Politics

Google cannot beat the state

Adrian Wooldridge in conversation with Łukasz Pawłowski · 23 December 2014
The Management Editor and ‘Schumpeter’ columnist for “The Economist” magazine discusses the role the state has currently to play and explains why it cannot be replaced neither by big corporations nor international institutions.

Łukasz Pawłowski: What is the state for?

Adrian Wooldridge: The notion of the state and the reasons why we need it have changed dramatically over the centuries. Back in the 16th century Thomas Hobbes claimed the state is to provide law, order and individual safety. These are public goods people can’t buy for themselves. Another answer was given by John Stuart Mill, who argued the state was needed to preserve individual liberty. This entails a degree of order but also a need to limit the state’s intervention in one’s life.

Yet Mill changed his notion of liberty over time and came to believe it cannot be conceived only in negative terms. Later in his life he argued the state needs to provide the people with some resources – pensions, public education, social benefits – so that even the poor can actually exercise their liberty.

Mill is a great example of the change from the second to the third notion of the state which says that the state needs to provide you with basic set of entitlements. At the end of his life Mill embraced a more expansionary vision of the state which led him to the notion of welfare liberalism which, in turn, was an idea behind the welfare state.

And now?

The examples above show that at different points of history we had a clear notion of what the state is for. Now we cannot answer this question anymore, since we believe the state must solve all the problems people grapple with. That’s insane. We have so overburdened it with expectations and obligations, it ceased to be able to perform its basic functions.
Which again are?

To provide law, order and safety net for those who are truly in need.

If somebody wants to live in a stateless place they should go to Congo or to Somalia, countries where the states are so dysfunctional they are virtually absent.

Adrian Wooldridge

Who is responsible for the current crisis? Usually the political right blames the left for expanding the notion of the welfare state beyond reason…

I think the guilt is universal, because both sides present more and more extravagant demands towards the state. Expectations on the left have grown and every attempt to limit them is seen as an attack on human rights. But the right has equally long list of demands including more security, more prisons, more military etc.

Are you saying that the opposition between those who defend the welfare state and those who want to roll it back is actually false?

I think that it’s a real disagreement, but it’s quite often based on false assumptions. The right assumes that the state can be disposed of and replaced with market mechanisms. It’s wrong not only because the state is better at providing some services, but also for the market to operate properly we need law, order and stable institutions. You can’t have a functioning market without a functioning state.

Left-wingers on the other hand, who want to defend the state as it is, do it in the worst possible way, by justifying practices which are clearly inefficient and out of date. They seem to forget that sometimes the best way to keep the status quo is to reform it. Current situation is untenable – people have awarded themselves with more benefits than they’re willing to pay for.

If you criticize both the right and the left, who is your book addressed to?

We wrote this book really to disagree with three sets of people. The first set are free-market people who say that the state doesn’t matter at all. The best thing to do with the state is to ignore it, shrink it or entirely get rid of it. I believe it’s profoundly wrong because the state matters, as it’s the basis for a stable, law-abiding society. If somebody wants to live in a stateless place they should go to Congo or to Somalia, countries where the states are so dysfunctional they are virtually absent.

The second group of people we want to address are left-wingers and socialists, who think that the state always needs to be to be defended and that any attempt to reform or to change it is an attempt to subvert it. Again, I think it’s profoundly wrong because the state can be constantly updated to the world we live in at the moment.

The third group are ordinary people who – in my view – no longer care about the state at all, or are frustrated by its incompetence. The obvious sign of this frustration is the growing popularity of radical parties in many parts of Europe. On the basis of both historical and contemporary examples we argue that the states can and will change.

The future trend will be towards taking power away from transnational institutions because they are divorced from people’s lives, too distant and too big.

Adrian Wooldridge

But are you not dealing with a wrong subject? Many people, not only right-wingers, claim that the state is already dead, because it’s no longer sovereign. It has lost its power to international or transnational subjects like global corporations or huge organizations such as IMF, WTO or the European Union. So maybe we should get over the state and start thinking in completely new terms?

Well, there’s been a widespread belief that the state is already an antiquated institution. We have the globalization people who see world as a globally integrated economy. Then you have the supporters of transnational organizations, particularly the EU, who argue that the real locus of decision making process is no longer at the state level but at the transnational level. I think that both these groups are wrong, because one of the most remarkable stories of the last twenty years is precisely how the state managed to survive as a decision making body, limiting the role of the market and remaining the centre of our life. The states still have some sovereignty.

But in Europe it is being transferred to the EU.

The EU supporters may see it as a great transnational organization taking many decisions, but in fact what happens in Brussels is mostly horse trading, national governments pushing for their national interests.

I think that the future trend will be towards taking power away from transnational institutions because they are divorced from people’s lives, too distant and too big. People want something they can identify with, culturally and politically. We are now witnessing a raise of parties with messages based on notions of national sovereignty and national identity. These parties are not going to go away and let the EU become the basic political unit. I believe the EU will be forced back more to its original conception which is a free trade area.

But even in this case the member states will need to give up on much of their sovereign power and transfer it to Brussels. Furthermore, we are just about to sign a free trade agreement between the EU and the US which will make individual states matter even less.

In order to have free trade you have to give up sovereignty over certain domains – over your borders, or financial institutions. Yet I think it’s quite possible to have a vigorous state with a vigorous sense of national identity in a free trading world. That was precisely the case in the 19th century. You don’t need to destroy the nation state in order to have a functioning free trade market.

Even if we agree on that, in the 19th century world there weren’t so many gigantic companies as there are today. And now we have these huge corporations – like Amazon, Google, Apple – which exert huge influence on authorities by, for example, refusing to pay taxes in a given country. Even very powerful countries – such as Britain – can’t do very much about it. That is why, in my view, we need a transnational organization that will bring states together.

Contemporary corporations are much less powerful than they used to be in the 18th or 19th century. The East India Company virtually ruled India – it had an army and controlled vast parts of the world. Back in 1900, the U.S. Steel employed a quarter of million workers, more than the U.S. Army and U.S. Navy put together. It was a giant corporation.

Contemporary big companies, like Google, are not very big in terms of he number of employees and therefore are not powerful in the sense the Eastern India or the U.S. Steel was. I can imagine Google disappearing in 10-15 years and being replaced by another company. Market has become more competitive and consumers are much more sovereign than they used to be. I therefore don’t see a future in which you have quasi-sovereign big companies ruling a world. The state still has a big role to play.

How is it possible that the state is at the same time so strong and so weak? On the one hand it quite often cannot deliver basic services properly, on the other it can monitor lives of its citizens to the extent which has never been possible before.

The state is capable of doing much, but on the other hand it’s based on routine, bureaucracy and order. The very same thing that gives it strength – its predictability – is also a source of its greatest weakness, which is lack of flexibility and ability to change quickly. The state has to be based on routine but routine can degenerate into stagnation.

I don’t see a future in which you have quasi-sovereign big companies ruling a world. The state still has a big role to play.

Adrian Wooldridge

Let’s then talk about specific solutions. You claim that one of the major burdens for contemporary states are pension and health care systems, which may collapse due to the demographic changes in Western societies. Yet you cannot force people to have children and even in states with well-developed social security systems – like in Germany and Austria – the birth rate remains low.

It’s very easy to despair about such issues as entitlements. And if you look at the numbers, they’re so gigantic one may think we will soon die under an enormous set of obligations we cannot fund. But if you go from country to country, you’ll see that many systems can be repaired by even minor changes, above all rising the retirement age and making it dependent on life expectancy. Quite often – as is the case with the United States – the problems are not economic but political. I think we generally know what to do, but lack political mechanisms and will to do it.

You said the state should provide a safety net for everyone. A very concrete proposition, which seems to be gaining some support, is a guaranteed income for all citizens. What do you think of this idea?

That’s a very strange notion, supported by many people on the left but also many people on the right – even Milton Friedman was one of them. I am against guaranteed income, because it may destroy the incentives people have to participate in labour market which, in turn, is an important way of giving people an anchor in the society and basic set of responsibilities.

The major argument of those who support guaranteed income is precisely the opposite. Instead of making people unwilling to work it can make them more innovative and more willing to take risk, as they will know there’s a safety net they can lean on in case of failure. So in the long run guaranteed income does not promote laziness but entrepreneurship.

This is based on an assessment of human nature which I do not share. There are certain places in which people are willing to take risk and be innovative – like the Silicon Valley in California – and it seems to have more to do with culture rather than guaranteed income.

And what about health care? We have public health care system in Poland but it is underfinanced, inefficient and quite often abused by people who overuse it. There are some voices saying it should be privatized, as it’s unofficially being done already. Many patients prefer to pay to skip the line, rather than wait months for their appointment. But then obviously the question of social inequality and solidarity arises – a large number of Poles cannot afford private health care. How therefore can you make health care systems more efficient without on the one hand privatizing it and not going bankrupt on the other?

I’m quite in favour of public health care systems. And though I do believe that the state is too big and should be pulled back a little, I do not think this should apply to health care.

Why?

American health care system – which is essentially private but with large public component designed for poor and elderly Americans – gives the state no control over the costs which escalate out of control. As a result the proportion of GDP spent in the U.S. on public health care is exactly the same as in Britain. The difference is that in Britain the whole population is covered while in the U.S. only a fraction entitled to it. There’s a case for national health care systems not just because of social solidarity, but also because they tend to be more cost-effective.

Public health care systems are here to stay despite unfavourable demographic trends?

Yes, but they need to be reformed. In the future we will know more and more about our health conditions and people having some propensity towards certain diseases might become uninsurable on the private market. No private insurer will ever pick them up, so unless you have some kind of public provision these people will be excluded from the system. However, even in a national health service not all services need to be absolutely free at the point of delivery.

What do you mean?

It would be reasonable to introduce small, affordable charges for every visit as they might discourage people from abusing the system, and show that their visits generate some costs. Secondly, the fact that the government funds the system does not mean that the government has to hire all the employees and run all the hospitals. It might as well contract private hospitals and private companies might also spread good practices to public institutions. For example, St. Goran’s hospital in Sweden is based on lean production techniques borrowed from Toyota.

What are these?

Doctors and nurses think only of providing medical care. Yet in this hospital the management thinks of the whole experience of bringing people into the hospital, putting the through the process of treatment, and getting them safely out as effectively as possible. It is a more wholistic approach aimed at eliminating all the unnecessary costs. As a result in Sweden they have less beds per patient than they have in France, though life expectancy in Sweden and the quality of the care is very similar.

Because they are more effective?

Putting a patient in hospital is very expensive. Whether you cover these costs for 10 days or only 2 days makes a huge difference. One can very significantly reduce costs by putting people through hospital quicker. That is why they can afford to have less hospital beds per patient in Sweden than they have in France.

But what motivation does a particular hospital have to do that? The costs are covered by the state anyway, so it might even be more profitable for a hospital to keep their patients in bed longer than necessary.

The Swedes are conscious that their health-care budget is not infinite. When somebody is in a hospital bed for 10 days, somebody else – maybe in more serious conditions – cannot be admitted. It’s therefore a question of social solidarity. The hospital is not a hotel.

Illustration: Magdalena Walkowiak

Illustration: Magdalena Walkowiak

So it is more a question of mentality and the way people think of their state. Why are the Swedes different than many other nations?

The answer lies in trust in government, which is pretty high in northern European countries and lower in southern. In Italy, for example, people tend to trust the family – often quite extended one – but do not trust the government. The capability to reform the state depends a lot on the whether it’s perceived as a public good and not as an alien institution imposed by some foreign powers.

That’s not a very optimistic diagnosis for Poland, because the level of trust towards the state here is closer to that in Italy rather than in Sweden. The family structure is also more similar to the Italian one.

It does not determine everything. France, for example, has had a very powerful and stable state which the people are very proud of, yet are not very good at reforming it.