Public Ownership: Excerpt from Two Lessons book

by John Quiggin on December 24, 2016

Here’s another excerpt from my book-in-progress, Economics in Two Lessons. As usual, praise is welcome, useful criticism even more so. You can find a draft of the opening sections here.

In the section over the fold, I’m looking at public ownership.


While the US adopted trustbusting and regulation as solutions to the monopoly power, most other developed countries preferred direct public ownership. This was in part due to the greater popularity of socialist ideas and in part due to the perceived failure of regulated monopolies to deliver adequate outcomes.

By the middle of the 20th century, infrastructure services such as railways, telecommunications, water supply and electricity were provided by public enterprises in most developed countries. These enterprises charged market prices for their services, typically designed to cover the opportunity costs of the resources used in providing the service and a surplus sufficient to cover depreciation and finance new investment. Over time, many of these enterprise were converted to a corporatised form and paid dividends, which provide a source of revenue for governments.

Along with redistributive policies of various kinds, the public ownership of monopoly enterprises contributed to the historically unprecedented reduction in inequality that took place in the decades after 1945, sometimes referred to as ‘The Great Compression’.

Moreover, the period of public ownership was one of substantial expansion of infrastructure networks. Electricity supply, which had previously been patchy and often confined to urban areas, became almost universal. Highway systems expanded greatly, with such developments US Interstate System as the most prominent examples. Telephone systems grew from local services to national and international networks, with steadily declining costs

However, public enterprises were subject to two significant criticisms. First, they were seen as overstaffed and inefficient. Second, although they generated sufficient revenue to cover the opportunity costs of production in aggregate, the prices charged for particular services did not necessarily reflect the opportunity cost of providing those services. There were extensive cross-subsidies, for example between rural and urban users and between households and business.

These criticisms emerged gradually over the post war decades. However, as long as Keynesian macroeconomic policies delivered full employment and continued economic growth, faith in the ability of governments to manage the economy extended to a judgement that the benefits of public enterprise outweighed the costs. Although there were shifts back and forth, with enterprises being nationalised for various reasons, and others privatised (fn: this term was not much used; the prevailing term denationalised reflected the fact that such movements were counter to the general trend) the general trend was towards greater public ownership.

The economic crises of the 1970s, and the failure of Keynesian policies to control them put an end to this. From the 1980s onwards, the trend towards greater public ownership was reversed. Beginning with the Thatcher government in the United Kingdom, public enterprises of all kinds were privatised.

Much of the political appeal of privatisation arose from the appearance of a ‘free lunch’ for governments selling assets. The proceeds of the asset sales could be used to finance current government expenditure, or new investments in desirable infrastructure, without the need to raise taxes or issue debt.

As is usually the case, the appearance of a free lunch was illusory. The opportunity cost of privatising a public asset is the loss of the income flowing to the government from ownership of the asset (dividends or earnings retained and reinvested).

In most of the privatisations undertaken after 1980, assets were underpriced, so that the value realised in the sale was less than the opportunity cost associated with lower future income. Once the sale proceeds were spent, governments were permanently poorer because of the loss of earnings flowing from the now-private enterprises.

Although free-market economists who advocated privatisation were mostly happy to let governments chase the free lunch of revenue from asset sales, their real hope was that, with government enterprisess out of the way, competitive markets would emerge, and that Lesson 1 would once gain be relevant.

Advocates of privatisation produced a range of studies suggesting that the problems of natural monopoly had been overstated and was easily soluble (fn contestability). As a result, they largely ignored the earlier failures of regulation, assuming that regulation would be needed only for a transitional period, until a fully competitive market emerged.

They disregarded concerns about the distribution of income and wealth, believing that the efficiency benefits associated with privatisation would be sufficient to provide lower prices for consumers, higher returns for investors and even some kind of compensation for displaced workers.

Initial evaluations of privatisation were highly positive. The World Bank, in particular, was an influential booster, and continues to promote the idea, though with an increasingly defensive tone.

Over time, however, problems became more evident. The cost savings from firing large numbers of technical workers were partially or completely offset by the expansion of marketing and finance divisions, and by an explosion in the salaries and bonuses paid to a growing number of senior managers, who also required support staff.

Moreover, the promised benefits to consumers often did not arise. Sometimes prices rose instead of falling. In other cases, lower prices were accompanied by reduced quality of services. Other costs have been slower to become apparent. A UN report in 2014 noted that privatisation of education had harmed educational opportunities for women and girls.

On the other hand, privatisation has proved a highly reliable method of enriching those who have managed to secure control of the process. Many of the great fortunes that symbolise the rise of the global “1 per cent”, from those of Russian oligarchs to the world’s richest man, Mexican Carlos Slim, have been derived from privatisation.

These failures have led to a slowing down in the push to privatisation, and even to some reversals. Examples include the renationalisation of the British railway track system and of the entire New Zealand rail network and Australia’s creation of a publicly owned National Broadband Network following the failure of its privatised telecom company to create such a network.

In the end, the choice between public ownership and regulated private monopoly involves the need to strike a balance between different opportunity costs. That balance has shifted over time, partly in response to technological changes and partly as a result of ideological shifts in thinking. Since the 1970s, excessive faith in Lesson 1 has led to a sharp movement away from public ownership, without any clear attempt to assess the balance of costs and benefits. Such a reassessment is long overdue.

{ 36 comments }

1

Brett 12.24.16 at 9:06 am

I’d be curious to see a list of privatizations generally considered successful. They do exist (the Shinkansen privatization is one IIRC), but the many, many failures of privatization seem to outshine them.

In any case, public ownership can work very well as long as the organization is responsive to outside pressure and accountability (be it from democratically elected oversight, responses to usage by customers, or both). It can be a lot harder to keep that up for a long time, though, because it depends so much on politicians who might have other priorities than running an efficient organization.

2

Phil 12.24.16 at 9:15 am

I’d like this to be more critical. Not because I’m against public ownership – I am and always have been* strongly in favour of it – but because opposition to public ownership is orthodox across a lot of the political spectrum, including (as you say) highly influential actors like the World Bank, and I’ve never understood why. Or rather, I can see lots of arguments for privatisation, but they’re all bad and partisan arguments which ultimately boil down to making shareholders richer and working people poorer**. I don’t believe the World Bank is dedicated to immiserating the working class, so I genuinely think I must be missing something. What are the good arguments against public ownership?

*Going back to when it was the norm.
**It can take a fair bit of boiling…
It’s flexibility, isn’t it?
– Meaning?
Well, a private company can react quicker to changing circumstances.
– How?
They can concentrate resources in particular areas much more easily, they don’t have the same kind of bureaucracy…
– Bureaucracy?
You know, consulting the unions all the time, giving people a job for life…

Some sequences have been shortened.

3

Just an australian 12.24.16 at 10:22 am

You didn’t mention that many of these markets require significant infrastructure investment, and in many of the privatisation cases, not only did they not pay the cost of the investment, they don’t invest in an ongoing fashion – they’ll get bailed out eventually. Privatise the profits, socialise the costs – privatisation is only worth it if we have some guarantee that this pattern won’t be followed. I don’t think so…

4

Alex B 12.24.16 at 10:23 am

Despite the benefits of public ownership, the history of privatisation has permanently lowered the viability of investing in public assets. Because we know that eventually the Tories will get back in and flog them off cheaply, as above.

5

Mike Huben 12.24.16 at 12:52 pm

I really like the introduction of inequality here. I don’t recall too much from the other chapters, but you may want to start the “lesson” with themes of goals of economic systems, such as less inequality, and keep referring to them throughout each chapter.

“privatisation has proved a highly reliable method of enriching those who have managed to secure control of the process”: that’s another example of a rather passive observation. Instead, you may consider the idea that people eye government resources that can be “privatized” as wealth ready to be plundered by political insiders. There’s a well-known cognitive bonus when you can explain problems as cheating. (That’s why “taxtion is theft” is such a strong meme.) Indeed, the social security system in the USA is the biggest pot of money in the world, and the Republican idea of privatizing it is just a way of stealing much of that pot of money.

I love the point that many of the largest fortunes in the world are a result of privatization.

You might also mention Pinochet’s privatization of the copper industry in Chile, which has since been re-nationalized.

6

Collin Street 12.24.16 at 1:49 pm

(the Shinkansen privatization is one IIRC)

You can actually see what made the JR sale work:
+ they sold it into an environment that already had large and extremely sophisticated private rail operators
+ they sold the entire business. Not just the profitable bits, but all of it, as geographically-integrated wholes. Not just the rail bits either; JR had some hefty non-rail businesses that were also sold off.
+ the third-sector railway concept meant that the cross-subsidy to the more intractably unprofitable lines could be maintained, but made explicit and under local control.

Only things I can think of that come close are the Commonwealth and state bank sales in australia, which could reasonably be argued were decent successes.

7

hix 12.24.16 at 2:49 pm

“I’d be curious to see a list of privatizations generally considered successful. They do exist (the Shinkansen privatization is one IIRC),”
Is it really? Or does this one just look decent compared to the typical rail privatication diasester? Sucessfull would require significant improvements over public ownership, no?

8

William Meyer 12.24.16 at 3:04 pm

I used to be a standard right-wing believer in the notion that publicly-owned infrastructure was guaranteed to be inefficient and poorly administered. However, because of my work, I’ve been involved with the electric power industry for 25 years now, and seen a number of examples where public power has delivered the goods absolutely as well or better as privately-owned companies. As a customer, I’ve moved between the Los Angeles Department of Water and Power and Southern California Edison with no obvious change in the quality or reliability of service–except that SCE charges a good bit more. In many cases, such as the adoption of energy storage technology, public power agencies are out ahead of investor-owned utilities. I have also watched private Internet providers offer ridiculously poor (and slow) service for highly elevated prices, while fighting municipalities that want to invest in better connectivity tooth and nail politically. I’ve also noticed the extreme difficulty we’ve seen in getting transportation infrastructure bills out of the U.S. Congress for the past 15 years or so. I know (because I’ve worked with many infrastructure funds) that Wall Street would love to invest heavily in transport infrastructure but is frustrated by trying to compete with “free” public money. I’ve wondered many times how much lobbying the finance industry has done to slow down public infrastructure funding, with the goal of forcing municipalities and states to accept privately owned infrastructure investment and ownership. Another area seeing a similar trend is smart cities, where a number of municipalities are turning to private players to provide upgrades that the local governments think they cannot afford. All in all, in many spheres public provision of services is a much cleaner way of addressing “natural utility” needs than when private companies are involved. Private investment looks cheaper in the short term–governments don’t have to take on debt and then tax citizens to service it–but in the long term the public will probably pay more and have far less control over the service if it outsources the job to a private company. Think about the decision by U.S. cities to get cable TV installed “cheaply” 40-50 years ago without taking on municipal debt by providing private companies with monopoly franchises (and no rate regulation), a decision many consumers have paid for over and over again for decades and will continue doing so, quite possibly forever.

9

EB 12.24.16 at 3:10 pm

Public ownership would not be nearly so vulnerable if it (we) could figure out ways to avoid the (political and moral) need to keep people employed even when their work is not productive or breaking even (cf. UK coal mines). The obvious solution would be to find or create other good employment in the same regions where jobs are lost due to the making of those hard decisions, so far not something that has happened.

10

H Horan 12.24.16 at 3:24 pm

While alluded to (..there were extensive cross subsidies between rural and urban users and between households and businesses..) I think greater attention needs to be given to the issue of whether an industry under private ownership (whether competitive or monopoly) would produce a socially optimal level of output and prices. Would private utilities provide all customers with an acceptable basic level of service, or would they focus on sectors perceived to be lucrative and ignore all others? Would a privately owned tollroad ration peak demand by congestion, or use prices to limit access based on wealth? Did the industry have strong underlying scale economies that would encourage investment and market development, or would these be underfunded? This allows you to closely tie “privatisation” to “deregulation” since a key motive of public ownership and regulation was to ensure that pricing, output and investment decisions were aligned with maximizing overall economic welfare, recognizing issues such as universal access to essential services, the equity issues you raise, and limiting the exploitation of artificial market power. Both public ownership and regulation created the risks of “capture” by inside interests that could harm welfare maximization (overstaffing) by preventing ongoing transparent reconsideration of the cost/benefit tradeoffs that are critical. Privatisation and deregulation were originally positioned as (and in a few cases legitimately were) attempts to some of this cost/benefit realignment, but quickly became a more extreme case of “capture” designed to ensure corporate activity strictly served the objectives of capital accumulators, and to eliminate any notion that overall welfare maximization should influence price/output/investment decisions

11

Kiwanda 12.24.16 at 3:49 pm

“once gain be” –> “once again be”

“On the other hand, privatisation has proved a highly reliable method of enriching those who have managed to secure control of the process. “

There may be some analogy to private equity, where a company’s management is bribed to give the company’s assets to the equity operators, by way of “leveraged buyouts”, “management fees”, and stockholder swindling.

The effective exploitation of corrupt public/private relations is the foundation of many great fortunes, including Carnegie’s and Ross Perot’s.

“The cost savings from firing large numbers of technical workers were partially or completely offset by the expansion of marketing and finance divisions, and by an explosion in the salaries and bonuses paid to a growing number of senior managers,”

Sounds a bit like the ever-expanding class of university administrators, with meetings to discuss the scheduling of meetings, etc.

A lesson from the Microsoft era is the importance of shared software and public ownership of standards. The web may be on its way to being a collection of facebook pages, and retail a service of amazon, so there’s probably more lessons to learn.

12

Brett Dunbar 12.24.16 at 5:53 pm

State owned monopolies have the same basic problems as other monopolies. Facing no competition they don’t care much about their customers. So you get things like poor customer service and a structure that is designed for the convenience of the business rather than the consumer. It really depends on whether you prioritise the consumer interest or the producer interest.

For an example of why state ownership is disliked look at the history of the communist states failure to produce consumer goods in the quantities and quality desired by the public. For example Lada making licensed versions of the Fiat 124 with limited options. Consumers faced a long waiting list to get a car that probably didn’t meet their needs that well. While in capitalist states the privately owned car makers produced a wide range of different models which were constantly updated and had a fairly extensive range of options. You could both actually buy one and could usually find something close to what you wanted.

13

Gareth Wilson 12.24.16 at 8:09 pm

You should mention status quo bias somewhere. There have been impassioned defenses of keeping public assets public, which don’t mention that the arguments also work for nationalising every equivalent private asset. This also applies the other way around.

14

fledermaus 12.24.16 at 9:29 pm

“their real hope was that, with government enterprises out of the way, competitive markets would emerge, and that Lesson 1 would once gain be relevant.”

Objection, facts not in evidence. This was the excuse economists used to convince governments that it will be no big deal to have a state-granted private monopoly. I really doubt that there is a company planning on competing in the Chicago parking meter business. Privatized utilities have all the same problems/issues as state utilities, just with a profit incentive layered on top.

15

Brett Dunbar 12.24.16 at 10:37 pm

Another point is that the state enterprises quite often failed to provide any service at all. Mains water is a notable example. In countries like Pakistan politically well connected neighbourhoods got mains water as they could lobby politicians while poorer areas and those that supported opposition politicians were left on the waiting list for decades. Privatising even what is a natural monopoly often worked better. A private water company that had a franchise or reasonable duration could borrow in order to pay the substantial capital costs of installing the pipes in the knowledge that they would then have a long period to pay off the debt. This does require that the state is trusted not to use grumbling about prices and profit margins to simply seize the water company. The private business is making a large operating profit but unlike the state enterprise it replaced is actually providing the service.

The World Bank has, for pretty good reasons, developed a high degree of scepticism about the competence, honesty and intentions of third world governments. While greed is a pretty good motivator for the private sector to actually provide services.

16

Kevin Cox 12.25.16 at 5:22 am

This chapter asks the wrong questions. Efficiencies arise when we decentralise and distribute control. Distributed systems of communicating autonomous agents addressing a given issue are always lower effort and lower cost in a connected world. The reason is that we eliminate the need for costly intermediaries. It has reached obscene levels with the inefficient, featherbedded, dysfunctional financial sector that supplies capital for infrastructure. It costs at least 100 times too much to provide funds to build infrastructure whether the infrastructure is privately owned or publicly owned.

17

Asteele 12.25.16 at 7:53 am

While you do bring up the corruption issue, I think this would be stronger with an example or 2

18

JohnT 12.25.16 at 10:10 am

The one additional point I would make is an expansion of the point EB makes above. Companies in public ownership typically become much more responsive to a much wider range of stakeholders. That may seem like a good thing but the average management faced with a need to genuinely please the unions, workers, customers, regulators and 3 separate government ministries often collapses into a near catatonic state of indecisiveness. The variables become too numerous. Private sector entities are focused solely on owners and customers – in that order – which may seem bad but does allow for meaningful and reasonably brisk comparison. In my working life I have several times worked with public sector enterprises at the highest level and this was a near-terminal problem. In principle it should be possible to give, say, the water company, a tight mandate and independence to deliver cost-effective and high quality water service, and i would expect such a company to outperform its private sector brethren. However in democratic governments lots of additional mandates slowly tend to get tacked on. (In non-democratic countries a bunch of mechanisms to rob the public, like nepotistic hiring and straight corruption tend to get tacked on).

19

Brett Dunbar 12.25.16 at 11:05 am

Provision of car parks is quite capable of being competitive. Anyone who has some vacant land in an area where there is demand for car parking can do so. Either on a permanent basis or a temporary basis. Say a farmer using a field as a temporary car park during a rock festival.

20

ZM 12.25.16 at 12:25 pm

I think the privatisation of electricity and gas in Australia is probably beneficial for moving to a renewable energy system with householders and businesses having solar panels etc. I also have the idea that distributed energy in France has been driven by private companies working with neighoughoods, and I would guess private companies or community cooperatives are more likely to be a good fit for this, due to the transformation of households and businesses into producers of energy as well as consumers, and the complexity and local specificity this adds to the energy system.

One thing that hasn’t been mentioned is the problems inherent of having the State responsible both for governance of the assets and provision if the assets. While this means the State can decide to provide something and there’s not many regulatory obstacles unless someone takes it to court or something, the decisions are not necessarily the best, and they might not be what the public want, or they can be politically motivated, or increase disadvantage. Examples are slum demolition and public housing which had some successes but also saw protests, transport decision making which in many cases has privileged cars and freeways and can damage amenity of affected areas and decisions might be in part politically motivated, environment justice issues like locating power stations and waste landfill and sewerage in poorer areas with less organised opposition from residents who are already in many cases disadvantaged, etc.

In terms of the NBN I think it was necessary because of Australia being sparsely populated apart from major urban centres. I would think in more populated countries private telecom companies could deliver something like the NBN and make a profit…?

21

dbk 12.25.16 at 12:30 pm

Very nice draft.

I’d like to see additional examples of privatizations of public goods/ services, in order to understand better in which sectors/under what conditions privately-held public service/goods provision offers a better alternative – recalling that public goods and services are not very subject to elasticity in demand, and that (as you noted, but perhaps didn’t emphasize strongly enough for my own tastes) ALL users are entitled to equal access to such services/goods, which in turn involves latent cross-subsidies/re-distribution (urban of rural, individual subscribers of businesses).

Thoughts:
(1) In major privatizations, how was the maintenance/ periodic replacement of infrastructure foreseen? I’ve always thought that there would be a conflict of interest between a private firm’s requirement to maximize profits and minimize costs and the periodic requirement to rebuild infrastructure.

(2) Some comparative examples of services deemed public in some (or most) countries, and private in (a few) others. How has “market choice” worked out for those in privatized markets, particularly in rural and under-served networks? Thinking here mostly of health care, but also of internet /mobile coverage in low-density population areas (in the U.S.). My impression has been that rather than resulting in a truly competitive market of providers, what you eventually see is a very small number of providers providing sub-optimal service and charging high rates. It’s almost like a quasi-monopoly/ de facto monopoly by private enterprises of the public sphere.

(3) What other areas of the public sphere remain ripe for privatization? I would suggest that in the U.S., the next target for privatization will be the public school system, both primary and secondary, under the new Secretary of Education, who has proven herself a devout (in more than one meaning) supporter of for-profit charter schools and vouchers for use at private religious schools.

22

Petter Sjölund 12.25.16 at 5:01 pm

The Lada-Fiat comparison is interesting in other ways. I theory, I’d rather have a car-maker that churns out cheap but serviceable cars that last than one that makes lots of “fashion-statement” models to impress the ladies and make the neighbors envious, and encourages people to buy a new model every year. A pity it didn’t turn out that way.

23

Brett Dunbar 12.25.16 at 6:34 pm

Carmakers in a capitalist system have to actually provide the cars immediately, customers will go elsewhere. If Fiat can’t sell you a car Citroen will be happy to take your money. Or if they get a reputation for poor quality again you can go elsewhere. They make frequent incremental improvements not because they expect customers to buy new each year but because they know some will be buying any year and all of the carmakers make incremental improvements.

Different customers have different requirements and preferences which is why a market economy provides a wide range of different models. In the west if the Fiat 124 didn’t suit you you could buy a number of other family cars. In the USSR you had to go on a waiting list and the only car you could get was a licensed copy of a Fiat 124. A car Fiat had stopped making in 1974.

24

Gareth Wilson 12.25.16 at 6:53 pm

Lada itself has been privatised – they’re now mostly owned by Renault-Nissan. So comparing the state-built cars to the private-built cars might be interesting.

25

Jonathan Monroe 12.25.16 at 8:00 pm

The best examples of successful privatisations are going to be companies which are not natural monopolies but had been nationalised purely because they were being g employers, or to save them from bankruptcy. Thatcher era examples include British Airways, BP and Rolls-Royce. Of course, in Am

If you are looking for successful utility privatisations, British Telecom gets cited a lot (for good reasons), but most of the telecoms privatisations in well-run European countries worked out well. Another interesting example is the Dutch post office (TNT being the international commercial arm thereof)

Privatisation of British Rail is a very interesting mixed case – it has been a total success in the freight space, and technically and financially arguable (the necessary investment to support a doubling of passenger numbers could have been made a lot more cheaply under state ownership, but probably wouldn’t have been) but definitely a political failure on the passenger side.

On the other side, I have never heard anyone credibly claim a successful water privatisation.

26

bruce wilder 12.25.16 at 10:55 pm

There is also a broad middle-ground of mutual or cooperative organization in various industries as well as banking and finance. Rural electrification was accomplished in much of the U.S. by local cooperatives sponsored by the Federal government.

27

Sebastian H 12.26.16 at 12:48 am

Petter, the Honda Civic is a very popular car and fits your criteria.

John, I may be asking for beyond the scope of what you’re trying to do but I find these types of discussions I helpfully dogmatic because they tend to resolve into pro and anti privatization camps such that “what makes a good privatization” can’t be dealt with by one side and “what makes a bad one” can’t be dealt with by the other. For example it seems to me that the phone deregulation did enormous good (long distance calls became a non luxury and arguably it spurred the cell revolution) while the similar cable company move didn’t. Why did one work and the other didn’t?

28

Brett Dunbar 12.26.16 at 6:37 am

Introducing competition seems to be important. With US cable what you ended up with was a lot of local monopolies that could use their control of the infrastructure to exact monopoly rents.

A study of water privatization’s impact on health, as measured by child mortality, found that between 1991–1997 in Argentina child mortality fell 8 percent more in cities that had privatized their water and sewer services compared to those that remained under public or cooperative management. The effect was largest in poorest areas (26 percent difference in reduction). The main reason was a greater expansion of access to water in cities with privatized utilities. This increase was concentrated in poorer areas that did not receive services before private sector participation was introduced.

Nationalisation depends on the paternalistic assumption that the state (or other privileged body or individual) knows best what is the interests of the consumer. A market involves the assumption that the consumer is the most knowledgeable and effective judge of their own interests.

29

Brett Dunbar 12.26.16 at 6:42 am

The quote is from Wikipedia.

https://en.m.wikipedia.org/wiki/Water_privatization

This blog could really use a preview and edit feature. The html didn’t do what I was expecting; the cite in the blockquote tag doesn’t seem to do anything.

30

Tax Payer 12.26.16 at 11:04 am

I don’t understand this sentence:

“Once the sale proceeds were spent, governments were permanently poorer because of the loss of earnings flowing from the now-private enterprises.”

Isn’t the government in charge of tax rates? Should they decide they needed more revenue, wouldn’t they just raise the rates?

31

James Wimberley 12.26.16 at 1:39 pm

” …. praise would be welcome …”
Let’s respond to this charming piece of wishful thinking.

Yes, thanks to John Quiggin and all the other fine bloggers here for your selfless work in 2016 keeping us readers entertained and enlightened! May the Nobel Prize Committee finally recognize your outstanding contributions to economic science! May Turnbull read the Climate Commission’s reports and have a Damascene conversion! May your students actually listen to your lectures and the prettier ones queue up afterwards to ask you phony questions as they flutter their eyelashes!

I’ll spare you the criticisms, over at JQ’s blog.

32

alfredlordbleep 12.26.16 at 5:51 pm

For example it seems to me that the phone deregulation did enormous good (long distance calls became a non luxury and arguably it spurred the cell revolution) while the similar cable company move didn’t. Why did one work and the other didn’t?

Right off the bat long distance calls don’t have a content provider problem (callers are the providers). TV content is a giant property rights arena, no?

33

John Quiggin 12.29.16 at 1:05 am

For clear cut examples of successful privatisation, Jonathan Monroe is right. The best examples are those where the motive for nationalisation was to rescue a firm in crisis. Most recently (as i suspect some cutoff text was going to say) the rescue of the US car industry.

The Australian bank privatisations, and most telecom privatisations, were great for the buyers but disasters for the public. Shares were massively underpriced (Google Quiggin + privatisation for dozens of examples). And to the extent that industry performance improved (as with long-distance telecom) it was mostly because of a trend of technological progress that was well established in the era of public ownership.

34

Collin Street 12.29.16 at 10:25 am

The Australian bank privatisations, and most telecom privatisations, were great for the buyers but disasters for the public.

If the private sector could afford the replacement cost of the infrastructure &c the infrastructure would never have been built by the state in the first place. I think pretty much all privatisations work out this way, possibly a-priori: you might think that this would be an a-priori objection to “privatisation”, but really generating positive externalities that are captured by private actors is a large part of what a state is.

All profit, after all, is rent: windfall profits from privatisations are no different in kind to anything else.

[which means you have to examine it case-by-case rather than a blanket rejection. Not that I think the result would be hugely different, though.]

35

Collin Street 12.29.16 at 10:29 am

… and in the case of the car companies[1] the infrastructure wasn’t built by the state anyway, so my objection doesn’t apply.

[1] But not the railways, road companies or utilities. Banks… unclear?

36

Terence 12.30.16 at 6:35 am

Thank you that’s very well put. I think that perhaps more could be made of the different type of dilemma faced in poorly governed developing countries. In such states governments often run entities very poorly and they’re often tools of patronage that, if they have any distributional consequences, probably promote gains for the already affluent. On theother hand, the government’s of developing countries also often fail miserably at dealing with private sector natural monopolies and the like.

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