Raymond Snoddy on media: Davies has the future of the BBC all figured out

Economics isn't called the dismal science for nothing and few of its proponents do much to lift the subject above its general reputation. An exception should - at least momentarily - be made in the case of Gavyn Davies, the former chairman of the BBC. He may not have been terribly good at handling Greg Dyke and even less adroit at dealing with bullying politicians, but when he talks about the economics of broadcasting, Davies the international economist starts to make sense.

His economic defence of the BBC and its Royal Charter at the Said Business School last week isn't exactly going to make headlines around the world or set the blood rushing to the head. But in a world awash with silly ideas from people, who really should know better, the Davies view deserves some attention and thought. It's all the more useful because the former BBC chairman has few remaining vested interests in the matter.

His case is a relatively simple one and luckily we don't need a first-class economics degree to get our minds around it. The ideas involved are as old as the hills; Davies argues that, left to its own devices, the free market will produce nothing like the BBC and its range, or above all, quantity of programmes. The old 'market failure' argument, he believes, is alive and well and is still the primary reason why the BBC should have such special treatment in the form of the licence fee.

This doesn't mean that the Corporation should only produce those programmes that are missing from the free market. 'Since practically everything is produced to some degree by the free market, such a rule would soon leave the BBC producing absolutely nothing at all,' Davies argues.

The aim is to produce the 'social optimum' of what Davies calls, for the sake of convenience, 'Reithian' services. The role of the BBC is to fill that gap between what the market would provide and the optimum.

Despite changes in technology, broadcasting remains a 'public good', in that once the programmes and transmitters have been paid for, the cost of an extra viewer is effectively zero. This, the former chairman believes, applies just as much to satellite as to terrestrial television. It also implies, Davies argues, that subscription or charging at point of use is not the most efficient way.

The Davies lecture in welfare economics concludes that broadcasting tends to lead to monopolies in a free market; it creates interpersonal relations important to society, but not fully reflected in market transactions; and because people can't know in advance what unusual programmes they might like, yet again the free market approach is not the ideal one.

Enough economics. What does any of this mean in practice? Well, it means exactly what you think it would. If you set up a subscription service, designed to exclude people, millions will decide not to pay. Based on research exploring what viewers would be prepared to pay by way of BBC voluntary subscription, Davies is even able to give some numbers.

His estimate is that 13m people would choose to pay for the BBC, but that the cost would be about £170 a year, compared with the current £121 a year for the licence. About 10m would decide not to pay, including the 6m who, according to research, say they think the BBC is worth less than £121 a year. Yet one-third of households say they would be prepared to pay double the licence fee for BBC service and more than a quarter would be willing to pay treble.

With the help of his calculator, Davies believes a move to subscription for the BBC would create a drop in national welfare of £500m - never mind the hidden cost of losing a national broadcaster for ever. Pretty dismal arguments maybe - but rather important for the future of the BBC.

- Raymond Snoddy is media editor of The Times

30 SECONDS ON ... ECONOMISTS

- John Maynard Keynes (1883-1946) developed the demand theory of economics. He also had Milton Keynes partly named after him.

- Milton Friedman (born 1912), the other half of Milton Keynes, is a free-market advocate whose theories educated California Governor Arnold Schwarzenegger, who said in 1994: 'Friedman's books explained how a dynamic capitalist system allows people to fulfil their dreams.'

- Adam Smith (1723-1790) was the original free-enterprise exponent and the founder of macro-economics. A quiet Scot, he lived with his mother for most of his life.

- Austrian economist Joseph Schumpeter (1883-1950) argued that entrepreneurial spirit was the engine of economic growth. He was made Austrian minister of finance in 1919, but sacked later that year following a period of hyperinflation.

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