Tuesday, 22 September 2015

These Paroxysms Of Lust Over The Public Sector Are Truly Baffling


It constantly amazes me that there are still so many people in the UK who live under the long-refuted misapprehension that public services are better than the more competitive, efficiency-inducing private sector. Currently making the headlines at the minute is the news that if he got the chance Jeremy Corbyn will commit to bringing all rail franchises back into public ownership. I saw two articles out yesterday that give well-argued reasons why railway nationalisation is a bad idea – one from the Adam Smith Institute’s Eamonn Butler (see here), and one from the IEA’s Philip Booth (see here). I’ve also written a couple myself a while back, which you can see if you access my ‘Transport’ link on the side.

Despite many compelling arguments, one area that neither Mr Butler nor Mr Booth considered is the area of opportunity cost, which is what we consider when we factor in what isn’t done as well as what is. I'll explain. There's a well known comment by economist Milton Friedman who wanted to rebut the idea that if soldiers enlisted in the army for money rather than duty they would be mercenaries, because to join the forces for money casts an aspersion over their commitment and patriotism. Friedman refuted the idea that a paid volunteer in the army would be worse than a conscripted member by pointing out that compulsory conscription isn't impassioned patriotism either, as forced servitude also does not contain the volitional incentives for serving one's country with impassioned patriotism. Friedman said the following:

“In the course of his [General Westmoreland’s] testimony, he made the statement that he did not want to command an army of mercenaries. I [Milton Friedman] stopped him and said, ‘General, would you rather command an army of slaves?’ He drew himself up and said, ‘I don’t like to hear our patriotic draftees referred to as slaves.’ I replied, ‘I don’t like to hear our patriotic volunteers referred to as mercenaries.’ But I went on to say, ‘If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general; we are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher.’ That was the last that we heard from the general about mercenaries.”

This kind of wisdom is the kind needed to show why proponents of government-run services overestimate the benefits and underestimate the costs. To show where they've gone wrong we need to see why the question of whether voluntarily paid soldiers or conscripted soldiers cost the nation more. Friedman showed that conscripted soldiers cost more by showing that costs are not the same as expenditure.

The expenditure of an army soldier is what he is paid in salary, whereas the cost of an army soldier is how much his being in the army robs society of the skills and abilities he could otherwise put in. Those who've chosen the armed forces are those who are getting paid for their chosen vocation; those who are conscripted are those who are now not free to do what they'd otherwise be doing.

When Elvis Presley was conscripted in the army, the cost of that conscription was whatever he didn't record or film whilst in there. If he'd been denied the reported $200,000 he was paid for shooting the film GI Blues then his conscription cost would have been $200,000, and the expenditure would have been whatever his military salary was (Muhammad Ali on the other hand refused to be conscripted on grounds of religious beliefs, which cost him personally his boxing title).

Alas, the politicians like Corbyn who are calling for re-nationalisation of the railways would do well to become mindful of the difference between costs and expenditure regarding government-run services. Not only do we see greater inefficiency and waste in government-run services due to the credit-guarantee that comes in the form of taxpayers, we see that government expenditure can't be considered without also considering cost too. The expenditure for nationalised railways is evident - although the extra costs, like pension contributions, sick pay, holiday pay, human resources costs, and so forth are usually overlooked, as are labour costs by being treated as beneficial jobs rather than expenditure (which is what they actually are). It's the costs that really bring about the inefficiency.

The cost of having 'conscripted' private sector employees in the railway is the cost of what they would be doing if they weren't being paid by the taxpayers. It's true some might be working in the rail industry, but they would be being paid by private company expenditure not taxpayers expenditure. So to put the analogy to effect in a more general sense, the cost of being nationalised is the cost borne by what those workers would otherwise be doing were they not funded by the taxpayer.

The other reality check pro-nationalisers need is over the issue of why the railways system is as it is. Train tickets are not priced as they are because there are private operators - they are priced as they are because the subsidies that used to keep the prices lower have been reduced. Whether the subsidy is increased or not, it is not an argument for re-nationalisation, which means running at a loss for the taxpayer, and more inefficiency too.

It's true that rail fares have crept up, and it's true that trains are delayed, they break down, tracks get damaged, and carriages get overcrowded, but to think that these problems are caused by not having the government in charge of the railways is really quite ludicrous. Consider prices – everyone’s favourite complaint. The complaint the rail fares are hugely overpriced, and that a government-run service would bring this back in check is overinflated, because the current profit margin for train operating companies is only between 3% and 5%. Ignore the fact that if the government makes no margin it becomes a very precariously run (and costly) enterprise – at 5% profit margins, a reduction of up to 4% on your train ticket is hardly going to amount to the kind of huge saving many imagine.

As for the issue of over-crowding (another favourite from people who think the trains run inefficiently), they may have missed the fact that the railway network is, actually, nationalised, it is only the train services operations that are tendered out privately. Given the limit on how many trains can viably enter a station at any one time, it is foolish to blame the private franchises for over-crowding. If anything, the sensible pricing that offers cheaper off-peak fares for people who are less price-sensitive or able to travel more leisurely under fewer time constrictions is exactly the kind of competition customers ought to value.

Consider that the government runs a comprehensive school monopoly and there is a shortage of teachers, but that shortage hasn't hiked up teachers' pay. Doctors, surgeons, lawyers and accountants all work in a prolonged qualification-based arena in which it is hard for competing forces to challenge, and that is not due to privatisation, it is due to scarcity. Also, scarcity power (which is what makes prices high) is not absent in government monopolies any more than private monopolies.

The paradox of competitive private industry is that it often starts as a nationalised company (as all the providers in the UK did - electricity, gas, telephones, water, etc), because otherwise there are few providers able to build the initial infrastructure to get their business off the ground. Generally, without governments' anti-monopoly policies one firm would rule because it costs so much to start a business that competition ends up costing too much to compete. For example, suppose no one was providing any large-scale water supplies around the UK. Thinking of economies of scale - to produce tap water, an aspiring water company had to invest in a huge network of water pipes stretching throughout the country. The fixed cost of this investment is very high. However, once in place any company that can distribute water to tens of millions of households brings the average cost down. Yet it often would not be worth another water company building another network of water pipes to compete with the existing company, because if they only got a small share of the market, the average cost would be very high and they would go out of business This is an example of a natural monopoly – but these largely occur when the goods or services provided are not fungible (see below).

That's why it's not always bad when the government first owns the means of production and then gets to the stage where it can sell off the rights of provision to competing companies, whilst stipulating a rule that they must compete for shares in the existing infrastructure.

What conditions this process is whether or not the good or service is a fungible one – by which we mean whether or not that good or service is easily replaceable in competition. The trouble with rail is that it is not a fungible good in the same way that food, clothes or cars are. If you need to take the train to London to Norwich you can't suddenly decide to purchase a vacuum cleaner instead and still get to Norwich, whereas if you're hungry and on arrival you find that sausage rolls at the station are too expensive you can buy some fruit from the nearby supermarket. Similarly, if the price of BMWs or leather jackets become undesirable, there are plenty of other alternatives you can seek, like Fords, Vauxhalls, wool or denim.

With trains things are not quite the same. The only competition for your train fare is other transport alternatives – driving, getting the bus, or occasionally cycling. But the competition in the railway services is not fungible: if you’re at Norwich station looking to get the 7:20am to London, you will not have a choice of trains like you will a choice of snacks and drinks in the nearby shops. A private monopoly or cartel that provides a service (like trains to 25 million people) is very hard to break, as competition for such a service is hard to generate. It's very costly to start up a rival firm to provide 25 million rail customers, and any small firm can be swallowed by being bought out by offering shareholders bigger shares in the larger company, as SKY TV did. Moreover, the fact that profit margins are under 5% shows that rail travellers are not getting ripped off - it is just simply the case that railway services are very expensive to run, they require lots of investment, and are large scale operations - and as such, they need to be run with the kind of efficiency that only the private sector is going to deliver.

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