State Capture

When​ MPs are caught pursuing their second jobs at the expense of their first, we are right to call it out for what it is: corruption, defined as the abuse of public office for private gain. The problem is structural, however. ‘Corporate state capture’ is the highest point of political corruption, when private interests can rig the legislative process in their favour. After forty years of neoliberal reforms, British MPs have extremely close ties to business. The state’s vulnerability to conflicts of interest and corruption are a feature of modern government, not an aberration, and perhaps the least of the matter is the massive and continuous waste of taxpayers’ money it entails.

Since the rise of ‘new public management’ under Thatcher, agenda-setting and policy-making have increasingly been outsourced to professional consultancies, third-sector agencies, law and accountancy firms, and privately-sponsored think tanks. There has also been an increase in direct business involvement in the internal operations of the state via senior civil service recruitment, and as a result of the proliferation of special advisors and non-executive directors, typically drawn from the corporate sector. (Non-executive directors can advise on recruitment and management, and chair audit and risk committees. They can also recommend the dismissal of permanent secretaries.) Many of these senior officials and advisors return to the private sector – it’s not called ‘the revolving door’ for nothing. All this matters because many of the British state’s core responsibilities have been outsourced to the companies that now constitute the ‘public service industry sector’. A third of central government spending is currently contracted out. As a result, the state is porous to business interests to a degree that is exceptional among established democracies. In the sociologist Colin Crouch’s description, it has become a ‘semi-permeable membrane’; governments refrain from intervening in the private sector, but allow businesses ever greater access to public authority and revenue. In countries that Britain likes to look down on as corrupt, this level of access costs money, and sometimes lives, but it is hardly a mark of superiority that successive UK governments have granted the same forms of influence as a matter of deliberate policy, often for free. We are not just foolish; we are also cheap.

The theoretical assumptions that underpin such policies are entirely utopian. They hold that the removal of forms of state regulation and intervention doesn’t just improve competitiveness – it shifts the entire political economy towards a general equilibrium in which demand and supply are matched with perfect, frictionless efficiency. This is the exact mirror of the Soviet belief in central planning: a truly efficient market and perfect central planning are formally the same; the only distinction is whether the all-informing price mechanism can be administered. When Vilfredo Pareto first discussed the matching of supply and demand at the turn of the 20th century, he did so as a theoretical exercise. Put into practice, these assumptions lead governments to embrace political determinism. They promise a world of homeostatic harmony, but require a population that behaves with predictable and universal rationality – and companies that aim only at productive development.

In Britain, this idealism has made every government since 1979 deeply complacent about the increasing dysfunction of Britain’s actual businesses, especially its large, traded businesses. Neoliberalism teaches that higher corporate profits will automatically be recycled as investment by omniscient shareholders, but this is to confuse a theoretical axiom dependent on closed-system reasoning for the real world, in which financial markets exist and are increasingly extractive. In the real, deregulated financial world, corporate profits and dividend payouts have been growing for decades, but rather than being reinvested they have more obviously been frittered away on consumption, or put into entirely unproductive financial speculation or, happier still, placed in offshore tax havens, as defended by Geoffrey Cox, the former attorney general (for a fee of £1000 an hour). Andrew Haldane, the former chief economist at the Bank of England, has rightly argued that Britain’s traded companies are cannibalising themselves. A report by the economists Adrienne Buller and Benjamin Braun earlier this year found that in 2020, aggregate dividend payouts by the FTSE350 represented some 90 per cent of pre-tax profit; this figure has been rising for two decades, despite stagnating real wages and productivity, and an unparalleled accumulation of corporate debt.

Yet Rishi Sunak has further withdrawn the state from climate interventions on the basis that the market will lead us to net-zero. His adherence to the efficient market hypothesis, which requires that asset prices reflect all available data and that a self-regulating financial sector will converge on the correct pricing of risk, is quite the punt given that just over a decade ago the global financial crisis proved definitively that the EMH is the mother of all grifts. As Karl Polanyi wrote in 1944, ‘to suppose that there exists some smoothly functioning automatic mechanism of adjustment which preserves equilibrium, if only we trust to methods of laissez-faire, is a doctrinaire delusion which disregards the lessons of historical experience without having behind it the support of sound theory.’

Britain’s large ‘public sector industry’ firms exhibit all the dysfunctions of ‘financialised’ corporations. Carillion and Intererve did go bust as a consequence of excessive profit-taking at the taxpayer’s expense, and to go bust in a rentier oligopoly takes real effort. Serco, G4S, Capita and the like tend to sweat their contracts and abuse their employment conditions and their pension entitlements; to minimise their investment and to indebt themselves in order to maximise profits. In this respect the nature of state capture in the UK is particularly dangerous for social welfare. The Public Accounts Committee has been warning for years that Britain’s structural dependency upon these companies makes them ‘too big to fail’.

The postwar British state had far clearer legal and organisational boundaries separating public and private realms. This isn’t to say that governments were immune from corruption, but the systematic opportunities were fewer. Contrary to the fantasy of the modern state withering away to its ‘nightwatchman’ minimum, our increasingly centralised polity has become a giant of procurement. Multiplying contractual relationships have transferred whole bodies of public spending from statutory to contract law, where they disappear under the cloak of commercial confidentiality (academy schools are one example of this). Even parliamentary select committees have complained that they are unable to scrutinise the financial details. The result is a system of direct corporate-government relations, chronic contractual underperformance and stymied, target-based bureaucracy.

In 2011, the Cabinet Office was forced to create a body called Crown Representatives to co-ordinate the ‘strategic suppliers’ of important goods and services. In the last financial year these strategic suppliers earned £15.7 billion in government contracts. As the market analyst Tussell has reported, this ‘close proximity to the heart of government [offers] unrivalled liaison opportunities with key procurement stakeholders’. Yet Crown Representatives completely failed to spot the imminent demise of Carillion and will probably fail to prevent the next case. The only obligation companies are under (and therefore the only leverage available to Crown Representatives) is to report anything that ‘may present a risk’ to the government.

The privileged access given to business has also had the effect of tilting the playing field against those other social interest groups that must compete for the government’s attention. And it has encouraged increasingly large donations to all political parties by companies seeking preferential treatment. The UK has the third largest lobbying industry in the world. When ministers and prime ministers with no experience in corporate governance retire into jobs in sectors they were once supposed to regulate, at pay rates beyond the wildest dreams of the average voter, are we really meant to believe that they are recruited for their good judgment? There remains a near total lack of legal regulation around some of the most serious systemic risks in the ‘self-regulation’ principle held by MPs.

The term ‘regulatory drift’ describes what happens when formal rules are deliberately maintained in the face of major shifts in practice, even as they cease to be effective. The cross-party Committee on Standards in Public Life, the Public Administration and Constitutional Affairs Committee, and the Public Accounts Select Committee have repeatedly called on government to tighten the rules around conflicts of interest, second jobs, party finance, consultancy, lobbying and the revolving door between government and the private sector. They have all been rebuffed. This kind of oversight would have violated many of the core assumptions of the neoliberal project: that business actors are honourable wealth-builders for the nation; that self-regulation is superior to state action; and that rational self-interest confers no unacceptable social harm. The public reaction has been one of rising distrust in political elites and anger with the institutional status quo.

Despite the widespread perception that politicians are ‘in it for themselves’, many MPs (the majority, as far as we can tell) resist the opportunities for self-enrichment that are now part of the fabric of political life. The culture of self-restraint and public service inherited from the postwar era has greatly weakened, however. A fifth of the new Conservative MPs elected in 2019 previously worked in lobbying or public relations. We also know that the greater an MP’s adherence to economic libertarianism, the more likely they are to cross the line. Boris Johnson’s cabinet is comprised of his party’s most committed economic libertarians.

The example of other countries shows that when corporate state capture takes hold, political parties risk being dominated by people who enter politics for private gain. Once this happens, elections become the point of access for what is primarily a financial market, with political parties as corporate brokers overseeing the continuous distribution of public revenue and rents into private hands. A populist, authoritarian politics is the most effective way to corner the market. Ideology matters so much here because for economic libertarians it isn’t obvious that there is any intrinsic moral injunction against running a private sideline while in public service. Owen Paterson may be entirely sincere when he says that he holds his integrity ‘very dear’. As Alain Supiot points out, ‘from the perspective of the total market … society is simply a swarm of contracting particles whose relations to each are based purely on calculated self-interest. Calculation – and hence the contract – thus comes to occupy the place previously assigned to the law as the normative reference.’

For economic libertarians, the marketplace is the sphere of true freedom: the only republic. In practice, however, the absence of a viable social contract in late-stage materialist utopias means that the nexus between the governing regime and its society becomes that of a protection racket. Insofar as Sunak has proved keen on public spending, it has been prompted more obviously by political calculation than the public interest. When the billion-pound Towns Fund was announced in January, 39 of the 45 areas chosen had a Conservative MP. Money is being directed at well-off Tory constituencies while poorer cities, such as Labour-voting Salford, are relegated to a lower funding tier. As the sociologist Ken Jowitt concluded of the USSR under Brezhnev, the aim ‘seems to have been to take the Party’s organisational corruption and elevate it to the status of an organisational principle’. Conservative MPs need to ask themselves whether they are happy to let their government do the same.