Thursday, 15 September 2016

Privatisation Myths

We're all Capitalists. In that I mean even people who bad mouth Capitalism, people who talk about its supposed inherent evil or how it degrades human beings; even these people don't want to abolish the market economy. They like choice and consumer sovereignty with the ability to buy goods under their own free will. Most people believe markets to be superior to Governments in producing goods and services and accept this supposed "necessary evil". Every once in while along comes a story of how the market has failed to deliver compared with the Government. Recently it has been stories of the Railways, the National Health Service or the prisons in America with the recent news that the US Government has decided to cut back on private prisons. For many people who believe our lives should be controlled by a central Government this is seen as yet more evidence of market failures and that we need more central planning by the state.

Before examining the details of the various cases we first need to define what Capitalism and markets are. In a nutshell they mean people acting under their own free will and co-operating with one another under voluntary actions. There is no force or coercion involved. No one can make you buy an iPhone, rather Apple have to persuade you to buy one. Its our voluntary actions that enable a more prosperous and peaceful society. Under such a system Apple are subject to the rules of the market. If they charge too much for their products competitors can come in and produce similar ones. If their quality suffers then competitors can offer consumers alternatives. If they fail to innovate then other companies that do innovate can steal market share. All these companies actions are judged by individual consumers deciding what goods and services they wish to buy. They decide be it as an ethical decision, an economic decision, a technical decision or hundreds of other reasons on whether to purchase an Apple product. We all have complete sovereignty and autonomy to choose. Likewise the company also has complete freedom in what they produce. This may be good products, it may be bad products, it can be complicated, it can be simple; but consumers will ultimately decide what will be produced. They have the funds to spend freely under their own free will. Companies not only supply consumers with what they currently consume but constantly offer new products in what they believe consumers may value.

So if we look at the private prisons for example how does this work. Private prisons are not private, they are paid for by tax money. Consumers have no say in how prisons should be run, be that laws they can choose to live by or protection agencies or insurance premiums. Instead the Government takes money from the consumer and a few bureaucrats get to spend that money how they see fit. We would all find it absurd if instead of us all paying for our own cars, our own TVs or our own smartphones that we instead got the Government to levy a car tax and we let a few politicians decide what cars they were going to buy everyone. This is exactly what happens in many cases of so called "market failures" or "privitisation failures". There is no market in the first place as there is no consumer. The consumers have been replaced with a bureaucrat who forces consumers to pay a lump sum to them, then the Government worker spends that money as they see fit. In many cases this results in what is known as crony capitalism where businesses no longer operate based on the needs of the consumers but operate to lobby a few privileged politicians as to how to spend the money. Companies have no incentive for example to control costs or raise quality as they are no longer answerable to consumers and are only answerable to politicians so just lobby them. The marketplace has been removed. When Governments do this they remove the power people have and give it to big business and big Government. Capitalism protects the little person as the original definition stated above, all individuals have complete sovereignty and autonomy over their decisions. It's taxation and Government once more that has failed in this so called "market failure".

Another key component is the rules by which market actors work by. For example in the definition of Capitalism above, myself, as a consumer has control of what I deem to be of good value. I may buy a car with no air conditioning as summer may not be too hot for me. I may buy an older car as I don't want to take care of it. I may not buy a sports car and opt for a bland, functional family car as it meets my current needs the best despite it having half the rate of acceleration which I may not value. The point I'm making is consumers decide what the rules are. They determine what is valuable to them. Companies also help define the rules. Maybe they spot a gap in the market and decide to offer something that they believe consumers may want. Like when Apple came up with the iPhone and companies such as Nokia, the then giants of mobile phones dismissed it. Again companies are free to offer whatever they like and consumers ultimately decide if it is good. With the private prisons example companies and consumers don't set the rules, again its the Government that sets the rules. The Government determines who goes to prison, how long they are sent there for, what sort of punishment there should be. They mandate how prisons should operate and what legal means of punishment or rehabilitation are available. Governments have created the record high incarceration rates. They control the laws, the police, the courts and legal system. Companies can't come in and offer alternative prison systems, alternative laws, alternative law enforcement techniques as they have to abide by the monolithic and monopolistic institution which is a Government. Again consumers have no say in this. Only the Government can approve or licence a new product therefore the rate of innovation grinds to a halt. Apple didn't ask permission when they disrupted the mobile phone market they just went ahead and did it.

A great example of this is Netflix. Originally they went to what was then the largest rental movie company in the world; Blockbuster. The founders tried to sell the concept of selling films through the internet however Blockbuster rejected it and sealed their fate. Now Blockbuster is gone because consumers no longer valued their products meanwhile Netflix went it alone and prospered because they met the needs of consumers but didn't have to ask permission from established players. When they did ask for in effect a blessing they were rejected so they just created a service they thought consumers would value and consumers as individuals decided they did like the new model. So in this example if Blockbuster were the Government and had complete control of the movie rental business do you think we would have Netflix now? I highly doubt it as the Government would have rejected the very concept and consumers would have been deprived of the product. A platform that now enables consumers to get their entertainment without leaving their armchair. They pay a flat monthly fee, watch whatever they want, whenever they want, on demand, 24x7.

We can apply all the above to other aspects. If we look at the Private Finance Initiative with the National Health Service what do we have? We take money from the consumer in the form of taxation, the Government then spends this on services they believe the consumer wants. In reality big business then "delivers" healthcare, again under the various Government rules. There is no consumer demand as services delivered are selected by a small number of people in Government. Smaller companies are excluded from such a process as the big providers have monopoly share as only they can lobby politicians. Again its Crony Capitalism (which is a misleading term in itself as there is no capitalism in action here, the term derives from the fact that people falsely believe that this is Capitalism). Worst part is when supposed free market supporters defend such an arrangement. They defend PFI stating private companies delivering public services is a good thing. As a Libertarian and a firm believer in Capitalism I reject such a view as this results in many cases a worst outcome then if Government had just delivered the service themselves. Big business know its taxpayer money and decide to cream off as much money from the Government as possible as they don't have to deal with consumers but only have to butter up a few politicians now and then. As its not directly politicians money they don't care about the deal they strike or if it is in the interests of the consumer. All they care about is a good headline in the newspaper or placating the process to further their own private interests.

Railways are another classic example. People argue for their nationalisation but what exactly are they asking for? The tracks, the signals, the stations, the timetables or the regulations that govern all this? All of that is already nationalised. The only private part are the carriages on the track and guess what? The Government again decides to offer monopoly rights to companies on select routes, basically companies who can offer the most money to operate a line thus excluding smaller more innovative companies. These companies can't compete on an alternative infrastructure for example as they would need buy the land for the routes, build the tracks then make various planning applications with the Government to allow them to do such a thing (Government would just reject this as its competition to their existing monopoly). Meanwhile the Government has all their track maintained and paid for by tax money which is always guaranteed with consumers having a say. Its no wonder the hurdles for a market to offer an alternative is so large. The same people who want to nationalise the railways argue its a scandal that it costs less to get a plane ticket than to buy a train ticket and use this for a case for nationalisation. It barely needs a shred of critical thought to contradict this line of thinking. Airfares are so cheap because last time I checked Governments were not as involved as they are in the railways. It was the deregulation ie getting the Government out of the airline business in the 80's and 90's that made air travel so cheap. In fact Europe now has some of the lowest airfares as companies across the world can compete on many routes. Contrast this with the US where domestic fares for similar distances are around twice the cost in Europe. Why? Because the Federal Government mandates only US based airlines can operate domestic routes. Again its the Government messing things up. No market failure, just a bunch of Government failures.

Capitalism is all about consumers setting the rules. Not Governments, not even businesses. Companies are servants to the public. The above examples are not the first and won't be the last of how people still don't fully understand Capitalism. Capitalism is only when consumers have free control of what goods and services they wish to buy as individuals and have their own money to do so. It also only exists when companies are free from interference from Governments to offer whatever they want to the market. Not following strict Government edicts, or being told what they can and can't do. Capitalism will always lead to more abundance compared with Government Planning, only an intellectual could ignore that. However I'm not even going to debate that aspect. Why private vs public? Its the moral case. Capitalism allows all of us as individuals to decide what we value in our lives. Central Planning gives a few elite bureaucrats that control and will never have your interests at heart. True Capitalism is giving power to the people. Nationalisation is stripping power from the people and giving it to the Political elite.