Privatisation is Justified… Only if it results in competition.

There is very limited choice in many of the privatised industries including rail.

Privatisation in the UK during Margret Thatcher’s premiership was intended to shift the economic burden away from taxpayers into private hands. It was intended to erode the natural state monopoly and establish market-based competition. Economic theory suggests that privatisation eradicates the state owned monopoly and creates competition in the market, which should lead to better services and a lower cost. Government led businesses are said to be inefficient at providing services that a private led firm can do, so the appeal is certainly there.

Nationalised industries tend to provide goods and services with high social value, goods such utilities, agriculture and transport tend to be provided by the state because these derived demanded goods are viewed as essential. Unlike firms, the state’s intention is not to maximise profits, so there are no shareholders to appease, nor answer to. This has its advantages and disadvantages because constantly operating at a loss will impose a burden on the taxpayer, who may feel their taxes would be best utilised elsewhere, where there taxes are not being wasted.

This was central when Thatcher and her government suggested that a wave of privatisations across various sectors such as transport, telecommunications and utilities were the best way to reduce the burden on taxation and the optimal way for consumers to be provided with essential goods and services. The state was viewed as a natural monopoly and the highest consumer satisfaction and utility is gained through competition, it is competition that yields the greatest efficiency and the lowest possible prices. Therefore, establishing competition through several competing firms was central to this proposal. Economists Todaro and Smith suggest,

“Proponents [of privatisation] suggest that it curbs government expenditure, raises cash to reduce internal and external debt and promotes individual initiative while rewarding entrepreneurship”  

Clearly the benefits of privatisation are clear, the eradication of the natural monopoly is perhaps the strongest because it opens the market and allow more firms to compete. However, in the UK this unfortunately has not been the case. The wave of sell offs during the 1980s continues to have a significant effect on life in the UK today. Services such as gas were privatised, so was telecommunications and parts of the rail industry. Some twenty years later after firms such as British Telecom (BT), British Gas and regulatory bodies such as Network Rail not only stifle competition, but they appear to have replaced the very monopoly it was created to replace.

John Moore was the Minister in charge of initiating the wave of privatisations. He said in 1983

“The long term success of the privatisation programme will stand or fall by the extent to which it maximises competition. If competition cannot be achieved, an historic opportunity will have been lost.”

He said at the 1983 Conservative Party conference:

“Our aim is that BT should become a private sector company…[but] merely to replace state monopolies by private ones would be to waste a historic opportunity. We shall continue our programme to expose state owned industries to competition.”

Moore explicitly states if privatisation cannot lead to a competitive market “an historic opportunity will be lost.” I could not agree more because had the privatisation initiatives been applied appropriately, with legislation implemented to prohibit cartels forming in the case of the rail industry or outright monopoly, like BT in the telecommunications market then these formerly stated owned industries would have created far more jobs on the sheer fact that the market would be significantly larger, they also would have lower prices. And they would have lower prices because there would be ten or more firms each competing to try and get customers, so lowering prices in order to attract custom. If however there are two or three firms, then they are more likely to collude, whether it is explicit or tacit, the outcome is the same and it is near impossible to detect.

Commentator John Gamble stating in 1994

“When BT, BG and the water industry were divested, the Conservatives failed to liberlise their markets meaningfully and as a result, were forced to create regulatory mechanisms and institutions to prevent the utilities from abusing their positions.” 

I mentioned in my piece about regulation and the above inflation gas price increases and how regulators in many instances interfere with business activity and can actually do little to prevent firms from these price changes. It should be noted that the way a customer will have low prices is through competition. That was the reason why Mrs. Thatcher sold off many state controlled firms, but we are seeing today that the state monopolies have been replaced by cartels and monopolies in some cases. Moreover, this is conflicting to what was proposed. One could even suggest that a return to state operated firms were better, because at least they are accountable to the public. Private cooperations are accountable to shareholders are not obliged to disclose information to stakeholders.

Privatisation in the UK does appear to have shifted from natural monopolies to private monopolies in the case of BT and oligopolies in the case of Network Rail, British Gas and so on. Clearly, this is the oligopolistic market structure is not competitive and fails to provide sufficient customer choice. Customers are therefore left to demand essential goods from limited suppliers, resulting in high prices. Unless privatisation leads to a highly competitive market, with several competing firms, it is merely replacing the very entity is supposed to be replacing.

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6 thoughts on “Privatisation is Justified… Only if it results in competition.

  1. There can’t be a completely free-market economy in reality, as has been proved by unrestrained privatization. Something needs to be done to right the economic and social imbalances created and entrenched by Thatcherite privatization policies and their long term effects. Consider also the effects of the Major administration that succeeded Thatcher and the heightened economic insecurity and homelessness of so many that resulted in the continuation existing privatization policies that John Major did nothing effective to reverse.

    • I’m not advocating for a completely free market, just legislation that ensures no cartels are allowed to be formed in any industry, so that they remain competitive and consumers get the lowest price possible. Great comment by the way.

      • Thanks. I’m more in favor of a socialist type economy or mixed economy where people are the central consideration, not large corporations that exploit workers and ‘milk’ consumers. We’re more or less in agreement on that point.
        cheers!

      • I wouldn’t advocate for a socialist set up, a command economy raises the same inefficiencies as private monopolies, so we’d have the same problem.

  2. Hi! Thanks for your kind comments on my blog. I have read your article as you requested and although I agree with some points I am afraid I do not share many of your assumptions. Below is a rather general response, not particularly aimed at your post, but at some of the assumptions I think are too narrowly drawn

    The problem with much contemporary economics discussions are that they take capitalist assumptions for granted. Thus efficiency, cost and competition become posited as supra-historic categories, rather than just categories specific to the capitalist mode of production. Thus discussions about privatisation versus state provision orbit around these twin suns of capitalism so to speak. I will return to this point later. Capitalism has long ceased to function in a competitive way. The logic of profit-based production is to monopolise the market and realise the maximum surplus-value possible and convert this to profit. There is no real-world competition, except in theoretic treatise.

    It is also long past the stage when ownership was really ‘private’. Production is generally so complex and requires so much capital, that even under capitalism what is termed private ownership is in fact a restricted form of collective ownership via partners, share-holders and creditors. It is restricted to those who have sufficient disposable capital. The question then resolves itself into are restricted collective forms better than unrestricted (public) collective forms. This in turn resolves itself into who is it best for. Of all the instances you give the product is not better or cheaper than under public ownership and the working conditions and pay are arguably worse, so the only gainers are the share-holders.

    It is at this point for me it is important to zoom out and see the bigger picture. The state and private enterprise are not two dually opposed opposites as appears in such discussions. The state under capitalism uses public services, when they are necessary and when no privatisation group can make money out of them. For example the public services after the second world war, and still the army, navy, airforce, police, fire, civil service and of course those banks which were rescued.

    If ‘privatisation was so efficient, why do the pro-capitalists not suggest ‘restricted collective ownership’ for these ‘services’? Why did they nationalise the banks after 2008? They perhaps know the problems would be; Who could be trusted to manage the system? and; Who would buy the product?

    If we zoom out further and ask what is the purpose of social formations and economic activity. Is it really to make profits for a minority, is to use up and despoil the planet and its ecology. Is it to only employ those from whom one can extract surplus-value?

    If over the history of the human species there have been successive stages of economic and social development; hunter-gatherer; ancient agrarian slavery; middle-ages agrarian feudalism; and then industrial capitalism; why then should humanity come to a dead stop at capitalism? Particularly when the contradictions in capitalism have become irreconcilable with a fair and just humanity and ecological sustainability. If humanity is to progress further some form of post-capitalist society becomes necessary. Of course, not the totalitarian failures that we have witnessed so far, but first attempts often fail. Initial failure has never stopped past human beings before from continuing to try to improve things, nor should we. See for example; ‘Defending public services’ at http://www.critical-mass.net.

    Regards, Roy

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