Don't sell the NHS like shampoo

The choice debate 1 - When it comes to public services, Britons are genuinely altruistic, valuing co

Parents of a gurgling baby born a few minutes before midnight on 4 July 1948 received, along with the congratulations, a bill for roughly £6. For those whose bundles of joy held on until after the stroke of 12, no charge was made: the National Health Service had arrived.

Amid the clamour of current, competing claims for the future of public services - especially healthcare - it is essential to recall a history lesson. In the NHS, the Attlee government created a new public good, removed immeasurable anxiety from millions of families and built the most important civic institution in British history. At the time, a popular joke ran: "What can a swan do easily, a duck not at all, but a doctor will have to do from 5 July?" Answer: "Stick his bill up his arse."

For those of us raised in a world where healthcare free at the point of delivery has simply been a fact of life, it is salutary to remember what a historic political achievement it was. And the hearts of Attlee and Aneurin Bevan would surely be warmed by the current spectacle of a Conservative Party desperately trying to persuade voters that it can do a better job than Labour of running public services, which historically the Tories by turns have opposed, grudgingly accepted, attacked and then allegedly embraced again.

Whatever the differences of opinion about the wisdom of Labour's specific policies - and there are plenty - it would be churlish not to recognise the achievement of forcing the Tories on to this terrain. Seven short years ago, Labour sought office on the grounds that the party was now competent to run the economy, and with a pledge to match Conservative spending plans. Michael Howard is seeking office on the grounds that his party is now competent to run public services, and with a pledge to match Labour spending plans.

The latest debate about public policy proves that the broad thrust of Labour's policies towards public services is right. As the past week or so has shown, the Conservative plans unravel under sustained scrutiny. And most of the arguments from the Labour left - in particular the visceral opposition to anything smacking of competition or performance management within public services - are misplaced.

All of which makes it enormously frustrating to see Labour, and Tony Blair in particular, making such a pig's ear of the issue. By and large, ordinary punters find the notion of "individual choice" a matter of indifference - or even anxiety. Their commitment to public services is based as much on their value to society as to themselves. By and large, they want local, quality services rather than having to shop around. And they are rightly suspicious of the involvement of the private sector.

The story of Labour's recent approach to public services, especially the NHS, is one of good policies - but bad politics. On the policy side, Labour's strategy has been to combine increased investment with tighter central standards, rigorous audit, publicly issued performance measures, financial incentives to improve efficiency, and the use of a degree of choice - although not typically choice by the individual user - to drive up standards. The package has been mostly an effective one.

Julian Le Grand, a former academic now advising Blair on health policy, has summarised the case for much of Labour's approach in his book Motivation, Agency and Public Policy. He favours most of the moves by the Conservatives to create a "quasi-market" in healthcare - the main features of which have been retained by Labour. Out of every £4 spent on the NHS, £3 is now spent by primary care trusts, large confederations of GP practices. As such, spending decisions are made closer to patients, and hospitals are obliged to maintain high standards or run the risk of trusts going elsewhere. Most importantly, putting the money into primary care trusts removes the previous incentive to push as much care - and cost - as possible up to the hospital sector. As a result, more care is offered locally.

Le Grand and Gordon Brown have both argued that individuals are not usually well-placed to make decisions about healthcare. When Brown said last year, in a phrase now thrown back at him by Howard, that "in healthcare we know that the consumer is not sovereign", it was a simple description of reality, not a prescription for policy. This is why, in healthcare, it is better to have somebody purchasing on our behalf. The typical citizen is no better-equipped to buy his or her own healthcare than the average British male is to buy his own clothes.

The essential differences between the protagonists are that Labour wants quasi-markets, while the Conservatives want a real market with real cash in individuals' hands; Labour wants "contestability" between hospitals on service, convenience and efficiency, while the Conservatives want competition on price; and Labour wants gradually to starve the private healthcare sector of money, while the Tories want to throw more at it.

If all of this sounds a long way from the recent debates about choice of hospitals for operations, that is because it is. The Health Secretary, John Reid, has promised that by the end of next year all patients who need to be admitted to hospital for elective care will be offered a choice of four or five providers at the time that they are referred for treatment by their GP. By 2008, they will be able to choose any NHS hospital in the country.

There is not much wrong with all this; it is good for people to have some freedom about where they go for an operation. It might influence standards somewhat, and it will chip away at private healthcare, which relies on middle-class frustration with long waiting lists. But elective surgery accounts for at most 20 per cent of health spending; and no one in government seriously thinks more than 15-20 per cent of the people eligible will exercise their choice to go to a hospital other than their local one. In the context of the broader reforms under way, a degree of patient choice over elective surgery is, frankly, pretty small beer.

Why then all the brouhaha? The short answer is: politics. Labour is desperate not to be outflanked by the Conservatives and their half-baked "right to choose" voucher policies. Michael Howard's actual policies may be absurd, but his instinct for finding Labour's sore spot is uncanny. By deliberately echoing the "right to buy" legislation that allowed council tenants to become homeowners, he reminds Labour that it bitterly opposed that policy (with honourable exceptions such as Frank Field) - and in the process showed how out of touch the party had become. It is enough to send shudders down many spines in Downing Street. And it has strengthened the resolve of the Blairites not to be left behind on the choice agenda.

However, trumpeting choice in marginal areas of public services is poor politics. First, choice is not an unalloyed good. The work of the US academic Barry Schwartz, author of The Paradox of Choice, shows that too much choice can engender paralysis as often as liberation. Second, there is scant evidence that people actually want a lot more choice in public services. Pollsters working with swing voters report that, with regard to public services, "choice" plays mostly negatively. Third, and most important, people value public services and private goods in quite different ways - a politically critical fact that is in danger of being lost. Psychological studies by a New Zealand academic, Simon Kemp, summarised in his book Public Goods and Private Wants, unpack the valuation mechanisms people apply to different kinds of goods.

Kemp uses "psychophysical scoring" in an innovative way. First, he asks people to value on a ten-point scale a good for which a market price is readily available - say, a Toyota Corolla, an hour of electricity for a light bulb, or a can of Coke. Once the relationship between the score and the price is established, other goods, for which prices are not available, can be valued on the same scale and a "shadow price" for those goods generated. In one study, Kemp estimates that a sunny weekend is worth about $500 for the general population - but just $100 among another sampled population less constrained by the Monday-to-Friday office captivity: students.

This is fun, but obviously of limited policy relevance. However, Kemp then uses his scales to value changes in policy for which costs are available - such as an increase in child benefit, more bobbies on the beat, or shorter waiting times for operations. What he finds is that, by contrast to market goods, there is a very weak relationship between valuation and the actual cost of the service provided. Many services received higher valuations than their cost would have predicted - most obviously health, policing and education - while others, including defence and subsidies to the arts, were relatively undervalued.

The final stage of Kemp's analysis asks people to value a good from both an individual perspective and a societal one - that is to say, "what value do you personally expect to receive from X during your lifetime?" compared with "what value does the country as a whole receive from X?". For goods provided by the market - including electricity, fruit, children's shoes, cars, holidays or private housing - there is a close fit between the two valuations: people tend to be individually "self-maximising" in a way that would gladden the hearts of orthodox economists.

Yet when services provided by the government are put under the microscope, people typically place a higher value on public services than their own expectations of benefit would suggest. "It is clear," writes Kemp, "that people do not think about and value government services and the goods and services supplied by the market in quite the same way." In particular, the valuation of public goods contains a varying, but generally high, "altruism coefficient". People without children value schools; people in perfect health value the NHS; the young value current pension payments; the old value early-years investment.

A couple of caveats: the research is from New Zealand and might not automatically apply to the UK - although some less sophisticated studies suggest that, if anything, the altruism coefficient is higher here. And the line between self-interest and altruism is not always easily discerned: one of the reasons people worry less about "free rider" problems in public services is that they might take the ride themselves one day.

None the less, these findings throw new light on a source of frustration for Labour: the "I've been lucky syndrome", in which people who have personally had a good experience with public services still believe that the service as a whole is poor. My local school is great - but the education system is collapsing. I was seen quickly at my local hospital - but most of them have corridors clogged with people waiting on trolleys. Media scare stories are an important part of the picture. Yet politically, it is important to think about why people care about the service being received by others, when their own experience is good.

The answer is that I value the NHS not simply for what it might give to me, but for what it gives to all of us, collectively. This goes to the heart of the political definition of a public good. Economists have a technical version of a public good, deriving from Paul Anthony Samuelson's 1954 definition as one which "all enjoy in common in the sense that each individual's consumption of such a good leads to no subtraction from any other individual's consumption of that good". Lighthouses are the classic example often cited in the economic literature: but defence, clean air or mosquito control would equally qualify. The "problem" with such public goods is that individuals have no incentive to pay for them if others can be persuaded to do so; hence a higher degree of regulation and compulsion in financing is required.

Healthcare and education are not, in this narrow, technical sense, public goods. Clearly, one person's use does have an impact upon another's because there are limits to the number of school places or hospital beds. Yet by choosing to fund these services out of general taxation, we create a different kind of public good - one where we have decided to hang together rather than hanging separately. There is no theoretical reason why both healthcare and education could not reside entirely in the private, free-market sector: after all, they used to. It is just that markets in these areas are less cost-effective and equitable than state-provided ones.

Once the decision to provide collectively for certain goods is made, however, a new politics emerges. There might be good technical reasons to support the funding structure of the NHS. And it might be a better deal for me as an individual than a market system. But once in place, such institutions acquire a life and a collective value of their own. Healthcare may not be a public good in an economics textbook, but half a century ago, we decided to make it one. The legacy of that investment lives on in current valuations.

What this means, bluntly stated, is that a public good such as health or education is more than the accumulation of millions of private goods - and is valued as such. The Conservatives will probably never understand this; deep down, most of them are still sceptical about the existence of that creature called society.

Labour, however, should be the custodian and advocate of public goods. The government needs to recognise that people are motivated by a high degree of self-interest - but, equally, it needs to recognise that this is not the limit of their motivation. Rather than selling public service reform like shampoo ("Because you're worth it") the government should be arguing, and demon- strating, that state-funded and state-provided services are the interlinked vertebrae of a healthy and successful society, and that these services are now visibly not only safer, but also better with Labour. We need more of the spirit of 1948.

None of which is to say that Labour should back away from its reform programme. In just the same way that individuals are a mixture of self-interest and altruism, so public servants are a mixture of public-spiritedness and selfishness. Many of the reforms in place or under way are intended to ensure that self-interest and good service pull in the same direction. Incentives to perform better are not in opposition to the public service ethos. Properly designed, as Le Grand correctly argues, they can reinforce it.

But Labour is making a mistake by highlighting choice in marginal areas of policy and turning reforms such as foundation hospitals into shibboleths of the modernisers' faith. Our public services are much more than the sum of their parts. They are expressions of collective life, engines of altruism and guardians of mutual well-being. Selling them by offering more choice for cataract operations is to sell them short. Labour is now fighting the Tories on Labour territory, but with weapons chosen by the enemy.