26 January 2018

Why Carillion’s collapse has nothing to do with ‘neoliberalism’

By Kristian Niemietz

The Left has won the economic argument. You can tell that from the fact that whatever happens in the world, it takes five minutes for someone to come up with an explanation for why this event somehow represents “a damning indictment of neoliberalism”. And within another fifteen minutes, that interpretation will have become the dominant narrative.

It happened after the Grenfell Tower tragedy. It has now happened again with the collapse of Carillion. One firm’s failure has become a tale of  “the outsourcing racket” in general. Outsourcing is now seen as central to the neoliberal worldview. Supposedly, neoliberals believe that outsourcing is always good, and that in-house provision is always bad.

For example, Paul Mason wrote an article entitled “Ink It Onto Your Knuckles – Carillion Is How Neoliberalism Lives and Breathes” for the far-left Novara Media. In it he claims:

When right-wing economists tell me there is no such thing as neoliberalism – that it is a figment of the left’s imagination […] – from now I’m just going say the word Carillion. In fact, if it would fit, I would get the word tattooed across my knuckles. […] Carillion’s entire history encapsulates the rise and fall of neoliberalism.

Does he have a point? What, if anything, is the neoliberal view of outsourcing?

Let’s start with outsourcing in the private sector. Private companies are constantly faced with the choice between outsourcing activity X or Y to an external provider, or providing it in-house instead. They will take a range of factors into consideration. There may be benefits from specialisation. But there may also be additional costs associated with contracting and monitoring, and additional risks associated with ceding control over the activity in question. If, for example, the quality of X is easy to assess, but the quality of Y is not, then it might be a good idea to outsource X, and keep Y in-house. The same is true if X can be purchased at any time, while Y is time-sensitive.

Either way: this is a business decision like any other. There is no reason why an economist – “neoliberal” or otherwise – should have any view on this matter. A fast food restaurant may ponder whether they should employ a cleaner directly, or contract an external cleaning company, just as they may ponder whether they should buy more ketchup or buy more mustard. A neoliberal can be no more biased in favour of outsourcing than they can be biased in favour of ketchup.

The free-market perspective is this: no one can know, from the outset, what the “optimal” structure of an industry is. No one can know which activities are best bundled in one single organisation, and which are best split between two or more independent organisations. The way to find out is through trial and error – a competitive market process, in other words.

We need different economic actors trying different business models, in competition with one another. Some may outsource a lot, others may outsource very little, and they may all outsource different things and in different ways. Some of those models will do better than others; the ones that do well will expand, the ones that do not will adapt or disappear. That is one of the major functions of market competition: we need markets to find out what works. That is the free-market position – not “outsourcing is good” or “outsourcing is bad”.

So much for outsourcing in the private sector. Does the matter change fundamentally when the party making the decision is not a private enterprise, but a government agency?

Not really. State involvement will weaken and suppress the functioning of the aforementioned trial-and-error process, especially when the state becomes a major player in the respective industry. If a private company outsources too much, or too little, or the wrong things, it will fall behind competitors that get the mix right. It will have better models to learn from, and a strong financial incentive to do so. Government agencies are largely insulated from competitive pressure. If they outsource too much, or too little, or the wrong things, they can keep doing so for longer than a private actor would. There is no strong self-correction mechanism.

But a crippled market discovery process is still better than none at all. Therefore, from my “neoliberal” perspective, there is no principle difference between outsourcing in the private sector and outsourcing in the public sector. It is simply a matter that I do not have a view on, and could not have a view on.

There should be no national policy to decrease the extent of outsourcing, increase the extent of outsourcing, change the type of outsourcing, or anything of that sort. Public sector organisations should be given a specific budget for specific functions. How exactly they want to deliver those should then be up them. They should be free to decide to what extent they want to provide services themselves, and to what extent they want to outsource them to external contractors.

Maybe the pendulum really has swung too far into the outsourcing direction. Or maybe it hasn’t, and we just have the wrong type of outsourcing. I don’t know the answer. And I’m not interested. I’m an economist, not a management consultant.

The point is that whatever outsourcing does, it does not extend the role of markets in the economy. Paul Mason claims that “Under neoliberalism, the role of the state is to continuously create opportunities for profit in the private sector by extending market forces into areas where they did not previously exist”, with outsourcing being one of those opportunities for profit.

This is nonsense.

Liberalism, neo- or otherwise, is about reducing the scope of the state, and increasing the scope for voluntary exchange. This is not what outsourcing does. With outsourcing, the state – and not individual consumers – still decides what gets produced, how much of it, and in what way.

Let’s put it this way: if the government of North Korea decided to procure some of its military equipment from private companies in South Korea, would that be a victory for neoliberalism? Absolutely not. It would not involve any transfer of power from the government to private consumers. As long as the government occupies the commanding heights of the economy, outsourcing is a sideshow.

Kristian Niemietz is head of health and welfare at the IEA.