Privatisation: a way to a more competitive economy, or exercise in Orwellian doublespeak?

The agenda of austerity economics is supplemented with the sale of public assets via privatisation programmes. Neoliberal dogma argues that this ‘structural reform’ aims at ‘reducing the government’s deficit and debt’ and to induce ‘competitiveness’. Orwell would have been impressed by this exercise of doublespeak.

Classical thinkers such as Adam Smith and John Stuart Mill viewed State assets such as ports, water, electricity, railway companies, the hospitals and the universities as entities, which are not supposed to operate for profit but rather to establish an infrastructure in the country conducive to providing a stable and low cost environment for all citizens and the business world, within which they could pursue their interests. Public investment and ownership is viewed by the classical thinkers as minimising the economy’s cost structure and protecting the citizens and business alike from rent-extracting that private monopolies build into the price of public goods such as water, roads, transportation, electric power, communications etc.  As Adam Smith put it:

The duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain”.

Thus

The expense of maintaining good roads and communications is, no doubt, beneficial to the whole society, and may, therefore, without any injustice be defrayed by the general contribution of the whole society” [1].

Contrary to Smith’s position, the neoliberal policy recommendations for wholesale privatisation of public assets not only negate the vital purpose of public investment in providing a stable and low cost environment for all citizens and the business world, but in addition introduce monopoly power in the market, since most State assets are to a significant degree natural monopolies. It is well known that private monopolies are detrimental to market functioning, as monopolists set whatever price the market can bear. This charged price has normally no relation to the cost of producing the product or service but it is an extortionate pricing aimed at the extraction of maximum monopoly rent.

In an attempt to blunt criticism regarding these well-established and detrimental (for market functioning) shortcomings of the privatisation policy agenda, the neoliberal policymakers have proposed and pursued the establishment of independent regulatory agencies that are supposed to oversee the practices of the privatised monopolies. However, as Smith also warned us:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.  

In this spirit, monopoly power enables monopolists to gain control of the regulatory agencies which in effect act in a way that promotes vested interests rather than the interests of the public, a process known in the literature as Regulatory Capture. Thus, evidence regarding the efficacy of regulation of the privatised public assets has shown the futility of such regulatory practices.  [2]

In addition, it is a usual practice for the monopolists not to use their own capital to buy the State asset but instead, in an era of low interest rates, borrow from the banks. In doing so they pass the resulting interest payments of the agreed loan to customers with a predictable effect on the price that the public pays for the product or service. Privatisation, in effect, turns the public services into a tollbooth operation by monopolists. This increases the costs of doing business to the business community in the country, and it raises the cost of living for the citizens of the country. This, in turn, reduces competitiveness.

Furthermore, when a country sells its assets, its net worth is decreased with long term consequences. Importantly the country not only does not own the asset but also forgoes any yields arising from its ownership. In effect, the sale of public assets results in increases in the government’s cost outlays when the state is forced to buy back - usually in prices that include monopoly rent - the services or goods that the forgone asset provided. Both of the above effects act against the alleged aim of privatisation, which is to reduce the government deficit. Hence, it further restricts the ability of the government to pursue any meaningful economic policy.

It is noteworthy, that if the purchaser of the public asset is a not a private interests entity but a foreign public company or entity, privatisation acts as a medium of transferring both the public asset and the resultant income including the monopoly rent to a foreign public sector.

Contrary to the neoclassical dogma, privatisation is counterproductive to any effort towards economic recovery as it both decreases the competitiveness of the economy and deprives the government of vital revenues that could potentially be used for enhancing economic activity. Indeed, Orwell would have been impressed by the neoliberal doublespeak.

Ioannis Theodossiou is Professor at the Centre for European Labour Market Research (CELMR) University of Aberdeen Business School

[1] A. Smith (1776) An Inquiry into the Nature and Causes of the Wealth of Nations, Book V.

[2] The article was amended to add this short section on regulators on 21 June 2017.