Bookblogging: Privatisation – Beginnings (updated)

by John Quiggin on January 2, 2010

I’m on the final chapter of my long-promised Zombie Economics, dealing with ideas refuted by the Global Financial Crisis. My target this time is privatisation – more precisely, the idea that privatisation will always yield an improvement over public ownership, and, therefore that market liberalism is an advance on the mixed economy that developed in the during the post-1945 long boom.

As always, comments, criticism and suggestions much appreciated.

Updated In response to comments, I’ve added a bit more material on the 1970s and the background to privatisation.

Refuted doctrines


     `We hope the fund is maintaining its push for a more flexible exchange rate, far- reaching reforms in the banking sector and more privatization.’’ 

Mr Timothy Ash, head of emerging-market research at Royal Bank of Scotland in relation to an IMF rescue package for Ukraine during the global financial crisis. The Royal Bank of Scotland had just been nationalised as a result of failed speculation and catastrophic mismanagement.

The ‘mixed economy’ in which public provision of a wide range of services and economic infrastructure, such as telecommunications and electricity networks, coexisted with a largely capitalist market economy was one of the most striking features of the political and economic settlement that emerged in Western economies after 1945. Public ownership was not new. Governments in many countries had played a role in providing infrastructure, social welfare systems and services such as health and education. But, before World War II these measures had generally been seen, by supporters and critics alike, as steps towards full-scale socialism, defined in traditional terms as the elimination of private ownership of the means of production.

The one exception, first noted by John Stuart Mill was that of industries that are ‘natural monopolies’ in the sense that the efficient scale of operation is so large that costs are minimised when there is only a single firm in the market. In this case, Mill noted, “it is the part of the government, either to subject the business to reasonable conditions for the general advantage, or to retain such power over it, that the profits of the monopoly may at least be obtained for the public.”  The alternatives proposed by Mill, that natural monopolies should either be regulated or publicly owned have proved to be the only serious policy options, despite occasional attempts to argue that unregulated private monopolies may be benign, such as the theory of ‘contestable monopoly’ put forward by William Baumol and his co-authors in the 1980s.

The experience of the Depression and World War II produced a fundamental shift in thinking about the roles of governments and markets, described by Sheri Berman as ‘the social democratic moment’. Rejecting both 19th century classical liberalism, and the mechanistic determinism of orthodox Marxism, social democrats saw themselves, in the words of Australian historian as ‘civilising capitalism’. From the Swedish ‘Folkhemmet’ (people’s home) to the British reforms based on the Beveridge Report to Roosevelt’s New Deal and Four Freedoms, social democrats put forward a vision of a society in which markets and business enterprise played a central role, but one subordinate to the needs of a just society. In addition to Keynesian macroeconomic management and the social policies of the welfare state, this vision required governments to make investments in the physical and economic infrastructure needed to ensure prosperity. 

The growth of government intervention was supported by a series of new developments in microeconomics, collectively called the theory of market failure. In the 1920s, AC Pigou developed the idea of externalities as a way of incorporating obvious (but previously  disregarded) features of industrial society such as air pollution into economic analysis. Pigou’s analysis is still in use today, and forms the basis for policy proposals such as the idea of a carbon tax to limit emissions of carbon dioxide and other greenhouse gases.

Then in the 1930s, Joan Robinson and Edward Chamberlin independently developed the idea of monopolistic competition, extending earlier work on industry structures such as monopoly (dominance of a market by a single seller) and duopoly (two sellers). The rise of game theory in the 1940s and 1950s, due to von Neumann, Morgenstern and Nash, provided a rigorous basis for analysing markets that did not fit the standard competitive framework. 

The development of modern theories of information and uncertainty, also deriving from the work of von Neumann and Morgenstern suggested a range of ways in which market transactions might lead to suboptimal social outcomes. The classic instance was Akerlof’s discussion of the ‘lemons’ problem. This is the idea that the sharp decline in value of new cars, occurring as soon as they are driven out of the showroom reflects the fact that cars resold soon after purchases are likely to be those regarded by the initial buyers as ‘lemons’. In the absence of an easy way to detect such lemons, buyers of good cars will be unwilling to sell at the low price available for slightly used cars, producing a self-sustaining equilibrium in which the only near-new cars on the market are lemons.. Such ‘asymmetric information’ problems are particularly severe in the context of insurance markets where they go by the name ‘adverse selection’. 

All of these possibilities were grouped under the heading of ‘market failure’. The view that governments should act to correct market failures where they occurred was  used to justify a wide range of government action, and in particular the provision of goods and services by governments and government owned enterprises. Government provision of health services, for example, could be justified by the limitations of insurance markets, while public ownership of infrastructure utilities was justified as a response to problems of monopoly and oligopoly. 

Paradoxically,the crowning theoretical achievement of neoclassical economic theory, the demonstration by Arrow and Debreu of the existence and optimality of a competitive general equilibrium, also provided the theoretical basis for the theory of market failure. Arrow and Debreu showed that if competitive markets existed for every possible commodity, in every possible time and place and under every possible contingency, the resulting allocation of competitive resources could not be improved upon for everyone. But that’s a very big if. 

It is obvious that the complete set of time-dated, place-specific,contingent markets required for the Arrow-Debreu proof does not exist, and cannot possibly exist. But a large literature in the economics of finance explores the idea that if financial markets are sufficiently well-developed, the instruments traded in this markets can effectively encompass all relevant possibilities, the real world will be close enough to that of the Arrow-Debreu model that conclusions about the optimality of competitive equilibrium remain valid. This idea does not have a standard name, but we can call it the complete financial markets hypothesis.

The complete financial financial markets hypothesis makes sense only if these markets are efficient, in the sense of the strong form of the efficient markets hypothesis discussed in Chapter 2. Given the powerful evidence against the strong efficient markets hypothesis, this is obviously problematic. But there are even bigger problems. The complete financial market hypothesis requires much more than the existence of markets for bonds, corporate stocks and associated derivatives. It requires that households should be able to insure themselves, at reasonable cost, against such risk as unemployment, business failure, ill-health or a decline in the value of their home. With the exception of health insurance, which exists mainly as a result of public mandates, and publicly-provided‘unemployment insurance’ which is not really insurance, none of the required markets exist.[1]

The problems explored in the market failure literature can be interpreted as pointing to the absence of many of the markets needed to satisfy the complete financial markets hypothesis and thereby guarantee the optimality of competitive market equilibrium. Arrow, in particular, made this point, and showed that general equilibrium theory gave only the most qualified support to economic liberalism. 

For much of the 20th century, then, the general movement of economic policy in capitalist societies was towards an expanded role for the state, including an expansion of the scope and extent of public ownership of industry. In the light of movements towards a greater role for markets in communist countries, it was widely anticipated that capitalist and communist economic systems would converge in a ‘mixed economy’.

The term ‘mixed economy’ was popularised by British economist Andrew Shonfield to describe the economic system of the postwar era. This system was not a compromise between comprehensive state socialism and free market capitalism, as is often supposed. Rather, in seeking a market system actively managed by governments the mixed economy transcended this dichotomy. It was, and remains, unlike the vaporous offerings of Tony Blair and Bill Clinton in the 1990s, a genuine ‘Third Way’.

By 1970, the success of the welfare state and the mixed economy seemed undeniable. Hopes turned to the prospect of a further transformation, not fully defined, in which the remaining inequalities and injustices of capitalism would be greatly reduced, if not eliminated. The most promising proposals centred on notions of industrial democracy. In Sweden, the peak union body, the LO put forward a proposal, developed by economist Rudulf Meidner to require all companies above a certain size to issue new stock shares to workers, so that within 20 years the workers would control 52% of the companies they worked in.

In the event, of course, the real challenge to the mixed economy came from market liberals, who dominated the policy debate from the mid-1970s onwards. Milton Friedman’s success in macroeconomic debates attracted new attention to the market liberal position he presented in works such as Free to Choose where he (along with his wife and co-author Rose) argued that even core areas of state activity such as education could be left to private provision, funded through voucher schemes.

Meanwhile, the economic performance of public enterprises deteriorated sharply in the 1970s. In an inflationary environment, public enterprises found it hard to resist demands for increased wages, but equally hard to pass on the resulting costs in the form of higher prices. Weak economic growth and rising unemployment pushed government budgets into deficit. A common short-term response was to cut investment spending, including that of public enterprises. Although this response made little economic sense, it was enshrined in policy by rules limiting aggregate public borrowing, whether this was used to finance current expenditure or income generating investment. The most famous policy target of this kind was the Public Sector Borrowing Requirement in the UK

Over time, these problems were mostly overcome, and public enterprises returned to profitability. But, in the general atmosphere of disillusionment with government common in the 1970s, there was a receptive audience for claims that public enterprises were inherently inefficient, and represented a fiscal burden on governments.

The strength of public sector unions, at a time when unions in the private sector were being pushed onto the defensive by mass unemployment, also contributed to the push for privatisation. Governments keen to weaken the power of unions, but unwilling to confront their own employees, could resolve the problem by handing public enterprises over to private owners, keen to break unions and eliminate overstaffing and above-market pay and conditions (at the shopfloor level, if not for senior management).

Criticism of the mixed economy gained theoretical bite with the rise of public choice theory, which sought to model democratic political institutions as ‘markets for votes’. The typical conclusion, unsurprisingly given the theoretical starting point, was that real markets were to be preferred to political markets. A variety of arguments were used to show that most market failures were unimportant or self-correcting. At the same time, the public choice theory of politics was used to introduce the idea of ‘government failure’. It was argued that, because of the systematic distortion of the policy process by interest groups, the costs of government intervention were greater than the costs of the market imperfections that government policies were supposed to remedy.

The rise of ‘property rights’ theory in the late 1970s produced a theoretical critique of public ownership. It was argued that, since private corporations were responsible to their shareholders, their managers would always have stronger incentives to seek efficiency than would bureaucrats or managers of public enterprise. Although it contradicted decades of research showing that ordinary shareholders are virtually powerless, the property rights theory met the political needs of the time, and was widely embraced.

Theory turned to practice with the election of the Thatcher government in the United Kingdom in 1979. Starting with popular proposals such as the sale of council houses to the tenants who occupied them, Thatcher began a program under which publicly owned enterprises in telecommunications, electricity, water and transport were sold, usually through public floats. Thatcher’s example was soon emulated by governments of all political persuasions in the English speaking world. By the 1990s, privatisation was part of the standard policy agenda, referred to as the Washington consensus and promoted by the World Bank, IMF and US Treasury as essential to sound economic management in developing countries.

The large-scale privatisation of publicly-owned enterprises in the 1980s and 1990s played a big role in promoting the triumphalist claims of market liberals. Commentators and thinktanks rushed to conflate the (real but manageable) financial difficulties of long-established public infrastructure services in countries like the UK, New Zealand and Australia with the collapse of Communism in Eastern Europe and the stagnation of North Korea.

Public ownership of infrastructure was seen as a relic of the past, doomed to vanish as governments rushed to sell off assets. Having claimed victory in the infrastructure sector, market liberals turned their attention to the core of the welfare state with proposals for privatisation of health services, prisons and the school system. In the US, the most ambitious assault on the institutions of the New Deal era was the proposal, pushed hard by the Bush Administration, to privatise Social Security. 

Few would have predicted that, a decade or so later, governments would be debating, and in some cases undertaking, the nationalisation of such iconic capitalist enterprises as Citigroup, Bank of America and General Motors. Although  these rescue operations mostly involve only temporary public ownership, they make the rhetoric of the 1990s look absurd. And they raise the question of whether some or all of the privatisations of past decades should be reversed.

But despite these failures and reversals, systematic privatisation of public enterprises remains part of the standard package of policy reforms recommended by bodies like the IMF, and there has been little serious effort to reconsider the theoretical rationale for these policies, or to ask who gains and loses from their implementation.




During the era of the mixed economy, the boundaries between the public and private sector were regularly redjusted, and not always in the same direction. While the predominant trend was for the role of the state to expand through the nationalisation of existing private enterprises or the establishment of new public enterprises,  it was quite common enough for publicly owned enterprises to be returned to the private sector (the phrase commonly used at the time was ‘denationalisation’. Peter Drucker used ‘reprivatization. An earlier usage under the Nazis is noted The newly elected Thatcher government initially focused on monetarist macroeconomic policies. However, attention steadily shifted to the idea of privatisation. ). 

It was not until the 1979 election of the Thatcher government in the United Kingdom that the mixed economy came under serious challenge. Following the failure of Keynesian macroeconomic management in the 1970s, the generally disappointing performance of the UK economy since 1945 (or earlier) and the full-blown crises of the late 1970s, the stage was set for a reaction against social democracy in all its forms.

Whereas previous conservative governments had denationalised some of the acquisitions of their immediate Labour predecessors, the Thatcher government began selling off enterprises, such as British Telecom, which had been in the public sector since their establishment.  The idea of privatisation, conceived as the systematic removal of the state from the production and provision of goods and services, was born.

Thatcher’s radical measures were much admired, and imitated, in Australia and New Zealand, which still tended to follow the British lead with respect to economic policy.  Surprisingly, in both countries, the crucial steps were taken by governments associated with the labor movement [2]. In Australia, the Hawke and Keating governments, in office from 1983 to 1996 moved slowly and cautiously, but eventually privatised the national airline, Qantas, and the main publicly-owned bank, outraging many of their traditional supporters. 

In New Zealand, caution was thrown to the winds. Labour Finance Minister Roger Douglas rapidly gained a reputation as ‘more Thatcherite than Thatcher’. Among a series of radical free-market reforms, large-scale privatisation began with the sale (by public float) of the Bank of New Zealand, and continued apace thereafter with the sale of assets such as Air New Zealand. New Zealanders had tired of the reforms by 1990, and replaced Labour with the conservative National Party, which promised a more moderate approach. In office, however, the Bolger National government continued to push radical free-market measures notably including the sale of New Zealand Rail(1993) and corporatisation of the health system with a view to eventual privatisation. The Labour party split in Opposition, with the radical free-market group leaving to form the Association of Consumers and Taxpayers (later the ACT Party). The era of radical reform finally ended when Labour regained government under Helen Clark in 1999.

Thatcher’s radical reforms reversed the century-long trend towards greater state involvement in the capitalist economy. But it was the collapse of Soviet Communism that seemed to confirm that free-market reforms represented more than a swing of the political pendulum and constituted, in the words of the great triumphalist text of the age The End of History. It was inevitable, given the collapse of centrally planned economies, that large numbers of state-owned enterprises would be converted, one way or another, to private ownership. The ideology of privatisation encouraged the adoption of a radical ‘shock treatment’ approach based on wholesale privatisation.

In this context,it was inevitable that  privatisation should become part of the standard ‘Washington Consensus’, package of reforms advocated for less developed countries by the World Bank, International Monetary Fund (IMF and US Treasury.  And by the 1990s, the privatisation trend had spread to EU countries that were often dismissive of such ‘Anglo-Saxon’ notions.

[1] Robert Shiller has long argued that new financial instruments could reduce the riskiness of investments in home ownership, but his efforts to promote the development of such instruments have had only limited success

[2] For reasons lost to history, the Australian party uses the American spelling, Labor, while its NZ cousin uses Labour



BlackMage 01.02.10 at 7:35 am

It’s not entirely ‘lost to history’ why the Labor Party isn’t the Labour Party. ‘Spelling reform’ was a minor intellectual undercurrent of the early 20th century, championed by, among others, Teddy Roosevelt. In Australia, King O’Malley, American immigrant and shameless self-publicist, supported the movement, and pushed strongly within the party’s first federal decade for it to adopt a ‘modernised’ spelling. Perhaps because of the strong ‘utopian futurist’ wing within Australian socialism at the time (epitomised by William Lane’s New Australia colony, or some of Henry Lawson’s poetry like The Star of Australasia), the party relented.


Ben Hyde 01.02.10 at 10:56 am


I found this: “the idea that if financial markets are sufficiently well-developed, the instruments traded in this markets can effectively encompass all relevant possibilities” particularly provocative. I don’t think I’ve seen that clearly called out as a overarching theme before. So, a citation or two would be appreciated.

I’ve often observe how advocates of the leap of faith to a privatization alternative do spin up fancy imaginary commercial alternatives. It’s a necessary part, selling the hope of a happy landing. Some of those are financial, vouchers might be an example. But some of these aren’t, for example privatizing the high-profit bits and leaving the public sector with the dross.

The idea that this is an overarching scheme – well, it leads to a vicious embrace between financial innovations and a market failures. Good, me thinks, to call ’em on that. But then, when is a financial innovation the right approach? I’ve no trouble thinking of financial levers that I support pulling.

Secondly. There is a theme in the privatization story that runs straight back to Moore’s law and his friends. That technology upsets current operating forms and that swarms of capitalist rent seeking entrepreneurs are particularly adept at setting fire to those disruption all that makes possible. Fedex or credit cards being two examples. That dynamic has created narrative that is often used to validate both privatization generally and financial innovations in particular. That the current crisis offers a lesson on the risks of this dynamic, me thinks.


The Raven 01.02.10 at 12:43 pm

But it was the collapse of Soviet Communism that seemed to confirm that free-market reforms represented more than a swing of the political pendulum and constituted, in the words of the great triumphalist text of the age The End of History.

Why, exactly? Forgive me if you’ve covered this elsewhere. But the Soviet system was corrupt from the very beginning, and by 1990 it was obvious that the attempt to convert Russia to US-style capitalism was a dismal failure, and had handed control of the Russian economy to criminals. By 1997, Alan Greenspan had made his famous, “Not nature but culture” remark. Why was this obvious failure ignored?


Casey Jennings 01.02.10 at 2:47 pm

Good chapter
Jose Gomez-Ibanez (diacriticals missing) has a very good book “Regulating Infrastructure” which discusses the long view of how the cycle of private ownership, private investment, regulatory capture, bad performance, public takeover, public investment, public operation, new idea “privatization” has repeated itself a few times. Each cycle a bit different but I would very much recommend. I am also a bit surprised that you left out the role of the University of Chicago and their role in creating intellectual air cover for the idea that contracts could replace regulators in public monopolies… but nonetheless, great chapter well written. Thanks


Henri Vieuxtemps 01.02.10 at 2:54 pm

The private vs. government-run dichotomy is fine as far as it goes, but the Swedish employee-ownership experiment mentioned in the post doesn’t seem to belong. It’s neither here nor there, it’s a syndicalist approach. Is it (syndicalism) going to be discussed separately?


P O'Neill 01.02.10 at 3:32 pm

Ireland provides a nice Johnny-come-lately example of privatization, only getting around to a telecom sell-off in 1999, with a sequence of financial disasters following. This captures the recent state of play with Eircom (note that the company’s Wikipedia entry glosses around the problems). As things stand now, the company’s Australian managers (via a Babcock and Brown infrastructure fund) seem to have decided that they’ve reached the bone in terms of fees and asset stripping and can’t decide what do with it next. And the government is talking about Ireland being a “Smart Economy” with Eircom as the roadblock on broadband.


Jim Henley 01.02.10 at 3:32 pm

@The Raven: I think you had to be there. In retrospect, the logic of 1) A coalition of mixed economies outlast an empire of command economies in a decades-long politico-military struggle; 2) Therefore, mixed economies aren’t viable! is . . . hard to recapture. Some confusion about dosage levels. You can kill yourself drinking too much water, but you need some.


Joshua Holmes 01.02.10 at 6:39 pm

I think this breezes a little too quickly over the massive failure of state-owned enterprises to improve service and lower costs. You mention the crises of the late 1970s without mentioning that they had effectively discredited both Keynesianism and state-ownership. The mixed economy looked as discredited in 1979 as Financial Supergenius Capitalism looks today. (This libertarian wishes good riddance to both.)

Interestingly enough, I think privatization has gone badly because issues of justice were ignored. Privatization was sold entirely on utilitarian grounds – lower costs, better services. But privatization advocates never addressed the justice of who ought to own these businesses, if the state shouldn’t. The default answer of “the highest bidder” falls short of that, because the state isn’t just another capitalist. I think if justice had been addressed, the outcomes might have been much better. Rothbard suggested turning ownership over to the workers. That’s not without problems, but it seems a lot more just than “raise taxes, improve facilities, sell for pennies on the dollar”.


The Raven 01.02.10 at 7:01 pm

@Jim Henley: “I think you had to be there.”

Jim, I was there. At the time I remarked that we could now write about the failure of capitalism in the Soviet Union & that the Chicago School didn’t seem to know what made capitalism work. (I also predicted the end result of the Reagan revolution with fair accuracy.) Now, no reason that leading economists and world leaders would have listened to a dilettante software engineer. What astonishes me, though, is that they were so entranced with their theories that they couldn’t see what was plainly in front of them, and so lacking in ethics and human sympathies that they couldn’t react to the human suffering that Reaganism caused in the former Soviet Union.

BTW, John, it may not be your subject, but I think that the beliefs that ethics and empathy don’t matter in economics are meta-zombie ideas that enabled many of the other failures. (I’ve said this before, but I’m not sure if I’ve said it here–forgive me if I’m repeating.) I suppose that’s a book for someone else to write, though. Perhaps me, if I were crazy enough.


The Raven 01.02.10 at 7:02 pm

“I think this breezes a little too quickly over the massive failure of state-owned enterprises to improve service and lower costs.”

This may be because there are as many successes as failures in this area.


iolanthe 01.02.10 at 7:38 pm

I tend to agree with Joshua Holmes above that the article is much too relaxed about the performance of state owned utilities. Energy utilities in particular seem to have specialised in significant overmanning and overinvestment and it seems to have taken private ownership to strip out these costs with significant benefits to customers.

The criticism of Australian Labor’s privatisation also ignores that the types of assets owned by the Commonwealth were generally not natural monopolies – it makes as much sense for Government to own food stores as it does airlines or banks.

There may be more of a role for Government in essential service delivery in natural monopolies but actual ownership has a very chequered outcome. Far better it seems is private ownership and price and or service regulation.


rob 01.02.10 at 7:54 pm

Directing former state-run monopoly economic activity into crony-run monopolies (as in Russia post-1991) within a matter of months can’t be so easily compared to liberal economic activity in a system which (given, sometimes only ideally) protects contracts between parties, can it? The complexities of different cultures and their acculturated (and ideally, enforced) respect for legal procedures certainly plays a role here doesn’t it? I’m not an economist but curious about whether “rule of law” should be classified as part of the “mixed” or “liberal” economy?



engels 01.02.10 at 7:59 pm

Energy utilities in particular seem to have specialised in significant overmanning and overinvestment and it seems to have taken private ownership to strip out these costs with significant benefits to customers.

Significant overmanning? Heaven forbid!


purpleOnion 01.02.10 at 8:35 pm

Over the past decade many descriptions and definitions of economic and social systems have changed. The changes were not an improvement on the existing theories as much as they were intended to obfuscate and confuse. The U.S. is the only nation in the world that has developed a deceptive means of assessing volitility and profitability of many corporations. Warren Buffet said that one of the dangerous changes he saw take place were pro forma descriptions of company strengths. Instead of detailed analysis through standardized accounting practices so investors could assess risk they were given summaries that did interesting tricks such as keeping non-recurring purchases off the books. One time expenses ranged from modernization of facilities to purchases of other companies which could have dramatic effects on the strength of company, but they were not reflected in the analysis. The U.S. is the only country in the world that includes future sales predictions in the black. During the Bush administration the Iraq War was not accounted for and an increase in taxes is waiting for an administration that has the courage to raise taxes to pay for it. Big business had a temper tantrum when the Clinton administration produced a government surplus from taxes. Its assumption was that if there was a surplus it paid too much in taxes and has propagandized against tax increases ever since whether it is necessary to mitigate poverty, pay for modernization and repair of infrastructure, or to pay for undeclared wars. War without tax increases is a sales technique, (no sacrifice no complaints,) not proper money management. Keeping Americans safe should not be an economic suicide strategy. The financial collapse is also a big business temper tantrum. Without republicans in power to completely surrender to the take-over of our nation by corporate interests the wealthy decided to hamstring the Obama administration in an attempt to cripple a democratic reorganization of priorities. Financial institutions were and remain so spoiled with the freedom to steal, without consequence that they would rather the nation fall into a depression the curb their irresponsible behavior. The problem is systemic. The problem is an economic system that cannot survive without deceit. Deceit greases the wheels of big business. It is the freedom to deceive that it feels is the only right worth dying for, (us not them.) It is the right to deceive that supports Pharma, insurance companies, bankers, manufacturers, defense contractors and many others suffering from greed psychosis. Their self-justifying self-serving rationalizations are destructive and delusional. Because deceit is the name of the game financial institutions and their leaders have become delusional, (believe their own deceptions,) and until this is corrected there is no reason for anyone to invest in America’s future. America is no longer credit worthy. Its in debt so deep that even with its production capabilities and innovation reputation investors are finding it difficult to believe it can dig its way out of the mess its leading finance gurus created.


purpleOnion 01.02.10 at 8:48 pm

When finance wizards went to Russia to teach them capitalism; they deliberately taught Russians methods that would lead to economic failure. The failure did teach the Russians one basic concept of capitalism – “Do not trust anyone.”


Barry 01.02.10 at 8:58 pm

iolanthe: “Energy utilities in particular seem to have specialised in significant overmanning and overinvestment and it seems to have taken private ownership to strip out these costs with significant benefits to customers investors.”



purpleOnion 01.02.10 at 9:05 pm

Capitalism is not what is practiced in the United States and most of the world. The economic reality are economies that are controlled by the rich for the rich. If a financial sector is “too big to fail” forcing taxpayers to pay for their failures it is socialist economics. Our economy is based on “whatever works for those in power” and it will slide in and out of any economic theory as long as it is believed that it will work for them. The majority of the nation’s people can go screw themselves as far as those in power are concerned.


JoB 01.02.10 at 9:20 pm

Well done, John, I learned something. But I think you should, in quoting Mill, also get to recognizing the inherent problem of organizing natural monopolies. The issue is not only one of private/public, but also one of size and specifically the vertical integration of production and service. One of the issues in privatization, next to privatization, has been the creation of private and unregulated monopolies or duopolies with a levels of bureaucracy that were mostly bigger than before (intenational consolidation!).

One of the areas with comparitively good success in privatization was in telecom and I believe this is purely due to the fact that in many cases at least two competitors, and in some cases (notably mobile) we had more than that and – on a per country basis – what were, in effect, smaller companies.

At least the splitting of production and service should be on everybody’s agenda and it should be done by regulation. Mixed economies are sometimes too limited to mixing a set of approaches neither of which sometimes works for some kind of problem.


Tom Hurka 01.02.10 at 10:37 pm

I agree with #8 and #11 that the piece is unconvincing about the rise of privatization, treating it as if it came out of the blue, or just from some economists’ heads. There were economic crises in the 1970s, e.g. stagflation, and the piece says nothing about them or about other developments at the time that encouraged the change in economic-political thinking. Mightn’t there have been some? (One is the rise in the power of public-sector unions. One effect of privatization is to lower labour costs by getting enterprises away from them.)

Also, the piece gives far too much credit to Thatcher. Reagan was elected in 1980 and would have done what he did whoever was in government in Britain.

The piece reads as if it’s written mainly for those who already accept its conclusions. For someone in the middle, like me, its historical analysis is too glib for it to be convincing.


The Raven 01.03.10 at 12:08 am

“[…] they deliberately taught Russians methods that would lead to economic failure”

No, I don’t think so. They deployed these same methods in Western Europe and the USA. I seen no indication that the Chicago School didn’t believe its theories.


John Quiggin 01.03.10 at 1:50 am

@8,11,19 As noted above, I’ve added some more background. Some of the other points will be addressed later in the chapter, but feel free to raise any further points you think need to be addressed.

@Jim Henley #7 This is a really neat encapsulation of a point I’ve made, more clumsily, many times. Can I pinch it for a footnote (with attribution)?


Michael Harris 01.03.10 at 1:56 am


As well as privatisations purely for ideological reasons, there’s privatisation for revenue reasons masked as being for efficiency reasons, which you’ve remarked upon numerous times in other contexts. It’s worth remarking on this somewhere in here, I’d imagine.

Also: is the (forward-looking) message to come from this chapter that “governance” matters more than “ownership”? There’s work — from years back so my memory is hazy — by Stephen King and Rohan Pitchford on ownership/governance under different conditions that might provide some hints as to a more nuanced take on how to think about privatisation (more nuanced than “private good, public bad”).


Alex N 01.03.10 at 1:10 pm

“Meanwhile, the economic performance of public enterprises deteriorated sharply in the 1970s. In an inflationary environment, public enterprises found it hard to resist demands for increased wages, but equally hard to pass on the resulting costs in the form of higher prices.”

That is not to say that rising wages were solely responsible for the long-term, system wide downturn, not at least according to Robert Brenner. In his book The Economics of Global Turbulence, Brenner points to overproduction by manufacturers and the subsequent price reduction of commodities, in order to maintain their market share, as the main driver for the decline in profitability. I would like to know how many economists take this view.

So, even with the return of a mixed-economy, how do you deal with overproduction?


Robert 01.03.10 at 3:44 pm

“Arrow and Debreu showed that if competitive markets existed for every possible commodity, in every possible time and place and under every possible contingency, the resulting allocation of competitive resources could not be improved upon for everyone.”

Arrow and Debreu showed no such thing.

No equilibrium allocation would necessarily “result”. The Arrow-Debreu model with complete intertemporal and contingent markets has no restriction of dynamics. This is a consequence of the Sonnenschein-Mantel-Debreu theorem.

And even if an equilibrium allocation did result, it might very well be possible to improve it, in any non-brainwashed person’s estimation. A Pareto-inferior re-allocation might hurt the extremely wealthy and benefit the poor. No reason exists why we might not say this is an improvement.

I think John Quiggin might want to read John Cassidy’s book. I don’t know what he is trying to write that isn’t already covered in some such pop book. (Many like Justin Fox, but I haven’t read him.)


Barry 01.03.10 at 4:17 pm

Re #8, 11 and 19: the 1970’s (in the USA) did feature worse economic growth and productivity growth than the 60’s (which in turn did worse than the 50’s). What’s striking is that the 80’s were worse than the 70’s, the 90’s were worse than the 80’s, and the 00’s look to be horrific.

Paul Krugman posted a figure for all developed countries on his blog:

This shows that the pattern held (on the average) not just in the USA.
We don’t seem to be realizing increased growth from neoliberalism/neoclassicalism.


Joaquin Tamiroff 01.03.10 at 5:23 pm

An important question to ask is less about economics, and less about regulation and law, than about culture. Question to ask the people of any country:

“What if any general obligations above and beyond those mandated by law do you feel towards anyone outside of your immediate family?”
“How far for you do those obligations extend?”

Obligation is the dark matter of political economy

And in relation to the Soviet Union we have the model of China and Singapore, of Microsoft and Google. And the “coalition of mixed economies” had a leader more than willing to undermine decision-making in its junior partners and democracy itself in those countries who supplied its raw materials.


bianca steele 01.03.10 at 6:19 pm

I don’t think asking “Do you have ethics or not?” is enough.


Joaquin Tamiroff 01.03.10 at 6:57 pm

There’s an argument that says the obligations of a board of directors are to the shareholders and no one else. But the Scandinavian anomaly is cultural before its economic, and a level of socialism is rational to those who think it is, as much as unalloyed self-interest is to those with different assumptions about their own behavior.

The cold war obsession with “freedom” rendered any interest in culturalism and behaviorism untoward. Unfortunately it also gave license for people to claim that freedom was what they represented even as they declared others unworthy of enjoying it. Methodological and cultural individualism are related to one another more than many still want to admit. That’s for historians to examine; but since we’re still in an age when many are still trying to imagine themselves as an end to history such efforts are unpopular. Empiricism built on old rationalist assumptions is of limited use.


Joaquin Tamiroff 01.03.10 at 7:03 pm

Is it really the “s” word?


will u. 01.03.10 at 10:26 pm

The added material goes further to address the question of why the Keynesian-Fordist settlement sputtered in the 70s, which I feel many of those arguing for renewed social democracy have failed to address. However, I suspect a Marxist or Marxisant like Doug Henwood and Andrew Glyn would have a fuller and more compelling explanation, however: relating the decline in profitability to underlying secular developments, and the resolution of the crisis to political defeat for the working class. (Alternative history: Meidner plans everywhere?)

That is, the collapse of the Keynesian-Fordist mode of regulation was endogenous to it (as a self-reproducing dynamic, in a certain historic context) and did not simply come “out of the blue,” as Tom Hurka puts it.

Since “class struggle” and “longue durée” aren’t in the neoclassical vocabulary, mainstream social democrats will continue to evade the question of why they lost in the first place.


papabaz 01.03.10 at 10:33 pm

“But a large literature in the economics of finance explores the idea that if financial markets are sufficiently well-developed, the instruments traded in this markets can effectively encompass all relevant possibilities, the real world will be close enough to that of the Arrow-Debreu model that conclusions about the optimality of competitive equilibrium remain valid.”

But, isn’t “the idea that if financial markets are sufficiently well-developed, the instruments traded in this markets can effectively encompass all relevant possibilities” itself a tautology which, at best, is merely aspirational and, at worst, is a truly dangerous misconception of the relation between the world and how we think it is possible to order it, at which point it may well prove once again to be a contradiction?


Gareth Wilson 01.03.10 at 11:27 pm

You may want to update the New Zealand section. The Clark government nationalised the railways, bought a large share in Air New Zealand, and created a state-owned bank, Kiwibank. The National party won in 2008 but promised not to privatise any assets, and they have kept that promise so far. The health system was restructured but privatisation was never a serious prospect.


Germa 01.04.10 at 12:10 am


Ted 01.04.10 at 3:15 am

It is not clear what you mean when you distinguish a “mixed” economy. All economies are mixed, even in 2010, surely? I also don’t understand the romanticizing of the 1940s, 50s, and 60s, and the desire to return to the policy ideas of those days. The policy prescriptions of those times relied on many socio-political realities that do not exist today, nor would we want them to return.

1. The sending of women back into the kitchen after their industrial labor during WWII. Sure, if women were to be sent back to the kitchen today, unemployment figures would be drastically reduced, but the reduction would be artificial. In other words, it is not really appropriate to compare unemployment and labor force participation today with the ‘good old days’.

2. Similarly, there has been a spectacular rise in life expectancy over the past 30 years or so. Back on the ‘good old days’ men retired at 60, and died not long after.

3. For most of the period 1940-1973, young American men were forcibly conscripted into the armed forces. For much of that period, so were young Australian men. From the early 1970s on these young men added to the demographic expansion of labor supply.

4. There can be no return to the purely national economies of the ‘good old days’.

5. Part of the reason for great changes from the 1970s onward was the revolution in capital markets. Previously national capitals were not sufficiently organized to be able to take on huge projects. This changed with the Eurobond/dollar markets on the 1970s, the invention of securitization methods and risk-management techniques such as futures, forwards, options, and swaps.

6. As others have noticed, the analysis so far treats one human being – Margaret Thatcher – as though she was Superman’s sister, and just dropped out the sky in 1979, taking over economic decision made in the land. We cannot begin to understand the posited structural transformation without a detailed examination of what happened from the mid-late 1960s, and why these events culminated in the disasters of the mid 1970s. Dismissing this examination by dropping in an airy reference to the “oil shock” does not cut it.

7. As also noted above, arguably the number one reason for privatizations was that many western nations – especially Britain – were facing bankruptcy or going broke. Governments could no longer raise the funds to prop up ailing state-owned industries.

8. There is no mention of the other side of liberalization, such as Thatcher and Paul Keating’s financial Big Bangs, which basically destroyed the cosey cartels such as those that existed in the City of London.

9. History is a complex discipline, which cannot be reduced to supposing that books written by a handful of men were the primary active agents of change; change after all is precisely what ALL history is about.

10. Finally, I am puzzled by this constant reference to the “Keynesian consensus/long-boom” when just about every economics student in the 1950s and 1960s used the Neoclassical Bible – Samuelson – as their textbook, not Keynes’ General Theory


John Quiggin 01.04.10 at 3:33 am

@Alex N 23 I don’t find an overproductionist analysis very convincing
@Robert 24 (and I think Papabaz) Certainly, the book is not aimed at people who worry about the DMS theorem. Given the obvious non-existence of the markets posited by the A-D theorem, I find worries of this kind uninteresting
@Joaquin 28 and others, I agree and I’ve said a little bit in the chapter on ‘trickle down’, but mostly I’ll have to leave this to another book
@Gareth 32, that will be coming
@Germa 33, thanks for these useful refs
@Ted 34 (and others) the background to the rise of market liberalism in the 1970s has been discussed at length in earlier chapters – that’s a problem with posting a bit at a time. Most of the text is online at


Walt 01.04.10 at 7:47 am


Part of the reason for great changes from the 1970s onward was the revolution in capital markets. Previously national capitals were not sufficiently organized to be able to take on huge projects.

You seriously believe this?


Jim Henley 01.04.10 at 1:06 pm

@JQ in 21: By all means. I owe you a quote anyway, since I pinched your “war is a negative-sum game” (with attribution) for a book review a couple years ago.


Tim Worstall 01.04.10 at 1:12 pm

“In an inflationary environment, public enterprises found it hard to resist demands for increased wages, but equally hard to pass on the resulting costs in the form of higher prices.”

Might be worth pointing out that it wasn’t the inflationary environment that made these two things difficult (why would an inflationary environment make it *more* difficult to raise prices? That’s what an inflationary environment is, everyone’s raising their prices?). It was that they were publicly owned: that is, policy was set through the political process.

You should raise the wages because the public sector unions are powerful but you should not raise prices because that’s politically bad. Rate rises were set as public choice theory would expect them to be.

“A common short-term response was to cut investment spending, including that of public enterprises.”

Indeed. Which gives us one of those interesting moments. One argument (which D2 has used on me) for public ownership of something like water is that only the government will provide the socially optimal amount of investment. Private sector owners would only put in their own optimal levels of investment.

Yet after privatisation of the water companies investment by them rose strongly. Which means either that privately owned companies invest more than the previous social optimum by government: or that government, while it might/could make the socially optimal levels of investment turns out in fact not to have done so.

There’s one more point from the British water privatisations. The four nations got different systems after privatisation. England got regulated privately owned area monopolies. Wales got a mutually owned (I think it was by 200 of the Great and Good) regulated monopoly. Scotland got a State owned regulated monopoly. Northern Ireland got direct supply by the local councils.

OfWat (the regulator doing the regulating) did a comparison of the four different systems some years after privatisation. In terms of cleaner water, less environmental pollution, lower costs to consumers, it went: England, Wales, Scotland, NI.

A result that, if we wish to measure the efficiency of different forms of infrastructure ownership, might be worth taking note of.


Alex 01.04.10 at 1:58 pm

Which means either that privately owned companies invest more than the previous social optimum by government: or that government, while it might/could make the socially optimal levels of investment turns out in fact not to have done so.

This argument assumes good faith on the part of the privatisers.


ajay 01.04.10 at 2:35 pm

2. Similarly, there has been a spectacular rise in life expectancy over the past 30 years or so. Back on the ‘good old days’ men retired at 60, and died not long after.

This isn’t actually true. In 1960, a white American 60-year-old man could expect to live another 16 years. By 2004, this had only gone up t0 20.9. The increase is actually slightly less for non-white men, from 15.3 to 18.3 years.

Interestingly, even as far back as 1850, our white 60-year-old could already have expected to live another 15.6 years; a startling statistic that reinforces the fact that improvements in overall life expectancy are very often due to dramatic reductions in infant mortality, rather than in longer lives for the old.


ajay 01.04.10 at 2:37 pm

39: yes, a study that finds that recent British governments have under-invested in vital infrastructure is hardly mind-blowing.


dsquared 01.04.10 at 2:42 pm

#40: furthermore, the increase in life expectancy at age 60 has so far been more or less exactly in line with the projections made by actuaries shortly after the second world war.


Walt 01.04.10 at 3:10 pm

ajay: Do you know a source for those figures? I’ve heard the “higher life expectancy = lower infant mortality” claim before, but I’ve never heard specific figures before.


Barry 01.04.10 at 7:27 pm

Walt, that’s standard in history. Taking a 25% death-by-age-5 proportion down to (say) 5% yields massive gains in mean life expectancy at birth.


Walt 01.04.10 at 7:50 pm

So if it’s standard, is there a reference, with explanation of the actual historical research done?


John Quiggin 01.04.10 at 9:30 pm

Australia seems to be doing better on this score. Conditional life expectancy for males at age 65 was more or less stable at 11-12 years from 1900 to 1970, then rose to 16 years by 1996, and is predicted (based on extrapolation of mortality trends over the past 25 years) to be up to 28 years by 2050, which would certainly qualify as dramatic.

Also, I’m pretty sure that reductions in deaths from road crashes (predominantly young men) have been at least as important as declining infant mortality in Australia.


Tim Wilkinson 01.05.10 at 1:27 am

You all seem to be leaving out of account Islamic Terror. Judging by its prominence in public debate, that must by now be having a pretty devastating effect on adult life expectancy in the Anglo world.


Zamfir 01.05.10 at 10:03 am

Tim, of course it has, but if you believe Lancet studies you might come to believe that only thousands of people died at 9/11 and hundred of thousands in Iraq. Which is of course incredible given that that there are a probably 10 times more people living in New York alone than in Iraq.


Chris A. Williams 01.05.10 at 11:01 am

John, I don’t buy your road accident / infant mortality assertion without numbers. Perhaps if you take 1935 and 2000 as your base years. Perhaps.


John Quiggin 01.05.10 at 12:16 pm

Chris, here’s data on infant mortality showing an approximate halving of deaths from 2000 to 1000 between 1985 and 2005

Over the same period, road deaths fell from 2900 to 1600

Obviously, saving infant lives contributes more to life expectancy. But the number of lives saved on the roads was higher so I think my claim looks OK.


Chris A. Williams 01.05.10 at 12:29 pm

OK, fair enough, but I was thinking about the big shift in the first half of the twentieth century, when the infant mortality percentage went from ‘quite a few’ to ‘hardly any’. Now it’s still ‘hardly any’ it, like road accidents (also ‘hardly any’) is lost in the demographic noise. Public health has made demographic pyramids different to the naked eye: most other social changes haven’t, with the exception of _major_ war, fags (possibly), vodka (in Russia), and AIDS. Five hundred dead motorists here or there makes little difference in a country of millions, crappy though it is for them.


Chris A. Williams 01.05.10 at 4:47 pm

NB ‘fags’ above was in the British, not the American sense.


Metatone 01.05.10 at 7:12 pm

It’s worth noting that the majority of telecoms privatisations took place in a period which saw huge changes in the technology of telecoms. It’s further worth noting that while some countries (notably the US) saw some serious quick benefits for consumers (typically around long distance call costs) these were also present to a lesser degree in countries like Germany, with a state provider. However, countries with state providers undertook serious upgrading of their exchanges, typically investing more in the infrastructure that would underlie widespread broadband access, while countries like the US did not see widespread improvements in last mile infrastructure at the same pace…

As for Tim Worstall, perhaps this quote from a recent House of Commons investigation puts some of the country comparisons into perspective:

105. Welsh Water, as a not-for-profit organisation, has built up reserves (rather than having to make dividend payments to equity investors) which, it told us, has allowed it to borrow less than other water companies.[207] Other water companies, however, expressed concern about the cost of servicing a large and increasing debt in the future, and the reaction to that from investors and customers. Severn Trent Water told us:

… we estimate that industry debt could rise by some £90 billion by 2035. For Severn Trent Water, the amount of debt equates to around £1,000 of debt for each customer today, rising to £2,600 by 2035. This suggests that bills will have to continue to rise in future years to fund the repayment of this debt and it is also a concern that such a situation is not financially sustainable.[208]


Ted 01.05.10 at 11:10 pm

Thanks for the points about infant mortality. I hadn’t considered those. Does the data easily control for infant mortality? For example, can we find out changes from 1960 to 2010 in life expectancy for those who survive infancy? for example, when we consider the ancient world, life expectancy is usually recorded as being very low (30-something), and yet the records abound with old men and old women. Some of the explanation is the bimodal death rate – at/near birth and death – or even trimodal, if we consider adult male soldiers.

The issue I’m trying to explore is the effect on unemployment of the demographic bulge from both ends and in the middle: the baby-boom; increased life expectancy – living longer and healthier, therefore staying in the workforce longer; the stunning success of “women’s lib”.


engels 01.05.10 at 11:22 pm

You all seen to be leaving out of account Islamic terror


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