A Popular Idea, But A Bad One

We all know really why Jeremy Corbyn is a Brexiter in a Remainer's clothing - it's because he wants our nation to undergo a prodigious re-nationalisation program, and he sees the Brussels Eurocrats as being an impediment to this (one of the few good things about the EU is they prohibit European nations from nationalising, subsidising and bailing out their own interests, as it is, rightly, seen as being inimical to competition from outside industries).

Apparently some of Corbyn's nationalisation plans (like the nationalisation of the railways) are proving hugely popular. Now, while I've written before about the imprudence of nationalised industry in the specific sense (see here and here), and while I have numerous blogs on the benefits of the private sector over the public sector (if you were ever inclined, all of them can be seen by clicking on this Private Sector vs. Public sector tab), I probably haven't written a blog post that swiftly points out why generally speaking nationalised firms are worse for us than non-nationalised ones.

A good place to start here is to remind you of Milton Friedman's famous dictum regarding the four ways to spend money:

“There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.”

Now, given that politicians have certain popularity-gathering incentives to spend taxpayers' money well, you'd think they might have constant mindfulness of appearing to the public to be prudent spenders. In a small sense this is true, yes - but what you have to remember is that due to asymmetry of information, short memories and copious amounts of spin, the relationship between a government's achievements/mistakes and the public's perception of them is pretty opaque and obfuscated - which is precisely what politicians and civil servants love.

If you’re spending someone else's’ money on someone else, as the government does with its various 'investment' schemes (which are rarely investments actually, they mostly mean 'costs') then the motives are likely to be less prudent than if you’re spending someone else's’ money on yourself. But both pale in comparison to if you spend your own money on yourself, which is what private businesses do, and because of which they have a better nose for efficiency, targets and outcomes.

The private sector is astronomically more competitive, because it has to forecast future demand and attract funds competitively. That's why public sector projects are far more notorious for cost overruns, being overstaffed, and for costly time delays.

That is why, apart from government spending that helps the needy and most vulnerable in society, low levels of state spending make society better off. Private investors are generally more prudent because it is their own money at risk, whereas the public sector corresponds to the fourth quarter of Friedman’s quadrant: they spend other people’s money on others far more recklessly.

And while we're at it, the national beef with big business is a strange one too. Quite often goods and services are produced more efficiently when they are produced large-scale. A firm might be able to make 50,000 burger meals in less than twice the time it takes a smaller firm to make 25,000. Trading small-scale often reduces the extent to which comparative advantage takes effect. Bob's metal firm can spend 3 days making 10,000 hooks, and Jim's carpentry firm can spend 3 days making 2,000 varnished boards, whereas one firm making both may take 8 days to produce that quantity.

A firm is said to be a more effective trader if it can produce a good or service at the same quality but at a lower cost than its competitors. And the benefits to society occur when as many firms as possible specialise in their field of comparative advantage and use it to trade. Therefore, it's usually the case that the country's biggest firms are the ones providing the most value for consumers, as well as being the biggest job creators.

To end, here's a thought experiment. Imagine if you pulled 30 people off the street in a random fashion, took them to an airfield, showed them all the parts of a Boeing 747 and asked them to work out how to build the plane from scratch. These non-experts would be clueless regarding how to assemble those proprietary parts - and the take home lesson would be: don't leave big and important jobs in the hands of amateurs, which is exactly how we should feel about our politicians and our economy.

 

The Guardian Goes Off The Rails Again

The Guardian really does have some disingenuous half-wits writing for it. Here we have Patrick Collinson ranting about rail price hikes and complaining that:

“In reality, fare increases aren't really paying for infrastructure but are instead covering the gradual withdrawal of government subsidies, which have fallen by 9% in real terms since 2010-11.”

Well whoopedoo, what about that – the taxpayers are paying less in subsidies, with the fares actually being paid for by…..wait for it……the people who actually use the trains. Surely not!! Contrary to Patrick Collinson’s wishes, most of us humans have evolved to understand that privatisation is not the bogey that the old socialists used to make it out to be, but the most efficient, right and proper state of affairs for the majority of industry. Why should the council maintenance man pay to subsidise the broker’s commuting? When you multiply those types of example nationwide you see how preposterous it is. Next we have this absurd swipe at profits:

“Passengers are also paying for the vast profits made by the rolling stock companies formed at privatisation. Just one, Angel Trains, made £372m in 2013 by its measure of underlying profitability.”

That’s the kind of squalid statement that sets out to paint a railway company as being greedy, unsympathetic fiends – when, in fact, a bit of digging shows the crassness attached to the claim. Sure, £372m is a big profit, but what does that actually amount to per customer? I can’t find any precise figures for Angel Trains rail users per year, but I did find out one or two things which will help. Angel Trains has 4,500 vehicles, which even at an outrageously meagre estimate of 10,000 passengers per vehicle per year works out at 45 million passengers. Divide the £372m profit by 45 million passengers and it works out at just over £8 per year “underlying profit” made on each person. Half the amount of passengers and it’s still only a profit of £16 per year per person – hardly the sort of profit that can be said to be ‘vast’ and worthy of public opprobrium.

But on top of that, I noticed that Angel Trains have invested over £3.4 billion in new rolling stock and refurbishment programmes since 1994, as well as donating over £135,000 to numerous charities since 2008.

I know being on the economic left entails the default position that success in business should be sneered at with socialist agitprop, but they really ought to be a little bit more responsible when it comes to the companies they are smearing with their conspiracy theorist anti-privatisation propaganda.


EDIT TO ADD: As is usually the case, the measure of success is in the evidence. Here's evidence that the number of rail passengers has doubled in the times of privatisation, following years of decline under the State: http://en.wikipedia.org/wiki/Rail_transport_in_Great_Britain#mediaviewer/File:GBR_rail_passenegers_by_year.gif
 

Don't Nationalise The Rail Industry!

 

If you're a Brit reading this, it's a pretty safe bet to say you'd hate to see the NHS privatised, wouldn't you? I know what you mean - it's a wonderful thing, isn't it - national insurance contributions making health service free at the point of delivery. Although personally I wouldn't want to see it privatised in one foul swoop just yet, there aren’t many things I want to see remain in the hands of the government.

You see, in net terms even the health service would be more efficient if it were privatised (take Singapore's health service as the nearest case in point) with people able to keep their money instead of paying it in NI contributions. The NHS costs are so high primarily because it is so inefficiently used - and the reason it is so inefficiently used is because it’s free at the point of delivery, so there's no financial incentive to minimise one's health and well-being.

To give you an illustration, imagine the government nationalised all food and asked us all to only eat what we needed - we'd be a nation of severe overeaters (we are already, and that's when we pay for our food). That said, despite the health service ideal, where incentives are locked in place, we just don't have the collective wherewithal to optimise this model, which is why I favour a State-funded NHS.

In just about every other instance in the UK, in just about every decade, privatisation has proved far more efficient for the economy and for the taxpayer than services run by the government, or services too heavily subsidised – and that’s an almost ineluctable law in economics. The reasons are standard textbook stuff.  Privatised companies have a much greater incentive than government-run companies to spend efficiently and reduce profligacy.

Not only are governments wasteful (people generally spend other people's money more carelessly than their own) - they do business in accordance with party politics and political pressures from the electorate, as well as subsiding or bailing out failing industries. Furthermore, investment in the rail industry is more proficient when governments aid private companies rather than running it themselves, as economic management that extends long-term is not always good for point-scoring in general elections.

Shareholders are good agents for profit-inducement, which means you usually get better managers in the private sector. Where there is inefficiency, the best recourse is a takeover or switching to competing forces, not State bailouts which are so often inefficient, party-based and largely ideology-driven.

But most of all, increase in competition is proven to be the greatest catalyst for efficiency and improved services. Competition is hard in the rail industry (even these regional franchises don't entirely guard against monopoly power) - but the government needs to do more to engender competition, not take steps backwards to the old days of nationalisation.

Lastly, profits make for a tiny proportion of the rail industry's investors - for example, staff costs alone are about 25% compared with 3-5% profits. The politicians in favour of nationalisation fail at basic rationality when they allude to a public sector profit in one region as evidence for greater efficiency than the private sector in other regions (that’s as injudicious as saying that all restaurants should be nationalised because city hall’s restaurant makes more profit for local government than privately owned restaurants in the nearby high street).

And they fail at basic arithmetic when they count railway labour costs (always the headline-grabbing ‘jobs’) as part of the benefits rather than part of the costs. Those 25% staff costs are borne by the taxpayer in public sectors and by the company in private sectors - but it doesn’t end there – not only are they costs that are only borne by nationalisation – with government expenditure we have to include pension contributions, sick pay, holiday pay, human resources costs, and so forth that aren't factored into the balance sheet, they are costs that carry on through all employees’ working life and henceforth thereafter – and it is either disingenuous or plain incompetent to omit them from the enquiry.

No, while nationalisation has the occasional success story - this usually occurs when the State has come in to take over from a failing private sector firm (and please note: a bad private firm does not logically necessitate a slightly better public sector agent, it necessitates a much better private firm) – history has continually shown that it is not to be preferred to the much more efficient market of competition, enterprise and diversity.

 

EDIT TO ADD: As is usually the case, the measure of success is in the evidence. Here's evidence that the number of rail passengers has doubled in the times of privatisation, following years of decline under the State: http://en.wikipedia.org/wiki/Rail_transport_in_Great_Britain#mediaviewer/File:GBR_rail_passenegers_by_year.gif