Carillion’s demise proves capitalism works

Our reaction to the group’s collapse shows the bizarre double standard by which we judge the private sector

Britain has long suffered from a debilitating national pathology, one that has plagued our political discourse since before the Industrial Revolution. We owe almost everything to capitalism, without which our lives would be nasty, brutish and short, and yet remain irrationally biased against the market economy. We continue to be baffled by its workings, and prone, once every generation or so, to allow ourselves to be bewitched by the siren songs of socialism.

More young people do aspire to become entrepreneurs, thanks to Silicon Valley, but one doesn’t need to dig too deeply into our national psyche to discover that commerce and moneymaking are still widely presumed to be grubby, suspect activities. We assume the worst of business people, especially when they start to become successful. Yet we lurch to the other extreme when it comes to the public sector: we endlessly give it the benefit of the doubt, forgive and justify all of its mistakes and gross incompetence, on the assumption that servants of the state must somehow be inherently more virtuous. We are rightly tough on for-profit businesses, and seek to hold them to account; but we are unforgivably lax towards their not-for-profit counterparts.

This bizarre attitude is not just unfair but corrosive: it implies lower expectations for state-run services, and helps to explain why we continue to put up with annual NHS winter crises, unlike almost every other Western economy, or schools that have underperformed for decades.

It is in the context of such double standards that we should interpret the reaction to the demise of Carillion, a useless company that deserved to go bust. For the Left, this shows that capitalism is broken; it doesn’t seem to grasp that bad firms going out of business and being replaced by better ones is a feature, not a bug, of the market economy. We should feel truly sorry for those who have lost their jobs, but almost all of the projects managed by Carillion will keep going, so most of its staff will hopefully be rehired.

Capitalism, as Joseph Schumpeter put it, is a process of creative destruction; it is much quicker and more ruthless at exposing and rooting out failure than socialism. The discipline of profit and loss, and the need to ensure that the cash doesn’t run out, leads to extreme, often immediate, accountability in a way that is impossible to replicate in the public sector.

If Carillion and other outsourcers didn’t exist, and the Government ran all of its own hospitals and schools, there would doubtless be even more episodes of horrendous mismanagement. The difference is that most of them would be hushed up. The Treasury would simply be called upon to inject more money, as it used to do with loss-making nationalised industries and still does with the NHS, and it would be spun as a triumphant increase in budgets from a caring government. There would be no scandal, and no real retribution.

The civil servants responsible would, in time, be awarded gongs, unlike the bosses of Carillion, who are quite properly being pilloried by MPS and the media. There are few errorcorrecting mechanisms in the public sector, and even fewer penalties for failure. The incentives are all wrong. It is far easier to cover up problems, and to pour good money after bad, when one has no skin in the game.

The Left’s narrative surrounding Carillion is incorrect in other respects. Far from ripping off the taxpayer, several of these outsourcing firms have been offering their services too cheaply and thus have actually been subsidising the Government. Why isn’t Labour thanking them for this? Private shareholders and creditors have paid a bitter price for their failure to supervise Carillion’s management more closely: the Government, having learnt the lessons of the financial crisis, rightly refused to bail them out.

At best, the banks will get 1 per cent of their money back; the shareholders will be left with nothing. Why isn’t the Left happy? You don’t get much more accountable than that, and the official receiver’s operations won’t cost as much as some anticipate. The pension funds are insured via the Pension Protection Fund, which doesn’t rely on taxpayers.

It is true that Carillion should not have kept on raising its dividend, and the shareholders should have insisted on tougher contracts with its directors, with provisions for clawing back their bonuses. But shareholders have lost massively more over the past 12 months than they received in dividends over the past 12 years, and it was their money that was squandered paying for the firm’s top directors. It was their problem, not the Government’s. Carillion was once a £2 billion giant; now it is nothing.

I feel sorry for the sub-contractors; some will go bust. But at least companies will be far more careful with whom they do business in future. Carillion was notoriously slow at paying smaller firms: its disappearance will encourage a more ethical approach. This episode has reduced moral hazard, as the private sector knows that it won’t be rescued by the taxpayer – a lesson that had been forgotten after 2008 – and will now proceed more cautiously.

It is true, as Labour argues, that the Government should have been wary about continuing to award contracts to Carillion, especially after its profit warnings. Hedge funds had long understood it was in trouble; and yet the Government’s procurement people seemed oblivious. But Jeremy Corbyn draws the wrong conclusion. It is much easier to commission outside contractors than it is to run services. There is no way a government that fails to notice a key contractor is going bust would somehow be able to produce these services more cheaply and with better outcomes itself. Labour’s solution, which is to take everything back in-house, would lead to catastrophically worse and pricier services.

We need to do the opposite of what Corbyn is calling for, and contract out even more, though with greater emphasis on viability and quality of service when awarding contracts, rather than just cost. The conclusion to be drawn from the Carillion fiasco is as simple as it is counter-cultural: real capitalism works. It punishes bad companies, and rewards good ones. We need more of it, not less.