HERE comes one of my favourite illustrations of economics in action. For many decades in the 19th century, Britain sent its convicts to Australia. Only 50 per cent survived the trip. One day Edwin Chadwick, the early public health inspector, took a walk with Jeremy Bentham by the Thames watching one of these grim hulks loading its human cargo.
Bentham asked Chadwick about the nature of the contract with the charter ship owners. Chadwick said the owners were paid a fee for number of convicts boarded. Bentham suggested a minor adaptation. Let them be paid instead for those disembarked at Botany Bay. The death rate fell from 50 to 2 per cent as the convicts were now better fed and tendered.
There you have it. Private enterprise, properly directed, can transform an ugly situation. The government can still be the procuring agent. It need not perform the task.
If I were to take any single Scottish institution which was demonstrably failing I confess I'd shortlist the dreadful nature of too many schools but I would have to plump for the Scottish Prison Service (SPS) for No.1.
It costs us £32,700 to keep each of our 7,000 prisoners in custody. What do we get back ? More than half will re-offend. Very often they will have refined their skills in theft or other criminal expertises.
Michael Howard had a mantra "Prison Works". I'm baffled. I can think of no entity that works less well at such vast expense.
The Scottish Prison Service is the very essence of socialism in practice. It is a failure. "Prison does not work".
Note, I am not arguing Tony Cameron, supremo of Scotland's prisons, and his SPS colleagues, are inept, lazy, cruel, incompetent or anything worse. Far from it. In fact I detect high-minded good intentions in the prison service yet I stand amazed that a prison such as Barlinnie only stopped the degrading "slopping out" after 122 years of saying this was the intention.
I do not want to be starry-eyed about prisons. It seems to me a good proportion of captives are better understood as psychiatrically ill. In 100 years' time everyone will express astonishment we treated the mentally wounded in such a cruel fashion. Again, this is not so much the turnkeys' fault. It is the courts which seem to fail to understand the nature of mental illness.
Another big proportion of prisoners strike me as less than villainous.
They come from those other great failing Scottish ideas - council estates and dross schools. Most prisoners are broken souls demoralised by blighted youthful years. A lot cannot write, count or read, however many millions have been wasted by local authorities in "education". Here is the nub of my argument.
We need private prisons with contracts paying the bulk of its awards based on cutting the re-offending rates of "graduates".
Prisoners who have truly learned social skills and have been taught commercial roles will not all be model citizens - but their success rate has to be higher than the present miserable story.
"Committed to Correctional Excellence" is the motto of the Scottish Prison Service. Top marks for the sentiment. More modest marks for the reality. Of course this is not just Scotland.
The prisons of England and Wales score even worse by most criteria - £35,000 a year per prisoner for example. Scotland incarcerates 135 people per 100,000 of population. The USA is an alarming 726. Japan 59 per 100,000.
The United Kingdom Detention Services Company is bidding for the new prison mooted for Addiehall in West Lothian. Yet as I understand it, the efficiency savings are purely in the "hotel" functions.
The real meat would be to award enhanced fees if prisoners did not re-offend. It may be that this needs real intimacy.
Rather than a huge plc, the relationship could be with one or two particular prison officers - with chunky awards if their pupil prisoner really got a job and lived a useful life. This would cover many decades.
I can think of no greater machinery of waste and cruelty than prisons. To bang up people with schizophrenia or related disorders is simply a scandal about which we are silent as prisons are a sort of waste bin.
Yet saving on the porridge or the soap bill is scarcely the point. The special jargon of the SPS is "Recidivism". Let the income of the prison staff be linked directly to this, and a miracle as big as Chadwick's more than 100 years ago could be achieved.
Let me end by quoting Liberal peer John Stuart Mill: "A state which dwarfs its men in order that they may be more docile instruments in its hands will find that with small men no great thing can really ever be accomplished."
John Blundell 
is director-general of the Institute of Economic Affairs.