Mimicking markets: is that really a government's job?

Markets, and the people who make them, have been plunging politicians into all kinds of difficulties recently. The global banking market so over-reached itself that governments had to step in and rescue whole institutions from collapse using taxpayers' money.

Here was market failure on a breathtaking scale. Some banks were part-nationalised. A lot more had some of their bad debts underwritten by the state. That eye-watering outlay, and the recession which followed the crash, have carved through public finances around the world to the extent that these same governments are now haunted by unprecedented debt burdens of their own. Politicians face a popular backlash, as tax rises and spending cuts beckon as the only credible way to restore fiscal order.

Recession spells business failure, corporate restructuring and a rising tide of job losses. That's a hand no politician wants dealt. Thankfully, in the boom years, that's rarely where the cards fell. However, in the past week alone in Scotland, the market Joker has turned up again and again and again. National Express has signalled that it can't sustain its current rate of losses on its East Coast Main Line rail service. The UK government is to take control of the franchise temporarily, at further cost to the public purse. And older debate - about whether rail should have been privatised in the first place - has started rolling again.

A leaked company memo has triggered fears about the longer-term viability of the last three naval shipbuilding yards in the UK, once orders for two supersize aircraft carriers are completed. Two of the three yards are on the Upper Clyde. Throw in the planned closure of a missile range on the Uists and we have the makings of another Westminster/Holyrood grudge match over who's selling who down the defence-procurement river. The SNP government in Edinburgh would happily see the Trident bases on the Clyde shut down tomorrow. But creating and testing conventional weaponry for the UK Navy is, it seems, a nationalist industrial must-have.

Diageo's decision to restructure its grain distilling and packaging operations in Scotland, with big job losses in Kilmarnock and Glasgow but new jobs and investment for Fife, has drawn the kind of political response I haven't heard in ages. Up till now, Alex Salmond has positioned himself as the friend and advocate of markets. His purpose, with a capital P, in politics is to raise Scotland's growth rate above the UK's, and grabbing a bigger share of market activity is his principal means of delivery. One of Salmond's first ambitions, once enough Scots opt for independence, is to set Scotland's rate of profits tax low enough to persuade plenty of mobile market capital to invest here.

Since becoming First Minister, Salmond has barely had a cross word to say about market capitalism. He was even commending the Royal Bank's bright future just months before it had to go to the UK Treasury for that bailout. No politician spends more time opening new offices and factories or promoting Scotland's market strengths. But there he was yesterday, laying into Diageo's management for "making billions out of Scotland" yet failing to give his administration enough notice of its monstrous restructuring plans.

Of course, Salmond is not the only politician having to retune his market message. At Westminster, Lord Mandelson remains convinced that Royal Mail needs investment from a profit-driven partner. But even His Lordship knows when to fold a weak hand. Mandelson's decision to put part-privatisation of our postal service in the return-to-sender dookit will trigger all sorts of other uncertainties - like what now happens to Royal Mail's gargantuan pension deficit. Realpolitik has trumped the market imperative.

Indeed, right across the Brown government, moves are under way to dismantle some of the worst excesses of what this year's BBC Reith lecturer, Professor Michael Sandel, calls "market mimicking governance". Belatedly, the target-driven culture in health and education is being replaced. The mauling that market capitalism has sustained since August 2007 is prompting a root-and-branch review of the prevailing orthodoxy about public goods - that they are best delivered trying to replicate the mechanisms of the marketplace.

If they can find time away from fire-fighting the latest jobs blow or contemplating their own plunge in public esteem, politicians of all stripes should spend a profitable hour listening to the fourth of Professor Sandel's lectures. He called it A New Politics of the Common Good. Sandel is an American political philosopher, but his critique of the prevailing ideology of the past three decades and his ideas about what might replace it hold powerful resonances for the future conduct of politics over here.

The idea that correcting for market failure is the main rationale for government, he argues, only emerged relatively recently as a corrective to the market fundamentalism of the 1980s and the economic exuberance of the 1990s. "It was the way centre-left governments after the Reagan/Thatcher era tried to restate the case for government," he suggests. It was the way of Tony Blair's New Labour and Bill Clinton's New Democrats. But it is, to Sandal's taste, too humble, too narrow a riposte.

"Democratic governance is radically devalued if reduced to the role of handmaiden to the market economy. Democracy is about more than fixing and tweaking and nudging incentives to make markets work better. The purpose of markets is to organise productive activity so as to maximise consumer welfare. But democratic governance is about much more than maximising GDP or satisfying consumer preferences," he argues.

Mimicking markets appealed because it seemed "to offer a way of making political choices without making hard and controversial moral choices". Sandal thinks the banking crash and its daunting aftermath have shown the need for a new public debate about the moral limits of markets and what has been lost in the past three decades as societies on both sides of the Atlantic drifted away from older traditions of community solidarity and civic virtue. I, for one, hope that debate is not drowned out by the case-by-case posturing over market failure we have begun to hear from our politicians this past week.