their various consequences is that there is no inventory of successes and, more importantly, of failures. There were relatively few state-owned industries, covering discrete areas, so their performance was relatively easy to gauge. Indeed, William A Robson was able to encompass them definitively within the covers of one book, Nationalised Industry & Public Ownership (1960). By contrast, the extensiveness of privatisation and, even more, the recourse to outsourcing, makes these twin manifestations even much more difficult to evaluate. This is the reason why the near-uncritical acceptance of the “private=good/public=bad” consensus has held sway for so long and is only now being questioned following Carillion and similar large-scale disasters. The Economic & Social Research Council (ESRC) really should have recognised before now this gaping lacuna and commissioned extensive sample studies of the phenomenon; instead, it allowed itself to become a mere adjunct to the ever-burgeoning nomenklatura. Doubtless, recent calamities will furnish material for future academic research but the findings will come too late to inform what now needs to be swiftly undertaken.

Another grievous issue concerns the occupational pensions industry. Firms’ pension schemes have been raided to produce easily accessible cash flows. While others, very noticeably in the case of BHS and Carillion, have been denied the finances needed to remain viable. Added to which, excessive over-charging by asset managers who run the investing of funds, has greatly reduced their overall worth and correspondingly lowered the amounts paid out to pensioners. This story has much further to run and the deficits being revealed are of such magnitude that they will undoubtedly force government, the regulatory agencies and parliament to take specific action to deal with these gross failings.

Can Capitalism Clean Up Its Act?

But there is a growing awareness that something much more radical needs to be done. While the re-nationalisation of rail transport may be seen as acceptable, widespread public ownership to include other sectors cannot provide the answer. Theresa May proclaimed that many current business practices are beyond the pale when she assumed the office of prime minister and has since re-iterated her worries. But, so far, all she has come up with are warnings of taking remedial steps at some distant date. But the enormity and ever-increasing frequency of the faults being revealed in the operations of industry and commerce in Britain and beyond demands immediate and urgent action. It is quite amazing that virtually no criminal prosecutions have been mounted against the perpetrators of major malpractice, which is in distinct contrast to what has been happening in the US. Like Britain, the American authorities levy big fines on the bad guys, or come to agreed compensation payments with them, but they also imprison many – why the difference, it has to be asked?

What will trigger radical reform? It may be that the wave of disasters will have to climb even higher yet to create the necessary political will before government(s) feel forced to take action. Similarly, will the main representative bodies of business and the professions, both individually and severally, feel obliged to take action to improve standards of members’ behaviour? At the recent Davos conference, it was reported that there was a general feeling among corporate participants that ethical behaviour needed much improvement; though don’t bet on anything happening very quickly. Another, slightly more tangible cause for a measure of optimism is that a handful of large enterprises are beginning to announce measures aimed at improving their behaviour. We can but hope but time is not on anyone’s side and by default Karl Marx may be allowed to have the last word.

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23 comments

    1. Self Affine

      Isn’t “radical reform” an oxymoron or some form of class based doublespeak?

      Reforming implies keeping the same assumptions and processes in place – just changing the form. I think we crossed that Rubicon some time ago.

      I don’t think its even close to being enough to pull us out of this ecological and social nosedive we seem to be determined to continue to the bitter end.

  1. hemeantwell

    The otherwise good article oddly makes no reference to Corbyn’s antiprivatization proposals. They might shed some light on what comes next. I’m not very familiar with them, can someone here sketch in the blank?

      1. Isotope_C14

        Worker co-ops are incredibly powerful. I do a little bit of gaming-overton-windowing figuring I can reach a few people to make them question the baloney.

        This literally means in multiplayer mode, I will name myself something provocative like “Capitalism is a failure”, or if there is multiplayer chat, say things that question our neo-feudalist rent extractors.

        I’m not kidding, in games with 30-40 people in a particular chat room, if I mention Democracy at Work, people respond, are you talking about Richard Wolff?

        The youngsters are very savvy now, due to being overeducated for Starbucks jobs, and when they take control here in the future, any type of “let the market decide” economy is in dire straits.

        The DC echo chamber has no idea how little future they have. If they start war with Russia, they better hope they don’t need to start a draft, cause none of these guys are going to fight for some 1%’er pipeline.

        Not only are the young sick of hierarchical arranged business, but the privatization model has been a failure across pretty much every industry. Will be exciting to see if Corbyn can overthrow the Tory government and establish a functional government in the UK.

  2. Jack

    “Like Britain, the American authorities levy big fines on the bad guys, or come to agreed compensation payments with them, but they also imprison many – why the difference, it has to be asked?”

    Actually, most of the fines for US companies have not been that big. And imprison many? I haven’t read about that anywhere. I don’t think a single guilty party was charged, much less imprisoned, for the recent mortgage scandal for instance. The last time I think any big finance people went to jail was in the 80’s after the S&L crisis.

    1. The Rev Kev

      You got that right. I think that about a thousand people went to jail over the S & L crisis which was much smaller. These days, when a company makes a deal to pay a fine it is always with the proviso that they do not admit any fault for what they did. After awhile, these fines just become another cost of doing business.

  3. Eureka Springs

    Just returned from an extended stay in an New Orleans airbnb with a Venezuelan landlord who vehemently opposes Maduro. Maceo Parker at 77 years of age is still all about the love with his saxophone and the parades were off the meter fun.

    Decided to listen to NPR yesterday morning for a couple hours while driving across Lake Pontchartrain into southern Mississippi. If NPR is any indication there will be no (as in zero) main stream media questioning the public/private Thatcherist aspect of Trumps stimulus proposals. If anything there is a whole new class of super stimulating public private steroids on the liberal streets. Over ninety percent of the ‘needed infrastructure” meme was about bridges and roads, one mention of water and sewage updates and nary a mention of fiber internet to homes. No mention of real costs of the private aspects at all.

  4. Sound of the Suburbs

    “We cannot solve our problems with the same thinking we used when we created them.” Albert Einstein.

    Precisely.

  5. Scott

    This article was published yesterday. This is an example of what proponents call “asset recycling.” There never seemed to be a good reason for selling Hydro One.

    1. Mickey Hickey

      What seems to be missing from the public discourse is that a real tangible asset on the Gov’t books which is sold off and folded into
      (Gov’t) general revenue is gone for good. The revenue stream for Hydro One is then gone forever and homeowners and businesses are stuck with higher cost private sector management and the higher cost of borrowing of the “private” sector entity profit. In my estimation the private sector mark up in total is in the vicinity of 15%. In a world where accounting has long since become sleazy as compared to being a science and a public fascinated by dreaded deficits it is not possible for politicians to point out that selling off $x billions of real and tangible assets has the same effect as borrowing $x billions. It all boils down to what and how things are sold to the public. Right now privatisation is good and borrowing is bad. The rot in the English speaking world set in when Ronald Reagan repeatedly said what he maintained were the 12 most terrifying words in the English language “I am from the government and I am here to help you.”. Who should we blame for the rot, Ronald Reagan or an easily duped electorate?

  6. David

    Slightly curious article, which mixes two things (and gets Fukuyama’s name wrong). This isn’t capitalism, which has its own problems. If anything, it’s a return to the eighteenth century, before the industrial capitalism that Marx knew. It’s rent extraction, of the type that was practiced in England up until the nineteenth century, where private contractors paid to be allowed to collect taxes and perform all other kinds of functions that were later nationalized. What we are seeing now is the natural end of resource extraction when the resources are exhausted. But it’s been a good ride for those who benefited, and the policy was actually a “success” in its own terms, albeit for a very few people. But it has nothing really to do with the end of capitalism, which is another story.

    1. Anonimo2

      Very well said.

      Saying that our current system is capitalist is a small victory for the leisure class. In fact we are now much closer to a neofeudal preindustrial extractive system than to old industrial capitalism.

      As Michael Hudson states in “J is for Junk economics”. The first thing we have to do is to fix our language and tell things by its name. For instance, casino style neoliberalism is not industrial capitalism, rent-seekers are not job creators, financial wealth is not wealth at all, and there is no such a thing as a [free] market etc…

  7. Scott1

    I read & awful lot of Nevil Shute, even through his autobiography. He was a powerful influence as a best selling author defining the British Gentleman. He has to have had an affect on the Private is Better philosophy. He was so widely read.

    Henry Petroski the engineering writer for professionals & lay people would have a more definitive judgement, but Nevil Shute Norway worked on the engineering as a mathematician titling his autobiography “Slide Rule” R-100 which was the Airship of the Two that was successful. The Government built the R-101 Airship which crashed on its maiden voyage somewhere over France killing 48 whereas the R-100 flew to Canada and back.

    This experiment has to have contributed mightily to the Privatization as More Competent than Public belief, & certainly in the orbits of those that run the UK.

    It would appear that the Lockheed Skunk Works model far as Government Private model for successful engineering outcomes went well. Aviation and movies are personality driven enterprises that have developed advanced systems for unique missions, but are dependent on the “Great Man” and the greater purpose combined to overcome the failure factor of all human systems.

    I’ve said that where the UK, London to build in London a Marxist Bank, which is the Industrial Service Bank serving Europe or anywhere on the Globe, it would overcome & pull past degenerated
    Finance, and as the US is denying use of the Federal Treasury by the States, Utility Banking represents for the States a good deal of the answer. (I’m thinking of the Bank of North Dakota.)

    Steve Minuchin’s US Treasury is being run in a way intended to replicate his Foreclosure King record, setting the States up for Too Much Bonds, instead of Taxes and imperatives of the Federal Government, Trump’s government compel State Debt, so the States are to Minuchin’s cohorts prey.

    A great Utility Banking Sector is what I understand to be Marx idea of good Banking. For all these institutions it is the Mission statement on the first page, or HomePage of them, that makes all the difference since people will know what they were really hired to do.

    It is of great concern and a pathology on a grand sociological scale that the Trump Era Mission statements of US institutions such as the FAA, FBI, CIA, NSA and others in Sciences & Engineering are being, have been removed or so rewritten as to mean mush.

    I noticed this mostly for the FCC. Others have seen it happening as regards the NSA.
    So far as accountancy, & will it fly territorial evidences of superior operating systems for humans the airport airplane transportation systems have the most of precedents to offer.
    Edward Hallet Carr has influenced my thinking here for his essay a “Critique of Realism”.

    You make up for the incompleteness of all systems by having all hear and see & feel clear articulations of the overarching mission of the institution that involves many different people and subsystems.
    The “Great Leaders” do that within the organizations & Institutions they lead.
    For instance we all know what Elon Musk intends to do. Everyone who works for him knows he wants to take mankind to Mars so we are not wiped out in the Solar System.

    Thanks.

    “Critique of Realism” is found in “Classic Readings in International Relations” ’94.

  8. RBHoughton

    Late-stage monopoly capitalism is not just about salary gaps. There are more problems than this timely article lists. And its not just BHS and Carillion either. G4S, Serco and Capita must all be in more or less the same disastrous state and as the article notes the defence of the realm is dependent on them. Capita is on the rocks and all the companies up and down stream are affected. Thank Heavens people are finally saying that Thatcherism was a name for cartelisation.

    It has occasionally been the case that UK cannot police its own borders. Ministers might escape the net of lobbyists by going direct to retirees who can answer the problems and save the country.

  9. Temporarily Sane

    As to where capitalism is heading, I found Wolfgang Streeck’s a very compelling and persuasive read. (Hat tip to NC for introducing me to Streeck’s work.)

  10. Rates

    The fall of the UK is almost complete. “Rule Britannia” has never been more distant.

    Add to this the still emerging RBS and Barclays “scandal”:

    The only question left is whether someone is still willing to pay premium for the British accent, because that’s about the only remaining thing that nobody else can quite produce.

    1. Andrew Dodds

      Well, according to Patrick Minford, Banking is about all we’ll be doing to earn our living post-Brexit. Could be a problem there..

      1. Rates

        The future of British economy will be:
        1 million people producing marmite
        50 million people taking loans to consume said marmite
        10 million people trading the marmite back and forth

        The rest will be involved in reality shows related to the above.

        All those Victorian era gentlemen would never have thought that there would be such a day of reckoning.

        Uncle Sam might have to bail out their distant cousins.

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