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28 September 2022

Dieter Helm: “Capitalism works best with a strong state”

The professor of economic policy at Oxford University discusses Trussonomics and system failure in the UK.

By Will Dunn

In the age of populism, the electorate is presented with a series of complex disasters and asked to choose the policies that will fix them. Will it be huge increases or decreases in public spending? Renationalising industries? Selling them off? Every government arrives with a sweeping agenda for change, every new minister arrives with a new set of targets, and nothing seems to work. The rivers foam with sewage and agricultural run-off; energy is grotesquely overpriced and blackouts appear likely; the health service is on its knees. Britain’s infrastructure is creaking.

Dieter Helm, professor of economic policy at Oxford University, has been working on this problem for many years. He has advised both the UK government and the European Commission on energy policy, and wrote the 2017 Cost of Energy Review, which recommended many of the steps that the government is now, belatedly,  undertaking to rationalise the energy market. In books including The Carbon Crunch, Natural Capital and Net Zero, he has addressed climate change and biodiversity loss, and was knighted in 2021 for his work on environment, energy and utilities policy. For Helm, the complex problems in energy, water, technology, health and education share a common root: a lack of coordination and integration; a systemic rot.

“Imagine you were wanting to build a house,” he explained, “and you didn’t bother to appoint a builder or someone in charge of the contracts to sort out which bits need to be done when and how they’re coordinated together. If you simply said, ‘Someone can come along sometime and put a boiler in; someone can turn up and do the roof at some stage,’ the shambles that would result [would be] very expensive.”

[See also: Martin Rees: “This could be our last century on Earth”]

Several years ago, Helm, now 65, laid this out for officials at the Department for Environment, Food and Rural Affairs (Defra). Standing in front of a whiteboard, he began to add up the money spent by different bodies attempting to maintain the Thames as an environment. Agricultural subsidies pay farmers to pollute the river; water companies are paid to clean it up again; City Hall regulates property developers that build around the river; the Environment Agency tries to cope with flood defences; river drainage boards, river trusts, Defra itself and the regulator, Ofwat, are all separately spending in different directions. When the whiteboard was covered in agencies and estimates Helm turned to his government audience and asked: “Could anyone do it worse? Could anyone get less, for the amount of money that’s currently being spent?”

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While water is “the classic example of system failure”, he told me, the same shambles is found everywhere. “You can see it in climate change and biodiversity loss… You can see it in the potholes in the road, the inability of the electricity system to handle electric transport, the state of the railways, the state of the sewers.”

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Helm recently described the UK’s privatised utilities as “not fit for purpose”, but he thinks it is not a matter of “private bad, public good”. “Neither the nationalisation model nor the pure privatisation that we’ve inherited are fit for purpose,” he said. Rather, Helm sees it as the job of the state to provide rules – a “system framework” – within which the private sector competes.

Trussonomics, according to the Prime Minister, is based on the embrace of “free markets”, but that phrase is an oxymoron: no functioning market is objectively free of the state. “You must have property rights, you must have the enforcement of law and order, you must have quite a lot of regulation, to make a market work,” Helm said. “People forget: capitalism developed most strongly from the Tudor period onwards. Why? Because capitalism works when you’ve got a strong state, within the framework of the rule of law. Getting government out of business doesn’t solve anything.”

[See also: Tsitsi Dangarembga: “People started pointing fingers at me, saying ‘She’s a Western puppet!’”]

He described Liz Truss’s government as “very unconservative” in its approach to the environment and the economy, and in its idea that by spending and borrowing huge sums – at least £200bn on energy bill support, £161bn over five years on tax cuts, according to the Treasury – it can use demand to create supply: “It’s like Keynesianism on steroids.” The notion that the government should determine the growth rate is “actually very Chinese”; the free-market economist Friedrich Hayek, who was such an influence on Margaret Thatcher, would have “torn [his] hair out at the idea of governments announcing growth targets”.

“For me, the primary job of the state in the economy is to ensure that the core infrastructures – and by that I include electricity, gas, water and communications, but also natural capital in the environment – are maintained – proper capital maintenance – and enhanced so the next generation inherits a set of assets, which gives them the capabilities to live their lives as they choose to.” 

The term “capital maintenance” is important. In a business, it means the finance department can only chalk up a profit if the company’s assets – which could be the money in the investment fund or the machines in the factory – have not reduced in value. In government, it would mean not borrowing for flashy new policies until the systems and services – the supply of affordable energy, water or data; the availability of healthcare – are maintained to at least their previous levels. Helm said capital maintenance should have “the first claim on revenues… You have to pay to fix the potholes in the road before you’ve got surplus money to spend. That’s not what we do: we borrow to fix the potholes when they’re a current cost and not a capital cost.”

This is a crucial mistake, he said, as infrastructure is “absolutely essential for economic growth”. The OECD is among a number of institutions that have observed that tax breaks, such as those introduced by Truss and Kwasi Kwarteng, “cannot compensate for poor infrastructure” when companies decide where to invest.

How decisions get made is also crucial. Helm’s 2017 review notes early on the “highly effective growth in lobbying” in the energy sector. “You need to design institutions and regulatory frameworks which are as lobby-proof as possible,” he told me, giving as an example the smart meters that have been rolled out to 29.5 million homes. In almost every other European country, these meters are installed in the distribution network, where they are “fantastically valuable” in coordinating power supply more efficiently. In the UK, thanks to “massive lobbying by the supply companies, who wanted to capture the data”, they are installed in people’s homes, where the onus is on consumers to be more efficient. “It’s an example of everything that goes wrong when you follow ideology, and don’t think about the system characteristics you’re trying to get.”

[See also: Sabrina Cohen-Hatton: The firefighter using psychology to prevent disaster]

A similar commitment to ideology lies behind the government’s fixation on fracking, which Helm says will not produce any meaningful amount of energy in the UK “unless the state pays for it, and the state couldn’t possibly afford the cost that would be involved”.

At the same time, he said, the public has failed to understand how integral fossil fuels are to the economy. “They think that lots of wind turbines mean we’re not that dependent. We’re 80 per cent dependent on fossil fuels, as we were in 1970. As is Germany, as is the globe. There has been no retreat from fossil fuels since 1990.”

This makes it all the more urgent to have a government based on true “system planning”, he said. Without a strong system that has agreed goals, government remains a fight rather than a process, and the costs – which are inescapable – continue to mount.

“We now face the need to recreate our infrastructure. This is a big, almost Victorian, moment,” he warned. “We’re not doing capital maintenance, we’re not paying for the pollution we cause, we’re living beyond our means. And that means we’re just cheating the next generation, and doing it at a scale on which almost no previous generation has done before.”

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This article appears in the 28 Sep 2022 issue of the New Statesman, The Truss Delusion