NS Essay - Competition in public services has the moral virtue of encouraging respect for their users

Are teachers, doctors and civil servants "knights" whose altruism will be destroyed by market-based

Public service reform has few friends on the left. Government targets, league tables, competition within the public sector, the extension of user choice are all under attack. Unions and professional associations threaten non-cooperation and industrial action. Party activists say new Labour is betraying socialism. Old Labour stalwarts such as Roy Hattersley and Frank Dobson fulminate against government policy in parliament and the press.

The hostility has a number of sources. One stems from a confusion of proposals for the reform of public provision with those that call for more private finance. In fact none of the reforms involves changing the basic principle that the services concerned should be funded from taxation and remain free at the point of use. Another source of concern is the impact on the poor and disadvantaged, especially of competition and the extension of user choice. But there is evidence, both from Britain and abroad, that these kinds of changes improve the position of the less well off.

A potent source of hostility is plain self-interest. Exposure to outside pressure, whether from targets, league tables or user choice, can be uncomfortable and threatening, and people would prefer not to be subjected to it. In the terminology of the 18th-century philosophers David Hume and Bernard Mandeville, the professionals and other public sector workers opposing reforms are "knaves" - self-interestedly protecting jobs and income.

But there is another, more sophisticated, view about the impact of these changes on those who work within the public sector: a belief that the reforms in some way damage the public service ethos. On this view, public sector workers are not self-interested knaves but closer to "knights": public-spirited altruists whose only concern is for the services and those who use them. To press on with reforms is implicitly to say that these knights are no longer trusted to provide a good service, and that they need to face either positive external incentives (such as financial rewards) or negative ones (such as increasing job insecurity). But, so the argument goes, the reforms are self-fulfilling: by introducing potentially knavish incentive structures, they turn public sector knights into knaves, and exacerbate the very problem of mistrust they try to address.

This is part of a much older debate over the mainsprings of human motivation and how that should affect the design of public institutions. It began with Hobbes, who denied the very existence of altruism in his discussion of the role of the state in Leviathan: "No man giveth but with intention of good to himself, because gift is voluntary; and, of all voluntary acts, the object is to every man his own good." It was taken up by Mandeville, who argued that social institutions should be designed "to remain unshaken though most men should prove knaves". Hume was more cautious: while reporting the view that "in contriving any system of government . . . every man ought to be supposed a knave, and to have no other end . . . than private interest", he went on to muse that "it appears somewhat strange, that a maxim should be true in politics which is false in fact".

The view did not go unchallenged. For John Brown, Hobbes and Mandeville were "detested names, yet sentenc'd never to die; snatched from oblivion's grave by infamy!" John Wesley wrote that Mandeville went far beyond Machiavelli.

Much of the venom was stimulated by Mandeville's proposition that not only were most people knaves, but that it was better for the economy and civil society that they were so, rather than virtuous moralists. Adam Smith took up the idea in The Wealth of Nations with his dictum that an individual engaging in market exchange "neither intends to promote the public interest, nor knows how much he is promoting it . . . he intends only his own gain, and he is, in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention".

Smith would not have said that altruism did not exist (indeed, he says the opposite in his other great work, The Theory of Moral Sentiments) or that it has no place in the public sphere. But he would have been unlikely to go as far as (to jump a couple of centuries) Richard Titmuss, one of the architects of the British welfare state, who argued that "if it is accepted that man has a sociological and biological need to help then to deny him opportunities to express this need is to deny him the freedom to enter into gift relationships". Titmuss went on explicitly to reject the use of competition or market mechanisms within the welfare state, arguing that "the forces of market coercions . . . place men in situations in which they have less freedom or little freedom to make moral choices and to behave altruistically if they so will".

But does the advocacy of user choice and competition in public services involve rejecting Titmuss and his followers and endorsing a Hobbesian/Mandevillian view of the world? Not necessarily. In the 17th and 18th centuries, many philosophers saw the pursuit of financial interests in a competitive context as having positive merit. They saw financial interest as a countervailing power against other, more destructive motivations, such as pride, envy and the lust for power and glory. The process of market exchange was itself viewed as a largely innocuous activity, especially when contrasted with the activities of the marauding armies and pirates of the time. Hence Dr Johnson's assertion that "there are few ways in which a man can be more innocently employed than in getting money".

This view led to the idea of "doux commerce", whereby commercial activity acted as an instrument of civilisation. As Montesquieu put it: "Commerce . . . polishes and softens barbaric ways." Thomas Paine endorsed it in The Rights of Man, where he argued: "[Commerce] is a pacific system, operating to cordialise mankind, by rendering nations, as well as individuals, useful to each other . . . The invention of commerce . . . is the greatest approach toward universal civilisation that has yet been made by any means not immediately flowing from moral principles."

The question now is whether any positive moral virtue attaches to competitive processes when applied to public services. In this context, it is not cruelty or the lust for glory that are to be set against market interests, but knightly motives that concern themselves only with public welfare.

Yet this historical debate is still relevant to the public versus financial interest issue. For the doux commerce debate led directly to a defence of market exchange by later philosophers and economists such as James Steuart, Adam Smith, Immanuel Kant and G W F Hegel.

Steuart and Smith argued that a key feature of market exchange was that it led to respect for other people. To offer something in exchange is to make an effort to understand the needs and wants of the other party to the potential exchange and to persuade them that what is on offer will meet those needs or wants. This is unlike forcible acquisition through robbery or war, where no effort is made to understand and no attempt is made to persuade. Efforts to understand and persuade are both a cause and a consequence of respect for others; hence, since respect for others is morally desirable, so are understanding and persuasion, and so is the mechanism that brings them about: market exchange.

Kant agreed about the importance of respect. He argued that individuals must treat others as ends, not only as means. Hegel shared with Kant the view that individuals must respect each other and argued that the route to ensuring this lay through the educative processes of the free market. As with Smith and Steuart, he argued that market relationships foster mutual respect and counter human impulses to dominate others. Merchants must respect their customers, or they will turn elsewhere. Similarly, customers must respect the dignity of merchants from whom they purchase, or merchants will not sell to them.

The proposition that market systems can encourage mutuality of respect and, indeed, other virtues such as equity or altruism is supported by recent behavioural experiments using the so-called ultimatum game. One person is given a fixed cash sum - say, £10 - and told to split it in some way with another person. If the other accepts the proposed division, they both get the share of the money proposed. If he or she rejects it, both get nothing.

If both pursued only self-interest, the outcome would be unequivocal: the first person would offer one penny and the second would accept it. But the experiments consistently yield different outcomes. People reject what they consider to be unfair offers; on the other side, people tend to make fair offers, either because they expect rejection if they don't, or because they have an innate sense of fairness. But such results are not replicated when they are tried out in non-market societies.

Anthropologists have experimented with these games in tribal societies. They found that the less market-oriented the society, the less likely were the participants to make generous (or egalitarian) offers. Thus, out of $100, a tribe used to trading cattle and working for wages would on average offer $44, whereas another that engaged in little trade would offer $25. Overall, the anthropologists suggest, experience of market transactions may make people fairer or less exploitative when dealing with strangers.

These arguments can be transferred directly to the case for competitive markets in public services. It is often remarked that the problem with state monopolistic public services is the degree of power they give to providers - arrogant doctors, insensitive teachers, uncaring social workers, overweening bureaucrats. There seems little respect; instead, there is deference and resignation on one side, and indifference and condescension on the other.

This insensitivity may arise because the providers really are knaves, not knights. But it could arise even if the providers were altruists imbued with the public service ethos. For, although acts of altruism require compassionate interest in the welfare of the beneficiary, this does not necessarily imply respect. Indeed, rather the reverse; the altruist may feel he or she is superior to the beneficiary. Feelings of superiority are hard to reconcile with mutuality of respect. Some knights need to deal with pawns if their knightly impulses are to be properly satisfied. So a positive case can be made that, with the right structures, competition and user choice in delivery of public services have the moral virtue of encouraging respect for users in a way other systems do not.

Moreover, public sector competition does not have to rely upon knavish motivations. The agents concerned do have to be interested in the financial health of the institution providing the service, but this interest need not be knavish. Providers of the service may have a genuine commitment to the welfare of users, and feel that they are contributing materially to it. In that case, it would be rational for them to fear that user welfare would be damaged if the financial health of the institution suffered. Competitive pressures would then operate as effectively as if the providers were knaves. The spirit of caring for others would be retained.

Indeed, if it is to work in the interests of users, the system has to have this kind of knightly concern. Providers of public services often (though not always) have superior information to users, especially about the quality and costs of the service they are providing. They are therefore in a position to exploit that information for their own ends at the expense of the user, if they are so motivated. This can be overcome by the use of informed purchasers to act on behalf of the user and/or by systems of contracting. None the less, we must rely upon some degree of knightliness among providers so that they will not set out to exploit their informational advantage to the detriment of the user.

In short, it is not necessary to turn knights into knaves for competition and user choice in public services to work. What is needed is well-designed public policies, ones that employ mechanisms which encourage respect for users but which do not allow unfettered self-interest to dominate altruistic motivations.

Julian Le Grand, professor of social policy at the London School of Economics, has begun a six-month spell as a Downing Street policy adviser. This is an extract from his new book, Motivation, Agency and Public Policy (OUP)