The Case For Privatisation

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Tom Rogers
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The Case For Privatisation

Post by Tom Rogers » Fri Jun 15, 2018 2:35 am

I sense that I am becoming a convert to privatisation, but on a contingent basis. 'Contingent' because, first, I have a particular understanding of what it is, which most others may not share; and, second, because my commitment to it is political-philosophical rather than political-economic or ideological. Briefly, I see the long-term political and socio-cultural benefits of stripping back state and public bureaucracies, which have become hives of the organised Left; but in that regard, I also see the benefit of eliminating large private sector bureaucracies too. As I will explain, privatisation in the true sense must involve the dissolution of public goods, not just the formalisation of private ownership. Thirdly, I am sceptical about the viability of wholesale 'public' privatisation; nevertheless, a commitment to the dissolution of state-run services opens up the possibility of other types of public provision by co-operators and social entrepreneurs, which again I regard as positive, albeit that such modes of delivery do not come under the taxomonic 'privatisation' umbrella.

Largely due to Thatcher (who actually got her ideas from Heath, not from Hayek as is commonly-believed), then Major, then Blair, the very notion of privatisation is benighted in Britain and associated with the Right, or (in the case of the Blairites) with neo-liberalism. I despise the legacies of those politicians, but I do not disparage privatisation in concept, and I regard its generally negative reputation as unfair. For one thing, I think we can reject the neo-thatcherite model of privatisation: in fact, I would question whether Britain's many privatisations amount to 'privatisation' in any real sense at all. Here I will outline some thoughts that explain how I define the concept and I will also give a very brief outline for what I would consider to be an acceptable privatisation programme.

I have a somewhat heterodox understanding of privatisation. I do not regard what is conventionally understood as the process of 'privatisation' to be real privatisation. The word 'privatisation' itself comes, I believe, from Nazi terminology: reprivatisierung. It may surprise some of you to know that Hitler and the German National Socialists were enthusiastic privatisers and were pioneers in this regard: they were responsible for the first comprehensive privatisation of the state assets of any modern country. But we need not go into that.

Now that I given a nod to Godwin's Law, I will develop my own idiosyncratic definition of privatisation. Normally people look at the concept in terms of economics (public goods, etc.), and I agree that's a necessary basis of analysis and no doubt if there are comments in this thread, some will go into that; but my definition of privatisation is strictly in terms of politics and power. Before I go into that definition, I will break down the conventional understanding of the concept and explain what I think is wrong with it.

The conventional definition of privatisation goes something like this: it is the transfer of assets from the state into private ownership. That seems obvious, but I would dispute the definition. My dispute is not on the basis that the definition is wrong in any literal sense, but rather with the conceptual exactness. The problem is that often private ownership is simply a means for state ownership to continue in all-but-name. The reason nobody notices this is because there is a misunderstanding about what 'ownership' means. People look too much to the form and not enough at the substance. It was said that the USSR was a 'communist' system because most of everything was state owned. Putting aside the oxymoronic error of associating communism with the state, what's also overlooked is that state ownership is itself a form of private ownership: the state being a legal personality in its own right, with interests to protect: specifically a ruling class and nomenklatura in the case of the USSR. The USSR was capitalist in which there was a wages system, owners and employees, and in which the state itself sought to make a return or profit on economic activity and depended on this for survival.

I mention the Soviet experience because the conceptual regression helps us understand the British experience and why I believe the neo-thatcherite programme of 'privatisation' has been a hollow sham, amounting to nothing more than a rationalisation of state ownership under the pretence of private non-state ownership. Most privatisations of major public services were achieved through asset transfers to highly-regulated public limited companies that act as surrogates for the state and disperse share ownership to individual and institutional shareholders. These shareholders mostly have little or no say in the running of the relevant companies, which are in reality controlled by the state and institutional finance, or sometimes foreign governments, through debt and regulation. The services continue to be provided in artificial market environments, often natural monopolies or near-monopolies, rather than in true free markets. Train services are a good example of this. Due to the nature of passenger rail services, the new train operating companies mostly did not and could not compete in the provision of the same services. Their profits are also subsidised: both by direct subsidy and indirectly via the state's ownership and subsidy of Network Rail, a publicly-owned company that owns and manages the railway infrastructure. It can be clearly inferred that the state has not disengaged. This is not a true privatisation. Water privatisation is often held up as a successful privatisation, but organised mass-scale water provision is a monopoly, and the water companies have abused their monopoly position, implementing abusive, rent-seeking pricing policies that maximise returns for their shareholders and in effect regressively tax the public. Their actions resemble those of a body with moral privilege, and related to this is the simple fact that the state itself - for ostensible public health reasons - refuses to dissolve the public good, instead insisting on a statutory guarantee of water provision to consumers, even those that do not pay.

For a model of what a true privatisation model could look like, I would point to commercial privatisations in which assets are transferred from publicly-listed companies to private owners. In a commercial privatisation, the new private company and its business are entirely the responsibility of the directors and the shareholders who own it. The former public shareholders do not continue to subsidise or support the new private owners, except perhaps as customers in a free market. The new private limited company, and the products or services it provides, stand or fall on its own efforts. As such, it must compete in a free market for customers, investors, venture partners and labour, just like all other private enterprises.

Applying that model, a 'privatisation' in the sense we are concerned with here would involve the following:

(i). the transfer of assets from the state to the ownership or control of private individuals; and,
(ii). the dissolution of a public good.

These are co-requisites. If a public good is not dissolved, then a product or service cannot be considered privatised. There must be free choice on the demand side in the provision of the product or service. I believe it follows from this that state ownership and public ownership cannot ever be construed as opposites: in other words, the state cannot 'privatise' services by transferring assets to the public or the community, as then the service is not 'private' as there is no individual free choice or discretion in demand for the service. The state could of course proceed with a transfer of assets in this form anyway, but the resultant service would remain public, and would probably have to be funded through taxation. Any form of public ownership, be it through a state or non-state public body, or through a community on some organised basis, is necessarily for the provision of a public good. This leaves us with the question of how public goods can be dissolved, and in relation to some public goods, whether this is even possible. In some cases, it can be achieved relatively easily. In other cases, I believe that what I have termed the 'passive free-rider' (see the thread on private policing) is difficult or maybe impossible to circumvent. In the case of private policing of a community or neighbourhood, some people would have no choice but to benefit from the policing service even if they are not customers of the service provider. This in effect turns the service into a public good, or quasi-private only, despite it being nominally private, and may result in its fees and charges evolving into a retroactive tax. Furthermore, it is difficult to envisage circumstances in which even the most minimal state could or would fully disengage from the provision of services pertinent to law and order: at the least, a complete dissolution of the corresponding public good would present a challenge. Fire and rescue services, a different example, I think can be provided entirely privately. Fire stations, facilities, vehicles and equipment can be sold to private companies that then charge local residents and businesses a fee for their services, either directly or via household and commercial insurance providers. Local fire and rescue authorities (and thus, implicitly the state) therefore withdraw entirely from provision and from any commitment to provide such services in the future in the event of service failure - a crucial condition for the dissolution of the corresponding public good. The private provider then only attends fires at properties that are owned by its customers, and perhaps adjoining buildings, and that are covered by the relevant terms of service. The rescue part of the service could be provided by roadside assistance businesses, in much the same way. Maybe new competing fire and rescue service providers would spring up, some perhaps owned and operated by local volunteers, similar to retained services, in which case that would presumably be the provision of a public good, intended to benefit all within a given geographic area.

The implication of all this, if accepted, seems to be that some public services which are incorrigibly public goods - or otherwise in the case of non-public goods like electricity, have natural or structural monopolies - cannot be truly privatised, at least not without profound changes to the way most people live, including a fairly radical devolution from modern society. As mentioned above, in Britain, water privatisation involves a statutory commitment from the water companies that they will supply water to all within their respective business areas, and in particular that supply must continue regardless of whether a particular customer pays or not - this being an explicit institutionalisation of the passive free-rider, done for public health reasons, as well as on account of the obvious political expediency that poor people going without water is not a good news headline. Water privatisation, then, was impeded from the start by our industrial dependency on a systemised water supply, which gives a publicly-listed company a state-like monopoly on the proviso that it should continue to provide water in the same way that a paternal state would: for all effect, it is not privatisation at all, it may be more accurately characterised as something akin to the corporatisation of state assets for commercial exploitation, with perhaps the subsidiary aim being the more rational provision of services under the disciplines of equity - and perhaps it should be considered just that. A true privatisation could only occur in circumstances where it was more typical for households, buildings and businesses to provide their own water; presumably this would mainly be through ad hoc rainwater systems and other parochial means, and there may also be peripatetic commercial supply of water. If these alternatives were widespread and considered practicable, then there would presumably be a political and social consensus for the privatisation proper of the water infrastructure and supply, and the withdrawal of the statutory guarantee of supply to non-payers, and thus the complete disengagement of the state, since there would be a free market and the passive free-rider would not be an issue. Other 'public' privatisations could proceed on a similar premise. If people can generate their own electricity idiosyncratically (solar panels, etc.), we have the basis of a truer free market and the state could disengage completely and allow competition. If, on the other hand, the structured mass supply of electricity is considered the only practicable alternative, then we have an effective monopoly situation because, even with an artificial market of multiple electricity service providers, and even with many different sources of energy, it is not considered practicable to have more than one mass-supplied source of electricity into a house. That said, electricity does not suffer from the passive free rider: only invitees and licencees benefit from electricity on the property of others, and non-paying customers can be cut-off (albeit this happens only rarely).
Last edited by Tom Rogers on Fri Jun 15, 2018 5:33 am, edited 4 times in total.

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Re: The Case For Privatisation

Post by Merlin » Fri Jun 15, 2018 3:30 am

I agree with the general idea, that the very nature of certain services make them poor candidates for privatisation.

I would add though that many of these same services can be to a good extent unbundled, separating the “problematic” part of the service (the one that causes the externalities) from the “private” part but this requires a lot of creative thinking. Absent this, it is rather easy to make a mess of a privatisation drive.

An example would be the privatisation of a rail line. The “problematic” part is the fact that the rail service itself does not make enough money to cover its costs, but creates value through increasing the value of properties in the two cities it links. Privatising the line (or, even worse, separating the line itself and the train operator into two different companies) would induce the acquirer to neglect maintenance and just milk the system for what its worth until its too derelict to use. A better solution is to sell of the line, rail stock and stations at either end, allowing the acquirer to cash in some of the value of the line. A relatively minor change (sell the station and development rights to nearby lands vs. just sell the line) would make the difference.

Selling the water corporation? Do so with a guarantee to a given quantity of water to each household paid form the treasury. Above that quantity the meter starts to run. Now the purchaser is free to charge market rates without the fear of protests (this still leaves the issue of the monopoly price of water given a single supplier).

But yeah, just selling the thing is rarely a good idea, for it ends up entangling the state even more than before as well as tarnishing the name of the market. Case in point: the UK.

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Re: The Case For Privatisation

Post by Physiocrat » Fri Jun 15, 2018 1:58 pm

I'm with your thrust Tom. Any privatisations need to mean zero government interference whatsoever to be meaningful. The "privatisation" on the railways was a complete and utter joke. It is obvious that under natural market conditions trains would be a vertically integrated service not split between stations, track and rolling stock. I also though happen to think that left to market trains on the whole simply wouldn't exist. They are just far too expensive to run. Metro systems with huge numbers like the London Underground may make financial sense but Penzance to Edinburgh I think not.

Given my Rothbardian approach to monopoly I don't think a single water supplier would be a problem. If it was then as you say, water reclamation etc is perfectly viable especially in the UK.

Something else to remember with privatisation, if the government is your major customer, you are not in the private sector.
The atoms tell the atoms so, for I never was or will but atoms forevermore be.

Yours sincerely,


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