money. If the state owns an inefficient factory or a costly service—a waterworks, say, or a railway—it offloads it onto private buyers.
The sale duly earns money for the state. Meanwhile, by entering the private sector, the operation in question becomes more efficient thanks to the workings of the profit motive. Everyone benefits: the service improves, the state rids itself of an inappropriate responsibility, investors profit, and the public sector makes a one-time gain from the sale. On the face of it, then, privatization represents a retreat from dogmatic state-centered preferences and a turn towards straightforwardly economic calculations.
After all, “[t]he performance of nationalized industries in almost every country has not been demonstrably better than that of private or mixed categories.” 17 And there can be no doubt of the downsides of public ownership. In the UK especially, the Treasury regarded potentially profitable operations as mere cash cows. There was to be a minimum of investment and a maximum of profit-taking to augment the public coffers. Thus railways and coal mines were expected to hold their prices down for social and political reasons; but at the same time, they were required to turn a profit.
In the long run, this made for inefficient operations. Elsewhere, in Sweden for example, the state was less heavy-handed in its economic manipulation, but often regulated wages, conditions, prices and products to deadening effect. And so, in addition to the short-term cash benefits of privatization there was added the hypothetical gain in initiative and efficiency. If noth-ing else, it was reasonably assumed, a business that reverted from public ownership to private hands would surely be run with a view to long-term investment and efficient pricing.
So much for the theory. The practice has been very different. With the advent of the modern state (notably over the course of the past century), transport, hospitals, schools, mails, armies, prisons, police forces and affordable access to culture—essential services not well served by the workings of the profit motive—were taken under public regulation or control. They are now being handed back to private entrepreneurs.
What we have been watching is the steady shift of public responsibility onto the private sector to no discernible collective advantage. Contrary to economic theory and popular myth, privatization is inefficient . Most of the things that governments have seen fit to pass into the private sector were operating at a loss: whether they were railway companies, coal mines, postal services, or energy utilities, they cost more to provide and maintain than they could ever hope to attract in revenue.
For just this reason, such public goods were inherently unattractive to private buyers unless offered at a steep discount. But when the state sells cheap, the public takes a loss. It has been calculated that, in the course of the Thatcher-era UK privatizations, the deliberately low price at which long-standing public assets were marketed to the private sector resulted in a net transfer of £14 billion from the taxpaying public to stockholders and other investors.
To this loss should be added a further £3 billion in fees to the bankers who transacted the privatizations. Thus the state in effect paid the private sector some £17 billion ($30 billion) to facilitate the sale of assets for which there would otherwise have been no takers. These are significant sums of money—approximately the endowment of Harvard University, for example, or the annual gross domestic product of Paraguay or Bosnia-Herzegovina. This can hardly be construed as an efficient use of public resources.
One reason that privatization in the United Kingdom appears misleadingly beneficial is that it correlates positively with the end of decades of decline relative to Britain’s European competitors. But this outcome was achieved almost wholly as a result of falling growth rates
The sale duly earns money for the state. Meanwhile, by entering the private sector, the operation in question becomes more efficient thanks to the workings of the profit motive. Everyone benefits: the service improves, the state rids itself of an inappropriate responsibility, investors profit, and the public sector makes a one-time gain from the sale. On the face of it, then, privatization represents a retreat from dogmatic state-centered preferences and a turn towards straightforwardly economic calculations.
After all, “[t]he performance of nationalized industries in almost every country has not been demonstrably better than that of private or mixed categories.” 17 And there can be no doubt of the downsides of public ownership. In the UK especially, the Treasury regarded potentially profitable operations as mere cash cows. There was to be a minimum of investment and a maximum of profit-taking to augment the public coffers. Thus railways and coal mines were expected to hold their prices down for social and political reasons; but at the same time, they were required to turn a profit.
In the long run, this made for inefficient operations. Elsewhere, in Sweden for example, the state was less heavy-handed in its economic manipulation, but often regulated wages, conditions, prices and products to deadening effect. And so, in addition to the short-term cash benefits of privatization there was added the hypothetical gain in initiative and efficiency. If noth-ing else, it was reasonably assumed, a business that reverted from public ownership to private hands would surely be run with a view to long-term investment and efficient pricing.
So much for the theory. The practice has been very different. With the advent of the modern state (notably over the course of the past century), transport, hospitals, schools, mails, armies, prisons, police forces and affordable access to culture—essential services not well served by the workings of the profit motive—were taken under public regulation or control. They are now being handed back to private entrepreneurs.
What we have been watching is the steady shift of public responsibility onto the private sector to no discernible collective advantage. Contrary to economic theory and popular myth, privatization is inefficient . Most of the things that governments have seen fit to pass into the private sector were operating at a loss: whether they were railway companies, coal mines, postal services, or energy utilities, they cost more to provide and maintain than they could ever hope to attract in revenue.
For just this reason, such public goods were inherently unattractive to private buyers unless offered at a steep discount. But when the state sells cheap, the public takes a loss. It has been calculated that, in the course of the Thatcher-era UK privatizations, the deliberately low price at which long-standing public assets were marketed to the private sector resulted in a net transfer of £14 billion from the taxpaying public to stockholders and other investors.
To this loss should be added a further £3 billion in fees to the bankers who transacted the privatizations. Thus the state in effect paid the private sector some £17 billion ($30 billion) to facilitate the sale of assets for which there would otherwise have been no takers. These are significant sums of money—approximately the endowment of Harvard University, for example, or the annual gross domestic product of Paraguay or Bosnia-Herzegovina. This can hardly be construed as an efficient use of public resources.
One reason that privatization in the United Kingdom appears misleadingly beneficial is that it correlates positively with the end of decades of decline relative to Britain’s European competitors. But this outcome was achieved almost wholly as a result of falling growth rates
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