22 July 2019

What’s really behind John McDonnell’s ‘insourcing revolution’?


Another week, another thoroughly misguided Labour policy.

John McDonnell now wants to take various outsourced services currently bought by government and bring them back in house, in something Labour is calling an “insourcing revolution”.

The only problem with this plan is that there’s no rational justification for it other than naked political self-interest. Trade unions are a rather important part of the Labour Party coalition, and union bosses would prefer their members to be feather-bedded inside the public sector rather than subject to the cruelties of markets outside.

There is, of course, an argument to be had over outsourcing and how much the private sector should or should not be doing in what McDonnell rather vaguely calls “the public realm”.

The go-to thinker here is Ronald Coase and his musings on The Nature of the Firm.

The question Coase posed was which things are better done inside an organisation, subject to command-and-control methods, and which are better done outside, as a nexus of contracts with players in the marketplace.

His answer was that perennial of all economics, “It Depends”. Upon what the organisation is trying to do, the technologies it’s using to try to do it and the state of other technologies outside the firm.

Note that none of this depends upon whether the organisation is attempting to make a profit, or has a social purpose. What should be done inside an organisation, and outside, just depends.

With at least the beginnings of a theoretical structure, one can try to address what the National Health Service – as an example – should be doing directly and what it should be buying in from outside.

We would all look very oddly at someone who said the NHS must own cotton fields, so it can supply the material to make bandages which are an essential part of health care. Britain isn’t a great place to grow the plant, doesn’t have the spinning mills any more, the skills required are those the NHS doesn’t have and couldn’t acquire and so on. The answer, clearly, is to just buy bandages in the marketplace.

At the other extreme, it’s equally clear that the NHS should be managing the budget for healthcare. They don’t always do it very well, but given the vast amount of taxpayers’ money the service depends on, central control is obviously a necessity.

In between those two examples lies a whole host of services where there is a legitimate debate over what to buy in, and what to do in-house.

The point of outsourcing, of course, is to get things done more efficiently by hiring specialists, those honed by the market into being actually good at a particular task, sharpened by competition.

To give a small scale example of the insourcing/outsourcing dilemma, look at catering in hospitals.

A month or so ago there was a listeria outbreak, traced back to sandwiches made by an outside caterer. This prompted Matt Hancock, the Health Secretary, to suggest that NHS hospitals make their own sandwiches. It is possible, for example, that local and immediate production, rather than centralised and remote, would have less problem with food poisoning. It’s also possible that multiplying the number of kitchens doing the preparation will increase the number of outbreaks, even if each of them would be smaller.

The point here is that this is an empirical question. There is no straightforward theoretical answer here. The knee-jerk response of ‘bring it back in house’ is just that, a knee jerk, not a careful examination of the pros and cons.

As it happens it was also an incorrect knee jerk. For continued examination showed that it wasn’t the now bust sandwich-maker at fault at all, but the next organisation down the chain, the company providing cooked meat.

Should there now be a clamour for the NHS to make its own ham? And if our hospitals are to start roasting meats in the basement next to the gurney repair shop, should the NHS be raising the pigs as well, or brining its own bacon?

Why is it more efficient, or fairer, or just plain better, that the NHS make its own sandwiches but not, say, bandages?

Clearly, these questions get more complicated depending on the particular service you’re talking about. But John McDonnell’s desire to bring things back in-house is based not on a reasoned judgment. It stems from a deeply held distaste for the private sector, coupled with transparent desire to simply boost the public sector payroll – and with it the power of his trade union chums.

Of course, I have my own prejudices too – such as wanting the state to do a great deal less than it currently does, rather than more. But all McDonnell’s offering us so far are his own, but mirror, insistences. What we really need to know is, well, where’s the beef John?

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Tim Worstall works for the Continental Telegraph and the Adam Smith Institute.