The Australian case for nationalisation

by John Q on January 25, 2009

The speed with which bank nationalisation has risen to the top of the policy agenda has found the economics profession largely unprepared. The literature on property rights that developed in the 1970s produced a range of arguments in favour of private as opposed to public ownership which had at least some influence on the widespread adoption of privatisation policies in the 1980s and 1990s. Although subsequent theoretical and empirical developments, such as the discovery of the equity premium puzzle and developments in agency theory cast doubt on the claims of the original literature, the profession as a whole had moved on, and showed little interest in revisiting the issues. The situation was a bit different in Australia.

As Joshua Gans observes,

the main contributions have come from Australian economists who did this research a decade ago only to be told by international journals that as privatisation had occurred everywhere by then, no one was interested in the conditions under which government ownership would be preferable.

and notes “I guess that view is wrong.” Unsurprisingly, I was among those who tried, with limited success, to interest the international profession in this question.

As Joshua’s post suggests, there’s a feeling here that Australia tends to get the short end of the stick in the economics profession. Australia has made some notable contributions to economic thought, with relatively limited recognition. Examples include the work of Trevor Swan (arguably the most significant economist never to win a Nobel prize), Colin Clark on national accounting, and before that the “Australian case for protection” developed by the Brigden Commission and later formalised as the Stolper-Samuelson theorem. In the 1970s, the “Gregory thesis” was an independent analysis of what became known internationally as “Dutch disease”. As these examples suggest, we tend to suffer a bit from being on the far side of the planet from the main centres of activity in the profession.

Looking at the history of the issue, it’s also not all that surprising that such debate as there was took place mainly in Australia. Until very recently, the economics profession has been dominated by the US, where public ownership is rarely part of policy debate, and by the UK, where the advocates of privatisation were dominant from the start. Australia is typically among the primary export markets for UK policy ideas, and this was certainly the case with privatisation. In Australia proposals for privatisation ran into serious political difficulties which created room for a critical analysis of central elements of the case for privatisation.

It rapidly became evident that the idea that privatisation was a method by which governments could raise money was not, in general, true – the earnings foregone through privatisation were often worth more than the sale price. And simplistic claims about improved efficiency only worked well for firms operating in competitive markets with little needed for regulation. Unsurprisingly, perhaps, public ownership was concentrated in industries with a high degree of natural monopoly and other problems that necessitated continuing government involvement. Combined with strong popular sentiment against privatisation, these criticisms meant that the push to sell off public assets was much less successful in Australia than in other English-speaking countries.

It will be interesting to see if the Australian case for public ownership gets any recognition now that the idea is in vogue in the Northern hemisphere.



dsquared 01.25.09 at 12:52 pm

I completely agree regarding Australia (numerous breakthroughs in econometrics also), and hurray for Trevor Swan and everything, but I think you’re going to lose that argument against supporters of Joan Robinson.


Joe S. 01.25.09 at 2:49 pm

I’m not sure that the Northern hemisphere vogue is for public ownership. At least in America, it seems like public ownership is viewed as a temporary way-station on the way to re-privatization. Jeekers, how could CEOs get their big bucks under public ownership?


Ginger Yellow 01.25.09 at 2:51 pm

“Australia is typically among the primary export markets for UK policy ideas, and this was certainly the case with privatisation.”

Although, funnily enough, “public private partnerships” were exported from Australia to the UK.


P O'Neill 01.25.09 at 3:31 pm

And didn’t Macquarie pioneer the model of privatization by sale to a listed fund which it collects large fees for managing?


John Quiggin 01.25.09 at 7:28 pm

On the contrary, we imported PPP’s from the UK PFI. I’ll put up a list of relevant papers soon, incluidng a heap on this topic.

OTOH, Macquarie-style financial engineering was our own contribution to the downfall of capitalism.


peter 01.25.09 at 11:52 pm

P O’Neill #4: Do you mean Macquarie Bank or Governor Lachlan Macquarie? Your description I think fits his partnership with the private sector (well, at least, the off-duty military sector) in the wholesale distribution of alcohol in colonial New South Wales. :-)


david 01.25.09 at 11:53 pm

Please do put up that heap. Anything good on the Macquarie engineering? I’ve read the press, but haven’t seen much beyond that.


peter 01.26.09 at 12:03 am

“Australia is typically among the primary export markets for UK policy ideas, and this was certainly the case with privatisation.”

Sadly, the UK produces more policy ideas than can be consumed locally, and the surplus, usually those of inferior quality or close to their expiration dates, are exported. I have also heard talk of a revolving-door VAT scam, in which locally-produced ideas are first exported and then re-imported to the UK under a different label, sometimes even years later. I don’t believe anyone has ever been arrested for this scam, because the participants are clever enough to avoid the same party being both the exporter and the importer of any one idea.


Martin Bento 01.26.09 at 3:59 am

Maybe another dimension of this that needs to be looked at is who gets to “print money” – that is to say, expand the money supply. Some of the money supply comes from the government, and some from multiplier effects. Krugman says the multiplier now is between 1.5 – 2.0, but a) it would have been much higher before the crash, when the velocity of money, for example, was much greater and b) I don’t think he is counting M3 (I’m using the American money supply categories here), which the Fed is now declining to measure. When last measured, in 2005, M3 was the fastest growing component of the money supply and almost 40% of the total (strictly speaking, (M3 – M2) was, as M3 is the superset of M2, but I’m going to talk of M3 as just the delta from M2 for simplicity). The private measurement given at tells an interesting story. M3 had been growing faster than M2 anyway (the government’s rationale for stopping the tracking of M3 was that it didn’t tell us any more than M2), but after 2005, it shot up and then collapsed last year. M3, I believe, would consist entirely of multiplier effects.

So private banks were generating a fair share of monetary expansion, as usual, through fractional reserve lending, and maybe some other things too. For example, players could create synthetic bonds amounting to bets on assets they did not own, and get these booked as assets in their own right. “Printed” money. It is easy to say that it was not real money, but it is implicit in the nature of money that any dollar is exchangeable for any other.

That M3 is collapsing gives the government room to run huge deficits and monetize them – the money supply needs to be expanded to compensate for the deleveraging that is happening. Put differently, the government must inflate just to counterbalance the deflation already occurring; this will not necessarily result in net inflation, right?

But fractional reserve banking means that the private sector is creating part of the normal monetary expansion that is desired to accommodate growth. As a boundary condition, suppose there are no private banks: the extra money supply creation becomes something the government could achieve by direct monetary expansion. The advantage of this is that the government does indeed get some free lunch – it can spend without taxing to the extent that the economy requires that extra money and can absorb it with no more inflation than desired (modest inflation can be desirable to encourage people to invest rather than hoard their loot). Against this, I suppose, is the notion that the banking industry will invest that money more wisely, and to better overall benefit, than the government will spend it, but I think that argument looks much weaker now than just a few years ago. Is there some reason I’m not seeing why this is not part of the discussion?


John Quiggin 01.26.09 at 5:22 am

#8 We have a winner!


Ginger Yellow 01.26.09 at 8:53 am

“On the contrary, we imported PPP’s from the UK PFI.”

As I understand it, the germ of PPPs came from PFI, but a) PFI had barely been used in the UK before PPPs took off in Australia, and b) the standardised procurement process using (D)BOT contracts was pioneered down under.


Chris Williams 01.26.09 at 9:36 am

There was a similar process in the early 1960s with criminal injuries compensation. The idea orginated in the UK; the Kiwis picked up on the buzz and passed legislation; the proponents in the podes then used the fact of the NZ law to press home their demands for a scheme.


peter 01.26.09 at 7:10 pm

BOT, BTO and like permutations of these ideas were common in the developing world from the 1980s onwards, which I think was before either Australia or the UK implemented PPP/PFI contracts. The main reason for their popularity, it always seemed to me, was that a nationalistic Government (such as that of Suharto regime in Indonesia or any Government of Thailand or South Korea) could retain at least the appearance of national ownership and control, while attracting foreign expertise and investment (along with all the personal pecuniary benefits to the political decision-makers such foreign investments could be made to entail). The people pitching these ideas to Asian governments, in my direct personal experience, were first the western merchant banks, followed in due course by the Japanese keiretsu (such as Mitsui), and then, in due course again, by the global infrastructure companies (such as telecoms and water companies). Not all of these global infrastructure companies were western, as successful third-world TNCs such as Singapore Telecom and the Mexican cement company, Cemex, demonstrate. Macquarie Bank was very late to this game, at least in Asia.


Jonathan 01.27.09 at 1:49 am

I can imagine a joke here that involves saying “Hayek” in an Australian accent.


Twisted_Colour 01.27.09 at 8:58 am

I can imagine a joke here that involves saying “Hayek” in an Australian accent.

Well… out with it.

Comments on this entry are closed.