Home > Dead Ideas book, Economics - General > Bookblogging: Privatisation – Beginnings (updated)

Bookblogging: Privatisation – Beginnings (updated)

January 2nd, 2010

I’m on the final chapter of my long-promised Zombie Economics, dealing with ideas refuted by the Global Financial Crisis. My target this time is privatisation – more precisely, the idea that privatisation will always yield an improvement over public ownership, and, therefore that market liberalism is an advance on the mixed economy that developed in the during the post-1945 long boom.

As always, comments, criticism and suggestions much appreciated.

Updated In response to comments, I’ve added a bit more material on the 1970s and the background to privatisation.

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`We hope the fund is maintaining its push for a more flexible exchange rate, far- reaching reforms in the banking sector and more privatization.’’

Mr Timothy Ash, head of emerging-market research at Royal Bank of Scotland in relation to an IMF rescue package for Ukraine during the global financial crisis. The Royal Bank of Scotland had just been nationalised as a result of failed speculation and catastrophic mismanagement.

The ‘mixed economy’ in which public provision of a wide range of services and economic infrastructure, such as telecommunications and electricity networks, coexisted with a largely capitalist market economy was one of the most striking features of the political and economic settlement that emerged in Western economies after 1945. Public ownership was not new. Governments in many countries had played a role in providing infrastructure, social welfare systems and services such as health and education. But, before World War II these measures had generally been seen, by supporters and critics alike, as steps towards full-scale socialism, defined in traditional terms as the elimination of private ownership of the means of production.

The one exception, first noted by John Stuart Mill was that of industries that are ‘natural monopolies’ in the sense that the efficient scale of operation is so large that costs are minimised when there is only a single firm in the market. In this case, Mill noted, “it is the part of the government, either to subject the business to reasonable conditions for the general advantage, or to retain such power over it, that the profits of the monopoly may at least be obtained for the public.” The alternatives proposed by Mill, that natural monopolies should either be regulated or publicly owned have proved to be the only serious policy options, despite occasional attempts to argue that unregulated private monopolies may be benign, such as the theory of ‘contestable monopoly’ put forward by William Baumol and his co-authors in the 1980s.

The experience of the Depression and World War II produced a fundamental shift in thinking about the roles of governments and markets, described by Sheri Berman as ‘the social democratic moment’. Rejecting both 19th century classical liberalism, and the mechanistic determinism of orthodox Marxism, social democrats saw themselves, in the words of Australian historian as ‘civilising capitalism’. From the Swedish ‘Folkhemmet’ (people’s home) to the British reforms based on the Beveridge Report to Roosevelt’s New Deal and Four Freedoms, social democrats put forward a vision of a society in which markets and business enterprise played a central role, but one subordinate to the needs of a just society. In addition to Keynesian macroeconomic management and the social policies of the welfare state, this vision required governments to make investments in the physical and economic infrastructure needed to ensure prosperity.

The growth of government intervention was supported by a series of new developments in microeconomics, collectively called the theory of market failure. In the 1920s, AC Pigou developed the idea of externalities as a way of incorporating obvious (but previously disregarded) features of industrial society such as air pollution into economic analysis. Pigou’s analysis is still in use today, and forms the basis for policy proposals such as the idea of a carbon tax to limit emissions of carbon dioxide and other greenhouse gases.

Then in the 1930s, Joan Robinson and Edward Chamberlin independently developed the idea of monopolistic competition, extending earlier work on industry structures such as monopoly (dominance of a market by a single seller) and duopoly (two sellers). The rise of game theory in the 1940s and 1950s, due to von Neumann, Morgenstern and Nash, provided a rigorous basis for analysing markets that did not fit the standard competitive framework.

The development of modern theories of information and uncertainty, also deriving from the work of von Neumann and Morgenstern suggested a range of ways in which market transactions might lead to suboptimal social outcomes. The classic instance was Akerlof’s discussion of the ‘lemons’ problem. This is the idea that the sharp decline in value of new cars, occurring as soon as they are driven out of the showroom reflects the fact that cars resold soon after purchases are likely to be those regarded by the initial buyers as ‘lemons’. In the absence of an easy way to detect such lemons, buyers of good cars will be unwilling to sell at the low price available for slightly used cars, producing a self-sustaining equilibrium in which the only near-new cars on the market are lemons.. Such ‘asymmetric information’ problems are particularly severe in the context of insurance markets where they go by the name ‘adverse selection’.

All of these possibilities were grouped under the heading of ‘market failure’. The view that governments should act to correct market failures where they occurred was used to justify a wide range of government action, and in particular the provision of goods and services by governments and government owned enterprises. Government provision of health services, for example, could be justified by the limitations of insurance markets, while public ownership of infrastructure utilities was justified as a response to problems of monopoly and oligopoly.

Paradoxically,the crowning theoretical achievement of neoclassical economic theory, the demonstration by Arrow and Debreu of the existence and optimality of a competitive general equilibrium, also provided the theoretical basis for the theory of market failure. Arrow and Debreu showed that if competitive markets existed for every possible commodity, in every possible time and place and under every possible contingency, the resulting allocation of competitive resources could not be improved upon for everyone. But that’s a very big if.

It is obvious that the complete set of time-dated, place-specific,contingent markets required for the Arrow-Debreu proof does not exist, and cannot possibly exist. But a large literature in the economics of finance explores the idea that if financial markets are sufficiently well-developed, the instruments traded in this markets can effectively encompass all relevant possibilities, the real world will be close enough to that of the Arrow-Debreu model that conclusions about the optimality of competitive equilibrium remain valid. This idea does not have a standard name, but we can call it the complete financial markets hypothesis.

The complete financial financial markets hypothesis makes sense only if these markets are efficient, in the sense of the strong form of the efficient markets hypothesis discussed in Chapter 2. Given the powerful evidence against the strong efficient markets hypothesis, this is obviously problematic. But there are even bigger problems. The complete financial market hypothesis requires much more than the existence of markets for bonds, corporate stocks and associated derivatives. It requires that households should be able to insure themselves, at reasonable cost, against such risk as unemployment, business failure, ill-health or a decline in the value of their home. With the exception of health insurance, which exists mainly as a result of public mandates, and publicly-provided‘unemployment insurance’ which is not really insurance, none of the required markets exist.[1]

The problems explored in the market failure literature can be interpreted as pointing to the absence of many of the markets needed to satisfy the complete financial markets hypothesis and thereby guarantee the optimality of competitive market equilibrium. Arrow, in particular, made this point, and showed that general equilibrium theory gave only the most qualified support to economic liberalism.

For much of the 20th century, then, the general movement of economic policy in capitalist societies was towards an expanded role for the state, including an expansion of the scope and extent of public ownership of industry. In the light of movements towards a greater role for markets in communist countries, it was widely anticipated that capitalist and communist economic systems would converge in a ‘mixed economy’.

The term ‘mixed economy’ was popularised by British economist Andrew Shonfield to describe the economic system of the postwar era. This system was not a compromise between comprehensive state socialism and free market capitalism, as is often supposed. Rather, in seeking a market system actively managed by governments the mixed economy transcended this dichotomy. It was, and remains, unlike the vaporous offerings of Tony Blair and Bill Clinton in the 1990s, a genuine ‘Third Way’.

By 1970, the success of the welfare state and the mixed economy seemed undeniable. Hopes turned to the prospect of a further transformation, not fully defined, in which the remaining inequalities and injustices of capitalism would be greatly reduced, if not eliminated. The most promising proposals centred on notions of industrial democracy. In Sweden, the peak union body, the LO put forward a proposal, developed by economist Rudulf Meidner to require all companies above a certain size to issue new stock shares to workers, so that within 20 years the workers would control 52% of the companies they worked in.

In the event, of course, the real challenge to the mixed economy came from market liberals, who dominated the policy debate from the mid-1970s onwards. Milton Friedman’s success in macroeconomic debates attracted new attention to the market liberal position he presented in works such as Free to Choose where he (along with his wife and co-author Rose) argued that even core areas of state activity such as education could be left to private provision, funded through voucher schemes.

Meanwhile, the economic performance of public enterprises deteriorated sharply in the 1970s. In an inflationary environment, public enterprises found it hard to resist demands for increased wages, but equally hard to pass on the resulting costs in the form of higher prices. Weak economic growth and rising unemployment pushed government budgets into deficit. A common short-term response was to cut investment spending, including that of public enterprises. Although this response made little economic sense, it was enshrined in policy by rules limiting aggregate public borrowing, whether this was used to finance current expenditure or income generating investment. The most famous policy target of this kind was the Public Sector Borrowing Requirement in the UK

Over time, these problems were mostly overcome, and public enterprises returned to profitability. But, in the general atmosphere of disillusionment with government common in the 1970s, there was a receptive audience for claims that public enterprises were inherently inefficient, and represented a fiscal burden on governments.

The strength of public sector unions, at a time when unions in the private sector were being pushed onto the defensive by mass unemployment, also contributed to the push for privatisation. Governments keen to weaken the power of unions, but unwilling to confront their own employees, could resolve the problem by handing public enterprises over to private owners, keen to break unions and eliminate overstaffing and above-market pay and conditions (at the shopfloor level, if not for senior management).

Criticism of the mixed economy gained theoretical bite with the rise of public choice theory, which sought to model democratic political institutions as ‘markets for votes’. The typical conclusion, unsurprisingly given the theoretical starting point, was that real markets were to be preferred to political markets. A variety of arguments were used to show that most market failures were unimportant or self-correcting. At the same time, the public choice theory of politics was used to introduce the idea of ‘government failure’. It was argued that, because of the systematic distortion of the policy process by interest groups, the costs of government intervention were greater than the costs of the market imperfections that government policies were supposed to remedy.

The rise of ‘property rights’ theory in the late 1970s produced a theoretical critique of public ownership. It was argued that, since private corporations were responsible to their shareholders, their managers would always have stronger incentives to seek efficiency than would bureaucrats or managers of public enterprise. Although it contradicted decades of research showing that ordinary shareholders are virtually powerless, the property rights theory met the political needs of the time, and was widely embraced.

Theory turned to practice with the election of the Thatcher government in the United Kingdom in 1979. Starting with popular proposals such as the sale of council houses to the tenants who occupied them, Thatcher began a program under which publicly owned enterprises in telecommunications, electricity, water and transport were sold, usually through public floats. Thatcher’s example was soon emulated by governments of all political persuasions in the English speaking world. By the 1990s, privatisation was part of the standard policy agenda, referred to as the Washington consensus and promoted by the World Bank, IMF and US Treasury as essential to sound economic management in developing countries.

The large-scale privatisation of publicly-owned enterprises in the 1980s and 1990s played a big role in promoting the triumphalist claims of market liberals. Commentators and thinktanks rushed to conflate the (real but manageable) financial difficulties of long-established public infrastructure services in countries like the UK, New Zealand and Australia with the collapse of Communism in Eastern Europe and the stagnation of North Korea.

Public ownership of infrastructure was seen as a relic of the past, doomed to vanish as governments rushed to sell off assets. Having claimed victory in the infrastructure sector, market liberals turned their attention to the core of the welfare state with proposals for privatisation of health services, prisons and the school system. In the US, the most ambitious assault on the institutions of the New Deal era was the proposal, pushed hard by the Bush Administration, to privatise Social Security.

Few would have predicted that, a decade or so later, governments would be debating, and in some cases undertaking, the nationalisation of such iconic capitalist enterprises as Citigroup, Bank of America and General Motors. Although these rescue operations mostly involve only temporary public ownership, they make the rhetoric of the 1990s look absurd. And they raise the question of whether some or all of the privatisations of past decades should be reversed.

But despite these failures and reversals, systematic privatisation of public enterprises remains part of the standard package of policy reforms recommended by bodies like the IMF, and there has been little serious effort to reconsider the theoretical rationale for these policies, or to ask who gains and loses from their implementation.



During the era of the mixed economy, the boundaries between the public and private sector were regularly redjusted, and not always in the same direction. While the predominant trend was for the role of the state to expand through the nationalisation of existing private enterprises or the establishment of new public enterprises, it was quite common enough for publicly owned enterprises to be returned to the private sector (the phrase commonly used at the time was ‘denationalisation’. Peter Drucker used ‘reprivatization. An earlier usage under the Nazis is noted http://michaelperelman.wordpress.com/2006/09/11/the-nazi-heritage-of-privatization/ The newly elected Thatcher government initially focused on monetarist macroeconomic policies. However, attention steadily shifted to the idea of privatisation. ).

It was not until the 1979 election of the Thatcher government in the United Kingdom that the mixed economy came under serious challenge. Following the failure of Keynesian macroeconomic management in the 1970s, the generally disappointing performance of the UK economy since 1945 (or earlier) and the full-blown crises of the late 1970s, the stage was set for a reaction against social democracy in all its forms.

Whereas previous conservative governments had denationalised some of the acquisitions of their immediate Labour predecessors, the Thatcher government began selling off enterprises, such as British Telecom, which had been in the public sector since their establishment. The idea of privatisation, conceived as the systematic removal of the state from the production and provision of goods and services, was born.

Thatcher’s radical measures were much admired, and imitated, in Australia and New Zealand, which still tended to follow the British lead with respect to economic policy. Surprisingly, in both countries, the crucial steps were taken by governments associated with the labor movement [2]. In Australia, the Hawke and Keating governments, in office from 1983 to 1996 moved slowly and cautiously, but eventually privatised the national airline, Qantas, and the main publicly-owned bank, outraging many of their traditional supporters.

In New Zealand, caution was thrown to the winds. Labour Finance Minister Roger Douglas rapidly gained a reputation as ‘more Thatcherite than Thatcher’. Among a series of radical free-market reforms, large-scale privatisation began with the sale (by public float) of the Bank of New Zealand, and continued apace thereafter with the sale of assets such as Air New Zealand. New Zealanders had tired of the reforms by 1990, and replaced Labour with the conservative National Party, which promised a more moderate approach. In office, however, the Bolger National government continued to push radical free-market measures notably including the sale of New Zealand Rail(1993) and corporatisation of the health system with a view to eventual privatisation. The Labour party split in Opposition, with the radical free-market group leaving to form the Association of Consumers and Taxpayers (later the ACT Party). The era of radical reform finally ended when Labour regained government under Helen Clark in 1999.

Thatcher’s radical reforms reversed the century-long trend towards greater state involvement in the capitalist economy. But it was the collapse of Soviet Communism that seemed to confirm that free-market reforms represented more than a swing of the political pendulum and constituted, in the words of the great triumphalist text of the age The End of History. It was inevitable, given the collapse of centrally planned economies, that large numbers of state-owned enterprises would be converted, one way or another, to private ownership. The ideology of privatisation encouraged the adoption of a radical ‘shock treatment’ approach based on wholesale privatisation.

In this context,it was inevitable that privatisation should become part of the standard ‘Washington Consensus’, package of reforms advocated for less developed countries by the World Bank, International Monetary Fund (IMF and US Treasury. And by the 1990s, the privatisation trend had spread to EU countries that were often dismissive of such ‘Anglo-Saxon’ notions.

[1] Robert Shiller has long argued that new financial instruments could reduce the riskiness of investments in home ownership, but his efforts to promote the development of such instruments have had only limited success

[2] For reasons lost to history, the Australian party uses the American spelling, Labor, while its NZ cousin uses Labour

  1. Hal9000
    January 2nd, 2010 at 18:39 | #1

    Thatcher government elected on 4 May 1979 following the ‘winter of discontent’ 1978-79. Still reading… Very lucid, btw, Prof Q.

  2. PeterS
    January 2nd, 2010 at 18:40 | #2

    I should think that “Labor” is the Shavian spelling, rather than American. I don’t disagree with anything else. :)

  3. Hal9000
    January 2nd, 2010 at 19:38 | #3

    I’m wondering whether you’re going to make any comment on the bad deals that the privatisations represented, in terms of cash received vs long term appreciation. My favourite instance is the Commonwealth Serum Laboratories, sold for a song and no longer delivering important new drugs for Australia like spider and snake antivenines. Also prepared to contaminate blood supplies with imported blood products. But now worth 20 times what it was sold for.

    Another possible line you could pursue as a negative outcome would be the vastly improved economic and political position of accounting and stockbroking firms as a result of the privatisation bonanza, making them now big time players in the corporate universe. As the gfc showed, corporate governance standards gained nothing whatever from the enrichment of these alleged providers of professional services.

  4. Hal9000
    January 2nd, 2010 at 19:42 | #4

    PeterS – it results from an infatuation with things American by the nascent labour movement. The spelling was adopted at the foundation of the party. They flirted with alcohol prohibition too. It wasn’t confined to the left, either. The composition of the Senate is lifted from the US, as is the constitutional prohibition on establishment of a state religion.

  5. TerjeP (say tay-a)
    January 2nd, 2010 at 23:17 | #5

    Regarding the lemon problem. I don’t see how this is a market “failure”. I agree that near new cars sold second hand tend to attract a lower price than new cars sold direct from the show room. However it simply illustrates the logical outcome of reasoned analysis by market participants who look not only at the nature of the goods on offer but the incentives of the other party. If anything the example seems to show how a seemingly irrational state of affairs (two cars apparently equivalent selling at very different prices) is in fact the product or rational behaviour.

    However let us suppose that this is a market failure and one that governments can address. Why then don’t they address it? What government in the world has every addressed this specific problem of car prices in a manner that is meaningful? Where in the world do near new cars sold second hand sell for prices comparable to new cars sold new from the showroom? And what are the broader consequences of the government correction? My suspicion is that this particular problem is generally left alone by most governments simply because they have nothing much to add to the equation. Probably even in nations with a nationalised car industry. And if my suspicion is correct then why on earth would you use this example as a rationalisation for government interventions.

    You start out quoting John Stuart Mill in regards to “natural monopolies” and end up inferring that this definition applies to airlines and banks. There seems to be a leap of logic somewhere in between.

    I hope that somewhere in this book you are going to deal with the negative unintended consequences of government intervention. The agent principle problems that flow from seceding too much power to the state. The history of regulatory capture and excessive unions. However from what I have seen so far I don’t expect much in this regard. The bias is pretty evident.

  6. bakho
    January 3rd, 2010 at 00:14 | #6

    Are you adding case studies? A few examples of privatization gone awry would be informative.

  7. Alice
    January 3rd, 2010 at 08:56 | #7

    @TerjeP (say tay-a)
    Terje P – you say “I hope that somewhere in this book you are going to deal with the negative unintended consequences of government intervention. The agent principle problems that flow from seceding too much power to the state. The history of regulatory capture and excessive unions.”

    Pardon me Terje – but what a load of bunk.

    You forgot to mention the principal agent problems that flow from the State seceding too much power to the private sector and the history of private capture of public services and excessive corporate excess. How about the bosses of energy Australia and Origin Energy now paying themslves the equivalent of financial sector corporate salaries while 18000 had their electrivcity disconnected last year, one in seven of whom were pensioners and customer complaints have almost doubled in five years. Of the three State owned energy corporations, all three bosses earned around 750K after their bonuses. Thats a hell of a lot more than most senior public servants get paid.

    Excessive unions Terje ?. Excessive private fatcats more like with excessive private sector egos.

  8. gerard
    January 3rd, 2010 at 09:34 | #8

    John, I know you occasionally post “What I’m Reading” blogs. Since you’re mentioning “shock treatment” here, I have to ask if you have read Klein’s “Shock Doctrine”? IMHO, the uncontested book of the decade

    speaking of books (yes I’m about to derail)… I was in Woolworths the other day – what is the ONLY book they are selling – Dan Brown’s “The Lost Symbol”, a whole shelf full, and no other books in sight! I am assuming it will be the biggest unread Christmas Gift book ever. How does an author get that type of preferential treatment? then this morning, one of those dreadful channel 7/9 morning shows with the grotesque paired male and female plastic-faced talking idiot presenters was blabbing on about “The Lost Symbol” by Dan Brown. I had a sudden flashback to Gabraith’s theory of “Producer Sovereignty”. I don’t get why the powers that be decided that Dan Brown was the author to push down everyone’s throat like this, but Mr Brown must be having the biggest free ride in the history of writing.

  9. Tim Peterson
    January 3rd, 2010 at 10:00 | #9

    Proponents of public ownership tend to stretch the definition of natural monopoly to things like telecoms and electricity generation (as opposed to distribution) that can be shown to not be natural monopolies at all.

    Prior to deregulation Telecom (Telstra’s publicly owned predecessor) grabbed monopoly profits left right and center to subsidize rural consumers. If it had continued as a publicly owned monopoly it would doubtless be doing the same with cell phones and broadband. Similarly electricity utilities creamed monopoly profits to spend on subsidies for aluminium smelters.

    Having said that, I think with telecoms that the “golden mile” of treches between telephone exchanges and consumers ought to be publicly owned to foster competition.

  10. iain
    January 3rd, 2010 at 10:29 | #10

    The argument for some sort of transcendent (and appropriate) mix of bureaucratic governance and privatised control is made – but the role for community self governance (without excessive state regulation) seems to be minimised?

  11. Alice
    January 3rd, 2010 at 10:42 | #11

    @Tim Peterson
    By your logic – people who live out west and produce part of our agricultural or export industries dont deserve subsidies for vital communication? So when we built telegraph lines we should have only have built them for people who could afford to pay. That would have wiped out communication to Broken Hill and Broken Hill Mines wouldnt it…unless of course Broken Hill Mines would like to have paid for the whole contruction all the way from Melbourne.

    Tim – you appear to be a supporter of user pays dogma when it comes to telecommunications (…and I presume everything else?)

  12. Tim Peterson
    January 3rd, 2010 at 10:52 | #12


    Broken Hill is a very well-off community that should pay its way (ditto for the wealthy squatocracy)! If remote communities deserve subsidies for telecommunications then they should be funded out of general government revenue (similarly for telephone boxes in certain suburbs where poor people do not have mobile phones). Paying for them by imposing a defacto sales tax on something as important as telecommunications does not make economic sense.
    This is especially the case since demand for a lot of telecoms services is price elastic (think Ramsay optimal taxation).

  13. Alice
    January 3rd, 2010 at 10:58 | #13

    @Tim Peterson
    On the matter of electricity generation and privatisation and how it has impacted greenhouse emissions and prices in Australia I have two links here

    So much for free market reforms.

  14. Peter T
    January 3rd, 2010 at 11:05 | #14

    I can’t say the lemon car example is particularly convincing to ordinary readers (I presume Akerlof’s article was backed by more analysis).

    One thing that has struck me is that privatisation was sold as reducing the size of government, and fostering greater investment in infrastructure. Yet government size does not seem to have declined much, if at all, and the impression is that there has been less investment (of course, one other argument put forward was that government over-invested in utilities, so privatisation would optimise investment levels. Consistency was obviously not an issue). Are these impressions right? And, if so, where did the money go?

  15. Tim Peterson
    January 3rd, 2010 at 11:07 | #15

    Any student of Pigou could tell you that if negative externailities are free then they will be overproduced. The greenhouse emissions are the result of failure to tax or cap and trade, not the fault of privatization.

  16. Peter T
    January 3rd, 2010 at 11:24 | #16


    Your argument only makes sense if you think of telecomms services (or post, or rail, or road) as analogous to private goods – discrete units, whose benefit to each person can be calculated. In fact they are networks, with emergent properties. For example, laying a line to Broken Hill necessarily provides the same or better services to Orange, Wellington and Cobar. Do these pay some proportion? And if so, how much? Ditto Broken Hill given that it lies on the way to Adelaide. Network traffic, and benefits, typically have large scale effects – half a network is expensive but no use, a small one more expensive but not much use, a large one not much more expensive but of great use. They are also synergistic – railways and telegraph went together, as each was needed to make the other run efficiently (and it’s easy to think of lots of other examples). When you think of these as systems, simple cost-benefit analysis becomes far too simplistic.

  17. Tim Peterson
    January 3rd, 2010 at 11:34 | #17

    @Peter T

    I haven’t heard of joint production as an argument for public ownership – that would also apply to butcher shops (many different types of meat from one animal carcass). Markup pricing over marginal cost should give a reasonable economic outcome in both cases.

    One argument that you missed is network externalities (the more people are hooked up to the network, the more utility for the consumers of the network). However, in the real world those externalities can be captured by network interconnection fees.

  18. Tim Peterson
    January 3rd, 2010 at 11:39 | #18

    @Peter T

    Joint prodiction does not entail public goods. The value of telecommunications to consumers (including network externalities) is calculable by consumer surplus (ie the area under the demand curvel, above the price line).

  19. Tim Peterson
    January 3rd, 2010 at 11:54 | #19

    Actually, now I remember 2nd year micro, competitive joint production will result in the product with lower demand being sold at less than marginal cost. This applies to butchers shops and oil refineries.

    Come to think of it, this is not going to be the case with telecoms networks; they are acase of joint fixed costs not joint marginal costs. The problem of recouping fixed costs by some formula is an entirely artificial accounting problem unique to publically owned corporations. In the private sector you either (do better than) break even or fold, based on profit maximizing markups (subject to competition).

  20. PeterS
    January 3rd, 2010 at 12:43 | #20

    @Hal9000 #4
    Thanks Hal – just shows how much Australian history I was exposed to. :(

  21. Alice
    January 3rd, 2010 at 13:03 | #21

    @Peter T
    Thats what I was trying to say Peter T – but you expressed it much better than I did. Infrastructure is a network that enables long term growth, not about servicing pockets that can afford to user pay now enabling some segments of economy to become even more enriched whilst other segments fall even more behind.

  22. Alice
    January 3rd, 2010 at 14:09 | #22

    @Tim Peterson

    you say” Any student of Pigou could tell you that if negative externailities are free then they will be overproduced. The greenhouse emissions are the result of failure to tax or cap and trade, not the fault of privatization.”

    Perhaps you didnt read the link I posted so Ill paste the relevant part Tim. Its no use being a good student of Pigous and going about creating market failures just so that you can then repair them with a cap n trade or tax . You need to look a little deeper and wonder why electricity generators were publicly provided in the first place (to avoid market failure), so by madly running about degreulating all and sundry you may actually be creating the failure.

    “During the 1980s many environmentalists in the US supported the deregulation of electricity as they were persuaded that deregulation would remove incentives from the regulated electricity monopolies to increase electricity sales and build large new power plants. They also believed that an electricity ‘free market’ would provide more opportunities for companies offering alternative power generation from renewable sources.[3] However this turned out to be a false hope.

    Private companies are hardly likely to encourage energy efficiency and conservation when their profits depend on maximising demand. In the US it is the public utilities that have led in conservation efforts while private power companies have cut their conservation budgets. Electricity deregulation caused the energy efficiency budgets of North American power companies to be cut by 42 percent between 1995 and 1999.[4]

    Someone mentioned the prescient JK Galbraith (very much like the prescient JQ IMHO) -so Ill just touch on one of his 1994 quotes (referring to the deregulation of the US airline industry).

    “This regulation was wholly consistent with established and sophisticated economic theory.” In short Galbraith then refers to the US airline industry as being an oligopoly, and the problems of such a beast being either tacit approval in pricing or disastrous price wars – – ie a mess which needed regulation.

    “Nonetheless, another doctrine, more precisely a dogma now intervened. It was that the market, however defective the competitive structure, and, in consequence however unpredictable or exploitative the expected behaviour, is ultimately benign. With much fanfare, it was held that the airlines should be freed of government restraint as to both routes and fares. And so they were. It was a triumph of dogma over elementary good sense and even over the established economic theory.”

    Ask me what happened…its no different to what has happened in Australia. Are we better off? No.

    We live with the failures of privatisation in our everday lives. NRMA, insurance, banking costs, hospital costs and gap fees, tollroads, charges for once free government services that are required by legislation, electricity and telecommunications prices, price scams and schemes and bad service. Yet who is there amongst the dogmatist policy makers that have pursued this profound casting aside of common sense to actually look back to examine the outcomes of all the privatisations? They keep singing the same songs of disorder “press on with it – we must keep going – privatise it all”.

  23. Alice
    January 3rd, 2010 at 14:16 | #23

    And dont ever forget ENRON.

  24. Tim Peterson
    January 3rd, 2010 at 15:00 | #24

    There has been an increase in renewable power generation since deregulation in the USA. ENRONs ability to manupulate prices was a product of an imperfect deregulation scheme (ie greater deregulation of wholesale then retail prices).

    Likewise US airline ticket prices have fallen since deregulation.

    Pigovian measures would have prevented the increase in carbon emissions in the 1990s /2000s.

  25. Alice
    January 3rd, 2010 at 15:50 | #25

    @Tim Peterson
    Where is your evidence? As usual no facts. Where is the evidence for increased use of renewables – where has it come from – Public or Private initatiatives? Where is your evidence for increased investment in cleaner energy? Public or private investment? – what has been the increase in emissions? Public or private firms responsible?

    Thats what really gets to me about free marketers Tim Petersen – they make these pronouncements from on high about price and quantity as if by virtue of deregulation it actually happened (they live in an alternative universe).

    Of course you dont expect that ordinary Joe looking at his electricity bills while wondering how they got so high, is going to check whether you are right or wrong do you? …but then thats also part of the dogma. Just keep on saying it.

  26. Alice
  27. Alice
    January 3rd, 2010 at 16:08 | #27

    @Tim Peterson
    And Tim you might say fares are lower because of de-regulation (and totally ignore economies gained by jets etc) but you ignore this…the total industry loss…and thats also means jobs…and this isnt an unlinked story…industry loss means unemployment Tim and thats the thing that keeps rising isnt it?

    “Whatever the arguments, there are a few undisputed facts. Since 1978, 165 US airlines have collapsed, been forced to merge or are in Chapter 11, the industry has lost billions, and it could not a few years ago make the required investment in more fuel efficient equipment that would have helped mitigate the crisis today.”

  28. Hal9000
    January 3rd, 2010 at 17:10 | #28

    There was interest in spelling reform throughout the left and liberal circles worldwide elsewhere in the late 19th and early 20th centuries too. The Kerensky Provisional Government of Russia in 1917 reformed Russian spelling, eliminating one letter and severely restricting the use of another, although, as in most such ventures, retaining usages, that, while not phonetic, were easier to write or so entrenched as to encounter resistance to reform. Similarly, in American spelling reform, the obsolete Anglo-Saxon spellings (e.g. ‘thorough’) were retained.

    Curiously, many of the American reforms actually returned spellings to their Latin original forms, ‘labor’ being one of them. English had acquired many of these words via French, thanks to William the Conqueror, and along with them spellings that worked in mediaeval* French. It’s a question of whether you think spelling should give a clue to etymological history, or whether you’re keen on the original root, I suppose. English spelling now has to account for the widely different pronounciations in, for example, Jamaica, Yorkshire, Brisbane and the Bronx, so I doubt whether more reform will eventuate.

    *A counter-example, where British-Australian English spelling has retained the Latin spelling and the Americans went for phonetic. Don’t look for consistency in this tortured field!

  29. Tim Peterson
    January 3rd, 2010 at 18:05 | #29


    Regulated fat profit margins do not create jobs – the money goes to shareholders, not to workers.

  30. DavetT
    January 3rd, 2010 at 18:20 | #30

    Early on you mention the provision of ‘infrastructure, social welfare systems, and services such as education and health’. These areas are obviously difficult to address on a ‘for profit’ or ‘user pays’ basis. It seems that by 2000 conservative strategists in the U.S. figured they’d found a solution to the social welfare aspect in the form of ‘compassionate conservatism’, which didn’t include the tie-in to religious groups in its label.

    Given the current penchant of Australian conservatives to seemingly buy into the recent U.S. conservative approach, an article in Vanity Fair on ‘An Oral History of the Bush White House’ is instructive. The way that ‘compassionate conservatism’ played out is one interesting aspect of this article. It’s on page 10 of the article.

    You can bring it up by searching on ‘Vanity Fair Bush Oral History’.

  31. Sam
    January 3rd, 2010 at 19:02 | #31

    Telecommunications certainly do constitute a natural monopoly Tim. Does everyone remember Telstra and Optus chasing each other up the same street in their rush to cable up the Australian metropolitan areas for pay tv in the 1990′s? They only managed a few million homes before they ran out of money and they carry mostly the same shows anyway, with only a quarter capacity each. I’m sure Professor Quiggin remembers. And if you think that was an isolated case, have you ever wondered why you can’t can’t get a signal on your Virgin mobile phone when you’re standing right next to a Telstra base station? The problem of infrastructure duplication is right from the first-year textbook on natural monopolies.

    One other thing. Has anyone done a study on the increased advertising costs of newly privatised companies? Do people still use the term “positional externality?” How much extra optical fiber could have been purchased for the hundred million dollars sunk into Telstra stadium?

  32. Sam
    January 3rd, 2010 at 19:18 | #32

    As for the banks, if the most important financial innovation of the past 30 years was the ATM, and I get charged $2 every time I use another bank’s machine, that seems like a pretty clear case of natural monopoly. Either that or the big 4 are gouging us. But that can’t be it can it?

    On an entirely unrelated note, Alice, heck if you can’t say it on the holidays when can you say it eh? I think I love you. I hope such a declaration doesn’t violate the comments policy here.

  33. Monkey’s Uncle
    January 3rd, 2010 at 21:10 | #33

    Sam, I can’t understand why anyone can object to paying a fee for using another bank’s ATM.

    Suppose I purchase my groceries from Coles, but the nearest Woolies is closer. If I went to Woolies and put in my order for groceries and got them to pick them up from Coles and bring them back, I would naturally expect them to charge a fee for doing so. Indeed, it would take some nerve to expect them to do it for nothing.

    For the life of me, I cannot understand why anyone would expect to carry out business using the property of a direct competitor and not be charged for the privilege of doing so.

    Of course, if there was only one bank you wouldn’t have to worry about fees for using the ATM of another bank. But other charges would be higher due to monopoly power. And a bank with no competitors might not bother to put more ATMs in convenient locations.

  34. Peter T
    January 3rd, 2010 at 22:35 | #34

    The issue is not just natural (or unnatural) monopolies, but the confusion of value and price, and the reduction of issues to a single level of analysis. Network effects are not captured by marginal pricing (the marginal cost is often close to zero – how much does an extra byte over the net cost?). And price is not cost – externalities can sometimes be priced, sometimes not. This is why we use actual prices for much less than half of our “economic” activities (we sometimes use notional prices where there is no market to set actual ones). A good many economists have actually said these things – they are nodded to, and then ignored. One good example is from the delightful Joan Robinson (I had the privilege of listening to her at Sydney University many years ago – an old lady then, but sharp as a razor). She wrote “There is a …. more fundamental bias in our economy in favour of products and services for which it is easy to collect payment. Goods that can be sold in packets…or services that can be charged for at so much per head, provide a field for profitable enterprise. Investments in, say, the layout of cities, cannot be enjoyed except collectively and are not easy to make any money out of….[W]hat can easily be charged for, and what cannot, is just a technical accident”.

    Why let one small group of people take advantage of such accidents to capture an increasing share of our collectively-generated wealth?

  35. TerjeP (say tay-a)
    January 4th, 2010 at 06:06 | #35

    Those that think that telecommunications is a natural monopoly need to explain why Australia had a rapid multiplication of telecommunications companies after the telephone was invented and up until the day the Commonwealth government nationalised the lot. Complaining about duplication doesn’t cut it because duplication is evidence that new entrants were willing to enter the market.

    Australias telecommunications monopoly was never natural and to the extent to which it became monopolistic this was a product of government nationalisation.

    Alice – I note you did some hand waiving. I also notice that neither you nor anybody else addressed my complaint about the lemon car example that JQ uses. Let me repeat it:-

    Regarding the lemon problem. I don’t see how this is a market “failure”. I agree that near new cars sold second hand tend to attract a lower price than new cars sold direct from the show room. However it simply illustrates the logical outcome of reasoned analysis by market participants who look not only at the nature of the goods on offer but the incentives of the other party. If anything the example seems to show how a seemingly irrational state of affairs (two cars apparently equivalent selling at very different prices) is in fact the product or rational behaviour.

    However let us suppose that this is a market failure and one that governments can address. Why then don’t they address it? What government in the world has every addressed this specific problem of car prices in a manner that is meaningful? Where in the world do near new cars sold second hand sell for prices comparable to new cars sold new from the showroom? And what are the broader consequences of the government correction? My suspicion is that this particular problem is generally left alone by most governments simply because they have nothing much to add to the equation. Probably even in nations with a nationalised car industry. And if my suspicion is correct then why on earth would you use this example as a rationalisation for government interventions.

  36. nanks
    January 4th, 2010 at 06:44 | #36

    @Peter T
    one of the best posts – clearest – I’ve seen here.

  37. Alice
    January 4th, 2010 at 07:27 | #37

    @TerjeP (say tay-a)
    OK Terje – the reason why a new car is sold for less as soon as it leaves the showroom is likely to be the result of more than one reason. Firstly, these cars are usually gems that need to be sold in a hurry (eg a person who has just bought the car new is transferred to an overseas job and now needs it sold or in fact the purchaser was an idiot who overfinanced themselves and this does happen and the finance company is only concerned with the amount borrowed not the total value).

    In this case the car is snapped up by a used car dealer pretty promptly – I know because thats what hubby does. It will sell fast at 5am in the morning for an immediate cash settlement. The liquidity is attractive to the seller. Therefore there are usually not many around and they sell quickly because demand is high but the person needs to sell quickly and gets an immediate liquid payment. The second reason is that the car may well be a lemon in which case it wont sell as quickly and will sell for an even lower price. These cars may be a lemon or they may be a gem. There is a cost involved in ascertaining whether it falls into either category, but if it is a gem most ordinary buyers wont find one except in the used car yards, unless they get up very early in the morning.

    There is also a little red book that dictates what second hand cars are worth….which has a lot of persuasion power. Dealers themselves also have sufficient expertise to also negotiate good buying prices.

    The lemon analogy doesnt convince me either unless it is still not sold a week later.

  38. Alice
    January 4th, 2010 at 07:54 | #38

    Sam – why thank you! Thats just as nice to hear on holidays!. You say “Either that or the big 4 are gouging us. But that can’t be it can it?”

    Well we all suspect it is that…and where there is smoke there is often fire….interestingly thieves are getting smarter. At my local shopping mall on Xmas Eve some few thousand accounts were skimmed by an ATM including the bank managers own when he whipped his card through on his way home. Must have been a pretty sneaky skimmer. Does this mean banks will use it as an excuse to raise the ATM fees – probably.

    An interesting comment above re the profit enterprise of things that can be packaged. We dont have to look too far to see shrinking packets in the supermarkets and we also see the monopoly profit enterprises of firms like proctor and gamble….I lost it last weekend when a packet of two replacement sponges for my mop scanned in at $13.95. Damn it, Ill get out the old squeeze variety from the back of the cupboard. Then there was the little old lady that made a passing comment to me “Im sure the prices have all been put up in this week since Xmas – I dont know whats wrong with them – dont they realise we do need to eat?.”

    Now the distinctly “non competitive” unregulated so called private competitive markets in supermarket goods wouldnt be gouging us either would they?

    I have a little problem with the presumption of “deregulation plus private = competitive”.

  39. BilB
    January 4th, 2010 at 08:13 | #39
  40. Freelander
    January 4th, 2010 at 08:50 | #40

    @TerjeP (say tay-a)

    They had the same thing in the US in the early days of telephone, that is, several different telephone companies rolling out their separate (unconnected) networks. People eventually got sick of having to be connected to more than one network if they wished to phone everyone. Of course, telecommunications is a natural monopoly. With regulation you can turn it into a natural monopoly in which different companies own different parts of the monopoly which is what we have today. The most important part of the regulation is requiring access on reasonable terms. If you don’t think telecommunications is a natural monopoly then roll out your own separate network without connecting and see how effectively you manage to compete.

  41. BilB
    January 4th, 2010 at 09:16 | #41


    What is a market failure is the guy who got a $120,000 phone bill. The US phone system, apparently, can route a call via variously privately owned pathways. So 2 phone calls to the same number can have completely different charge rates if the routing for each call is different. This routing is beyond the control of the caller. That is what happened to this guy. He was expecting a large phone bill, but what he got was many fold what it should have been. I had a smilar experience when I was buying US dollars once, the Comm bank misunderstood the instructions and allowed the exchange conversion to occur in the recieving Cobb&Co Bank (it seems from my experience that Cobb&Co have changed sides to become the robbers). This phone experience highlights the vulnerability of the fragmented system that you prefer.

    To this sort of experience I am sure that you will say that these are exceptions. I doubt that such instances are that rare, and as they say, the exception breaks the rule.

  42. James
    January 4th, 2010 at 09:22 | #42

    Prof Q, I have often found your discussions of the Baumol effect instructive when comparing public and private service provision. Since governments tend to deliver human services and private companies deliver goods, one would expect the government services to have less productivity growth than the private goods (which may be why they are less attractive to private provision in the first place: look at the results of the late unlamented ABC learning for a good example, or the de-mutualisation of AMP). This feeds into the perception that governments are worse at delivering services than markets, since their costs go up due to labour mobility, when the truth is that the nature of the service is itself harder to improve; hence the general failure of privatisation to have the effects it was supposed to have. I think the Baumol effect would fit well in this section, alongside Akerlof.
    On Akerlof, given the “zombie economics” theme, you might want to mention Akerlof’s essay on the difficulty of publishing “the market for lemons”, which he attributes to the fact that the profession did not want to hear about market failure: “The economists of the time felt that it would violate their methodology to consider a problem, such as the role of asymmetric information, that was out of its traditional focus”. As one of his rejecting referees put it, “if this paper was correct, economics would be different.” How’s that for a defence of a degenerate paradigm.
    I will continue my pet Sraffian theme by noting that Akerlof completely avoids mentioning that Solow’s “capital as putty” growth models, which he heralds as part of a new kind of mathematical economics, got their a$$es kicked in the Cambridge controversies.

  43. Sam
    January 4th, 2010 at 12:10 | #43

    TerjeP, your definition of natural monopoly is wrong. An industry characterised by natural monopoly is one in which goods (or services) can be created (delivered) most cheaply by a single producer. It most certainly does not mean that if left to its own devices (w/o government intervention) the industry will “naturally” amalgamate itself into only one supplier. I hope everyone can see that those are two very different things.

    Duplication is evidence of inefficient investment. Every unnecessary cable laid, or base tower constructed represents money that could either have been taxed, consumed, or invested elsewhere.

  44. TerjeP (say Tay-a)
    January 4th, 2010 at 12:47 | #44

    Sam – if a single supplier is the cheapest solution for a given market then the need for nationalization is completely missing. Most advocates of nationalization complain that a single supplier solution is expensive thus the call for intervention.

    Alice – your explaination of why some cars sell for a lower price does nothing to answer my question as to how this justifies intervention nor does it address my point that no intevention examples that “fix” the car market have been demonstrated.

    JQ – your book is stacking up to be a boring set of disconnected anecdotes if this example is anything to go by.

  45. Kevin Cox
    January 4th, 2010 at 13:09 | #45

    When we talk about a “natural monopoly” were are talking about common standards and in the case of telecommunications using the one set of wires to service a house. There is nothing “natural” or is there any need to have a single owner of all wires. With respect to telecommunications it is my belief it would be best if each householder and business owned the wires up to the point of connection to multiple wires. The reason businesses and governments love monopolies is that they own the standard (as with microsoft and operating systems) as with governments with their excessive taxes on water through their control of water supply systems.

    When you own the standard you can charge rent for use of the standard which should be free and should be a common good. Giving private industry control over a standard is much worse than the government taking control of a standard because at least the profits from the government operation tend to go back towards the common good.

  46. Alice
    January 4th, 2010 at 13:19 | #46

    Exactly Sam – the unnatural monopoly (say by virtue of industry amalgamation) should be distinguished from a natural monopoly. An industry amalgamation does not necessarily occur because that structure is more efficient – it can occur through misuse and abuse of market power by one firm. It is the type Menzies said the ordinary person needed protection from. It is the type of monopolistic empires that led us to the creation of anti trust laws. It should not be confused with a natural monopoly at all.

    Terje – there is no market failure in the new car market hence there is no need for intervention. On that we agree. Its a lame example of market failure. On the other hand our infrastructure and communications requirements for now and the future as a network that services households and firms and keeps their costs down and emissions down in our collective airspace is an area where market failures abound. They do demonstrate the need for public investment

    Terje – Im suggesting it. The phrase you hate the most as a remedy- government intervention. The big G. The small G. Any G because the free market isnt providing well in this area. A Pigovian tax remedy as Tim P might say. A cap n trade. Some thou “shalt not…be anti competitive legislation” that actually bites. Consumer protection against liars, cheats, cartels and price fixers. Real jail terms for corporate criminals.

    I dont see what your problem is with Government intervention is Terje (in most cases)? Or would you rather get down in the gutter and haggle it out with scoundrels on a one to one basis?

  47. Sam
    January 4th, 2010 at 13:27 | #47

    TerjeP, under natural monopoly conditions, the marginal cost of production is lowest when undertaken by only one supplier. However, if that single supplier is an unregulated private monopoly, they will extract economic rent from consumers by charging a monopoly price. This is both inefficient and unfair.
    One way to remedy this is to allow competition. This would cause the price to fall, but only as low as the marginal cost of production in a multiple supplier system, which as already discussed, is higher than it needs to be.
    A much better way is to either regulate the price charged by the single supplier, or to bite the bullet and simply nationalise it.

  48. derrida derider
    January 4th, 2010 at 13:41 | #48

    John, I’d question whether your introductory quote is a good choice. Your chapter is really about privatisation in developed mixed economies with (relatively) good governance. The arguments about privatisation in the Ukraine – an underdeveloped socuialist state with spectacularly poor public and private governance – are similar in economic theory (the same arguments about government vs market failure, costs of funds, etc) but very different in policy practice because those contesting theoretic arguments play out so differently on the ground there.

    If you oppose more privatisation for the Ukraine the grounds of your opposition are not likely to be quite the same as those for, say, the privatisation of Queensland railways. It’s muddying the waters to bring in circumstances so different to those the rest of your chapter focuses on.

  49. Monkey’s Uncle
    January 4th, 2010 at 14:17 | #49

    There is some truth to the claim that if an industry or service is a natural monopoly it is better to have a public monopoly than a private monopoly, as a private monopoly is more likely to abuse its power at the expense of consumers. Whereas a public monopoly is subject to political pressures not to gouge consumers.

    For example: if all roads and footpaths were privately owned and there was no regulation on what landowners could charged, people would be held to ransom by landowners whenever they wanted to travel anywhere.

    Indeed, there is an old joke about how people support libertarianism until they realise they will have to pay to walk down every sidewalk.

    Where I disagree is that many social democrats tend to stretch the definition of what is really a natural monopoly, and in some cases discount alternatives to nationalisation like using competition laws to give competitors access to monopoly infrastructure.

  50. gerard
    January 4th, 2010 at 15:16 | #50

    Sam, I can’t understand why anyone can object to paying a fee for using another bank’s ATM.

    Suppose I purchase my groceries from Coles, but the nearest Woolies is closer. If I went to Woolies and put in my order for groceries and got them to pick them up from Coles and bring them back, I would naturally expect them to charge a fee for doing so. Indeed, it would take some nerve to expect them to do it for nothing.

    Maybe if Coles and Woolies were places in which customers opened an account in which to deposit their own groceries, to be withdrawn later, you might have a point. Of course the “groceries” would have to be weightless, vital, costlessly transportable and of a a single perfectly interchangable kind. In other words, the analogy could hardly be more absurd.

    I wouldn’t complain about a one cent fee, although even that would be well above the actual cost to the bank involved. Two dollars is “abuse of its power at the expense of consumers”.

  51. gerard
    January 4th, 2010 at 15:26 | #51

    John it seems some people are missing the point by dwelling on used cars. you might want to connect the “lemons” reference to the financial crisis (securities after the subprime crash being suddenly perceived as lemons, leading to a freezing of credit markets)… and the “free rider” problem involved with any private investor going to the expense of investigating the true health of a given financial instrument. In fact the credit market is much closer to the definition of “market failure” than the used car market!

  52. Alice
    January 4th, 2010 at 15:45 | #52

    Gerard – re the $2 ATM fee being just plain greedy – of course it is – especially to an old age pensioner who may have difficulty getting to the ATM and doesnt have much to withdraw but needs it.

    To charge $2 for them to get their cash out is immoral and unethical, especially when the banks have closed branches and sacked tellers, saving themselves the extra costs that have helped fatten their very high profits further, and they dont have their own ATMs where the branches used to be.

  53. BilB
    January 4th, 2010 at 16:43 | #53

    ‘ connect the “lemons” ‘

    I read this first pass in “join the dots” form, which painted a fun mental image.

  54. Monkey’s Uncle
    January 4th, 2010 at 17:22 | #54

    “Maybe if Coles and Woolies were places in which customers opened an account in which to deposit their own groceries, to be withdrawn later, you might have a point. Of course the “groceries” would have to be weightless, vital, costlessly transportable and of a a single perfectly interchangable kind. In other words, the analogy could hardly be more absurd.”

    Gerard, please don’t be tedious. Just because there are varying degrees of cost and inconvenience involved does not change the underlying principle that one cannot expect to do business using the property of a direct competitor without paying a fee for the privilege.

    Moreover, in the example I cited I would expect to pay a much higher charge than $2. So I am not ignoring differences in costs incurred.

  55. Monkey’s Uncle
    January 4th, 2010 at 17:43 | #55

    Another problem with the ATM example is that if customers could use other banks ATMs for free there would be less incentive for banks to invest in more ATMs.

    Why invest in infrastructure if others can free-ride on it, when you can just sit back and allow your customers to free-ride on the infrastructure of others? Banks would not lose customers from having fewer ATMs if their customers could use other banks ATMs for free.

    Gerard, to carry your argument to its logical conclusion, I guess if there are no ATMs around people should be able to get the money off a random stranger who can then get it back from their bank at the earliest convenience. After all, money is weightless and easily transportable. So there’s no problem.

  56. Alice
    January 4th, 2010 at 17:48 | #56

    @Monkey’s Uncle
    MU – But you are being tedious ignoring completely the fact that banks have already saved costs by using ATMs so shouldnt cost savings be passed on to consumers in the form of lower fees or higher interest rates on deposits?…so much for the competition that isnt there??…and what we see is the age old problem of oligopoly (an imperfect market) where there is tacit approval between the competitors on the degree of fee gouging. No one in their right mind would suggest it was a fair reflection on costs to charge $2 to use a foreign ATM when millions of dollars are settled between banks each day without such a fee accompanying each and every transaction.

    You ignore the fact that it simply doesnt cost the bank remotely near this much to process a withdrawal from a different bank and that it is in fact, a fee gouge.

  57. Monkey’s Uncle
    January 4th, 2010 at 18:06 | #57

    “MU – But you are being tedious ignoring completely the fact that banks have already saved costs by using ATMs so shouldnt cost savings be passed on to consumers in the form of lower fees or higher interest rates on deposits?”

    Even if that’s so, why should the savings be passed onto the customers of rival banks? Plus, there is no reason that all savings should be passed onto consumers and none retained as higher profits. Why would any business invest in cost-saving efficiencies if consumers get all the benefits and business none?

    Banks charge these fees for facilitating the business of a rival firm. Why on earth would any business give their rivals a free kick without charging for the privilege?

  58. nanks
    January 4th, 2010 at 18:28 | #58

    Who gets the dollar (or two) is a diversion when the obvious point is that it is wasteful to have multiple ATMs owned by multiple owners sitting next to each other and idle most of the time where shared machines will do. ATMs are not spatially allocated according to consumer needs ie they are spatially clumped such that some spaces are empty where usage is needed by the public but not at a level that returns profit to the bank according – one supposes – to some optimality criteria (which would include their function as advertisements). ATM distribution is an example where a ‘competitive’ private market ensures resource waste and misallocation. A central ATM backbone would be more efficient – as for telecommunication infrastructure in general.

  59. Sam
    January 4th, 2010 at 18:37 | #59

    Monkeys Uncle, Re competition laws. This was tried in the Australian telecommunications sector. Telstra threatened, and enacted, a capital strike. They tied up every decision in legal knots, declared the ACCC a “rogue regulator” and refused to invest any money into broadband unless they were guaranteed a minimum 27% return. This caused years of delay during both the Howard government and the Rudd’s first term so far.
    Instead of people in blue shirts laying cable in the street, we had men in ridiculous wigs laying bogus arguments in the courtroom. When a private monopoly is big enough, and important enough, they can game the system, playing chicken with the government. A state owned monopoly enterprise with a public mandate to efficiently produce for the good of all simply doesn’t do this.
    Telstra is a shining example of everything that is wrong with privatisation, and why we simply shouldn’t trust theorists who care more about markets than economies.

  60. gerard
    January 4th, 2010 at 18:43 | #60

    “Why on earth would any business give their rivals a free kick without charging for the privilege?”

    They wouldn’t, that’s the problem! but the good news is, there’s no need to actually regulate, since as the recent dropping of their “overdrawing fee” scam shows, it only takes the government to merely raise the possibility of regulation to make them fold like a cheap suit!

  61. TerjeP (say Tay-a)
    January 4th, 2010 at 19:31 | #61

    The ACCC is a rouge regulator.

  62. Sam
    January 4th, 2010 at 19:35 | #62

    Explain how

  63. Freelander
    January 4th, 2010 at 19:48 | #63

    @TerjeP (say Tay-a)
    You mean a red regulator?

  64. Alice
    January 4th, 2010 at 21:02 | #64

    Or does Terje mean a pink regulator ??

    Terje – you couldnt possibly be suggesting that all regulators are lefties are you? This gets more ridiculous by the day.

  65. Alice
    January 4th, 2010 at 21:08 | #65

    says on the antics of privatised Telstra courtesy of the eternally ungrateful Trujillo for his remuneration (so grateful he left calling us a bunch of hicks or Australia a backwater or something similar)

    “Instead of people in blue shirts laying cable in the street, we had men in ridiculous wigs laying bogus arguments in the courtroom.”

    I love you too Sam.

  66. Ernestine Gross
    January 4th, 2010 at 22:13 | #66

    @TerjeP (say tay-a)

    Terje, in reply to your complaint about non-responses to your problem with ‘the lemon problem’:

    1. You say that there is no ‘market failure’ because the decisions described are individually rational. You miss the point. The point of Akerlof’s example is to illustrate that individually rational decisions can have consequences other than those postulated by, for example, van Hayek (markets aggregate dispersed information efficiently). Perhaps it might be helpful to you if you were to re-read JQ’s paragraph containing the reference to Akerlof’s lemon problem. Further, it might be helpful if you were to respect the work involved in writing for a broader audience while at the same time capturing the historical development of economic theory and policy. This is not easy. Your assertion of bias is wrong.

    2. You say that if one were to accept Akerlof’s lemon problem as an instance of ‘market failure’ then the question arises why governments do not solve it. This question arises if, contrary to the expressed statements in JQ’s post, one is stuck in the 1940s (or thereabouts) where social systems were often (not everywhere and not by everybody) discussed in a bi-polar (‘capitalism’ vs ‘socialism’) framework – one or the other, ‘good guy’ vs ‘bad guy’ frame of mind. In an even more popular fashion, one might say that the Akerlof example is a counter example to the phrase ‘the government can’t pick winners’ – well, ‘the market’ can’t either.

    There is a well developed economic theory known as ‘second best’. This is an example of progress in economics. The notion of a ‘mixed economy’ is an empirical example of progress based on progress in ideas and empirical observations.

    It would be most helpful if you could set an example for other libertarians to recognise that while some of your ideals about personal and economic liberties are shared by ‘mainstream economists’, constraining people to confuse ideals with feasible and actual outcomes is not a good idea; ideals become dogma.

  67. TerjeP (say Tay-a)
    January 4th, 2010 at 22:15 | #67

    Sam – it’s track record in court cases shows that it regularily launches proceedings against without getting it’s facts straight (let alone evidence). It’s a PR noise box.

  68. Sam
    January 4th, 2010 at 22:58 | #68

    In some sense I almost don’t blame Trujillo. He is what he is after all: A selfish, arrogant, bullying, incompetent, barely literate moron who comes the closest anyone could to providing a justification for the phantom anti-Hispanic feeling he complains so much about. He never hid any part of his personality when running US West (into the ground).
    At Orange SA he proudly established a reputation as the kind of incurious, entitled, corporate dud that would make Dilbert’s pointy-haired boss blush. This kind of man causes engineers to use the word “management” in the same tone of voice as “cockroach.”
    None of this is Trujillo’s fault, he was simply made that way. It’s our fault, for privatising Telstra in such a way as to make his kind inevitable.

  69. Ernestine Gross
    January 4th, 2010 at 23:00 | #69

    JQ, re the paragraph starting with “The complete financial financial markets hypothesis makes sense only if these markets are efficient, in the sense of the strong form of the efficient markets hypothesis discussed …”

    Minor point: The duplication of the word ‘financial’ is probably already edited out.

    It seems to me you are treating two quite separate research programs on financial markets simultaneously. There is the analytical stream, starting with Arrow in the late 1950s (French) and ending, via Radner in the 1970s, with the work on ‘the theory of incomplete markets’ in the 1980s. This research program asked the question: Under which conditions, if at all, can the properties of the solution of the Arrow-Debreu model be obtained when the assumption of complete commodity markets in the model is replaced by alternative assumptions about the institutional environment. The second approach is Fama’s efficient capital market hypothesis.

    It seems to me your approach captures very nicely how policy formation proceeded, namely as if someone with absolute power had read the Arrow-Debreu model, ‘liked’ the optimality properties and decided that the real world has to change to fit into the model. Since the Arrow-Debreu model is a model of a ‘competitive private ownership economy’ ‘everything’ has to be privatised and ‘everything’ has to be made – by decree – ‘competitive’. The decision was then sold by publicising event studies on Fama’s semi-strong form efficient capital market hypothesis (without checking the methodology).

    IMHO, it is important to distinguish the two research programs because the first one resulted in practically useful insights (on many issues you address in your book) while the latter did not. Moreover, I am very concerned that this knowledge will be lost because students will enrol in mythology subjects (to study the cultural messages of Aventor or whatever the film’s name is) instead of academic economics subjects with the possible consequence that the next financial crisis will be even worse.

  70. Pinguthepenguin
    January 5th, 2010 at 00:58 | #70

    Quick comment on the whole ATM discussion. I have been living in London for the past 4 years now and when I first came here I was pleasantly surprised by the fact that as a general rule ATMs of rival banks do NOT charge for their use. Obviously it is possible to do here (London) without any huge fallout, how is it that in Australia we are ripped-off to the tune of $2 every time we want to make a withdrawal?

  71. David
    January 5th, 2010 at 08:51 | #71

    John, for footnote 2 the reason that the Australian labor party spells its name with the American spelling is due to King O’Malley. You can find the reference in his wikipedia entry.

  72. Monkey’s Uncle
    January 5th, 2010 at 14:18 | #72

    In the ATM example, I don’t doubt that the cost to a bank of allowing customers of other banks to use their ATMs is relatively small compared to the $2 charge. Although it would be a lot more than 1 cent, when you factor in the cost of reduced business due to aiding a rival bank.

    But to me this is no more objectionable than the fact that someone who owns an amusement ride, arcade game, slot machine, vending machine or gaming machine only incurs a relatively small additional cost for every extra $2 that goes in. If you invest in the infrastructure being there, you are entitled to get a profit from each additional person who wants to use it.

    The cost of purchasing and installing an additional ATM is quite high, and any ATM needs to attract a fair number of customers to simply pay for itself. If the bank can get additional customers and start making a tidy profit, all well and good. That’s capitalism.

  73. TerjeP (say Tay-a)
    January 5th, 2010 at 14:45 | #73

    Monkeys Uncle – the vending machine analogy is pretty spot on. If you don’t want to pay for the convience of an alternate banks ATM then don’t!

  74. Alice
    January 5th, 2010 at 15:16 | #74

    @Monkey’s Uncle
    Mu – you continue to ignore the entire reason banks put ATMs in the first place – to reduce the cost of staffing banks. Next you will be suggesting the bank’s customers pay for the bank manager’s laundry. Some costs are operational and should be paid for by the bank out of the profits it already makes on the interest rate spread. The costs of banks transferring money between themselves and other banks goes on seven days a week, 52 weeks a year. It is already factored in. Arguing that when the customer uses the ATM they should pay to get theor own money out is akin to tellers expecting tips from withdrawals made in branches.

    Its an unnecessary gouge – pure and simple.

  75. Alice
    January 5th, 2010 at 15:23 | #75

    I recall in the late eighties companies introduced the “admin fees” on invoices or statements for the first time. So you get a statement by mail and suddenly the company I worked for charged a $4 admin fee. It was money for jam. We knew it. Some of our customers refused to pay – so for them we wiped it out. For others who didnt ask what it was and didnt object – they paid, but the real company costs reflected in the invoiced amount before the admin fee. They have since gotten much more creative with governments and the private sector levying these ridiculous extra charges. The only problems with banks doing it is – they just take it electronically from your account. You have no choice not to pay it. That is not a fair method to conduct business. First they manage their profits quite handsomely and then they go for the jam on top.
    It has nothing to do with their costs of the ATM installation.

  76. Alice
    January 5th, 2010 at 16:55 | #76

    Imagine…just imagine…pre ATMs…if a bank (any bank) introduced a $2 fee to take your money out in the branch – how long would they have lasted before customers withdrew their accounts en masse? Thats the trouble with electronic banking…they take it before you can object. They just electronically debit your account with whatever fees they feel like charging. Then all banks get on the oligopoly bandwagon and do the same. Does it make it right? Nope.

  77. fred
    January 6th, 2010 at 20:24 | #77

    @Peter T

    Thank you for a really good comment.
    I’m sure sometime in the future I will have occasion to post such thoughts at other places in the course of discussion and you have said it so well I would like to quote you in full [maybe minus the bit about heasring Joan]..
    Can I have your permission to do so?

  78. Monkey’s Uncle
    January 7th, 2010 at 12:46 | #78

    Alice, now you are comparing banks charging their own customers with banks charging the customers of other banks for use of their facilities. This is comparing apples with porcupines. I give up.

    I know you believe that capitalism is evil and all is fair in the cause of taking away their profits. We will just have to agree to disagree on that.

    The bottom line is that if you are not a customer of that bank, you haven’t paid one cent towards putting that machine there. There is no reason you should be able to use it free of charge. Unless you believe that all property is theft.

  79. TerjeP (say Tay-a)
    January 7th, 2010 at 14:13 | #79

    Ernestine – I previously missed your reply to my question about lemons. I appreciate it is difficult to write for a general audience. This is why I tries to help JQ with feedback. To argue for intervention in the market using an example in which intervention has never been shown to help seems to me to be a recipe for confusing any general reader who has basic thinking skills.

  80. TerjeP (say Tay-a)
    January 7th, 2010 at 14:19 | #80

    Alice – your ATM logic seems to be along the lines of saying
    many restaurants offer free water to their customers so all restaurants should offer free water to non-customers. In short your logic is daft.

  81. Alice
    January 7th, 2010 at 19:10 | #81

    The banks got their extra profit when they sacked people and closed branches to put ATMs in. What part of that dont you understand? There should be no fee and we should already have lower charges…

    Jeez Terje. You can be infuriating. Its gouge – plain and simple. I know a gouge when I see one.

  82. Alice
    January 7th, 2010 at 19:12 | #82

    @TerjeP (say Tay-a)
    Furthermore Terje

    All restaurants whould offer free water. If they cant build the cost into their meal prices then they are idiots.

  83. Alice
    January 7th, 2010 at 19:19 | #83

    @Monkey’s Uncle
    Oh for goodness sakes MU. I go into Target to buy sheets for my bed …..I pay target using a commonwealthn bank debt card. Target may bank with NAB for all I know.

    These settlements happen everyday MU. Target doesnt charge me $two bucks extra because I bank C’wealth and they bank NAB.

    This happens every day across the country and the bankls dont charge for settling money between themselves – so why should ATM fees be charged…its money for jam. Its what banks do. Stop looking into the minutiae of costs that baks dont have MU. Its in their cost structrure already (in their interest rate spread)(. Dont you get that?

    Crazy people want to justify bank gouges on the basis of costs of each ATM…please spare me – they are five tellers and one branch manager and branch rent and electricity and rates in front. !!!!
    Why should I pay the $2 for lesser service???

    I am the customer. I was once king!!!

  84. Monkey’s Uncle
    January 8th, 2010 at 10:19 | #84

    Alice, whenever someone points out the logical flaws in your position you basically respond by saying ‘why I’ll huff and I’ll puff and I’ll blow your house in’.

    Even if your argument is correct that banks are excessively profiteering and charging excessive fees, why should non-customers benefit from that? The benefits should be returned to customers, rather than having customers subsidise non-customers.

    “This happens every day across the country and the bankls dont charge for settling money between themselves – so why should ATM fees be charged…its money for jam”

    I have already addressed this. Yes, banks settle accounts with each other every day at little cost. But it still costs money to put more ATMs in place. No-one would bother to invest in infrastructure if the benefits are all socialised.

    Banks would not bother to pay to install more ATMs if they could just allow other banks to put in the ATMs and let their own customers use them for nothing.

    In any case, just because banks carry out some transactions for nothing doesn’t mean they are obligated to do so in other circumstances. This is akin to someone coming to your home and saying ‘you let Joe Bloggs use your property free of charge, so you must let me do the same.’

    “I am the customer. I was once king!!!”

    So how does that work if you are not even the customer of the bank!!

  85. TerjeP (say Tay-a)
    January 8th, 2010 at 13:02 | #85

    ATM machines entail overheads that EFTPOS terminals don’t. For starters they are filled with cash belonging to the bank and they need to be secured and restocked at the banks expence. This is simply not the case with an EFTPOS terminal. The attempted comparison isn’t a good one. It is like complaining that postage costs more than email.

  86. Sam
    January 8th, 2010 at 14:38 | #86

    TerjeP, It’s not “ATM Machine.” That’s an example of Redundant Initialism RIS Syndrome :)

    Also, do you accept that the Australian telecommunications industry in it’s current form displays significant inefficiencies and these result from it’s natural monopoly characteristics? It is possible for you to answer yes to this and still not agree that nationalisation is the answer. You could argue that these are outweighed by efficiency benefits from ‘market dynamism’ for instance.
    There seem to be two different types of libertarians, those who think that an unfettered market always gives a superior economic outcome, and those who see the market as the primary aim. I know one prominent libertarian who would be happy to have 50 different water companies lay out 50 different parallel sewage pipes along the same street in the name of competition. Do you feel the same way?
    Monkeys Uncle and TerjeP, what do you think of Nank’s (#8) idea of a central ATM backbone maintained by an independent body? This appears to get around MU’s objections. No one replied to his/her post and I thought is was a very thoughtful and well considered argument.

  87. TerjeP (say Tay-a)
    January 8th, 2010 at 15:39 | #87

    RIS indeed.

    I think the telecommunications industry in Australia is plagued with poor customer service. I don’t have a view that it is otherwise inefficient.

    We have not agreed on a definition for the term “natural monopoly”. Based on past comments I doubt we will. I think the industry is over regulates particularily in regards to mandatory access.

    In terms of mobile communications would you agree that there is little penalty in terms of infastrucure duplication if we have multiple providers and that the duplication that does occur provides some useful redundancy. Further more do you see any benefits at all from a competitive environment in this example?

    I don’t think 50 parallel water systems would make sense. I was however appalled when I arrived in Sydney in 1988 and learnt that I was prohibited from putting in a water tank such that I was forced to buy from the government monopoly. Also as to why the ACCC has made Telstra copper a declared service but not the pipes of Sydney Water (a true monopoly) is beyond me.

    I see no merit in a single monopoly ATM network. This is technology that needs to evolve still and that means there needs to remain scope for innovation. Plus it seem like a large capital expence for no net benefit. If the banks want to pool infastructure there is ample scope for them to do so without government decree.

  88. TerjeP (say Tay-a)
    January 8th, 2010 at 15:51 | #88

    p.s. If we had a monopoly ATM network then who’s cash would reside in the ATM? Assuming the operator owns the cash and lends it to the banks on withdrawal by a banks customer then doesn’t the network operator become a bank or sorts. Or do you envisage that the machines still belong to the banks and it is only a comms monopoly?

  89. nanks
    January 8th, 2010 at 18:24 | #89

    @TerjeP (say Tay-a)
    One of the problems with the conservative or libertarian conception of monopolies is that they are framed within an hierarchical model of power – ie the existing implementation of economic power. I think it is, at least on the face of it, reasonable to think of hierarchical monopolisation as dysfunctional. But that is not the only possibility for structuring control of monopolies. I would be interested in any links to theoretical work on sortition (or similar) models of monopoly control. It would seem to me a reasonable assumption that randomised distributions of power may obviate some of the concerns regarding impediments to innovation.

  90. Monkey’s Uncle
    January 9th, 2010 at 10:01 | #90

    “Monkeys Uncle and TerjeP, what do you think of Nank’s (#8) idea of a central ATM backbone maintained by an independent body? This appears to get around MU’s objections. No one replied to his/her post and I thought is was a very thoughtful and well considered argument.”

    I think for the most part it is unnecessary and would create at least as many costs as benefits. I also fail to see how holes in the wall are a natural monopoly or should be operated as such.
    This approach would create additional costs, including presumably having to pay a third party to operate the ATM network and negotiate costs among the banks.

    In some cases, it may be beneficial for two banks to have a common ATM in a particular area and in some cases this is already happening. In some areas the credit unions have joint ATMs.

    But having one single ATM network is not really necessary, and as Terje points out this is a technology that is still developing and has room for improvement. Having a one-size-fits-all infrastructure would potentially kill off innovation.

  91. Monkey’s Uncle
    January 9th, 2010 at 10:07 | #91

    “Oh for goodness sakes MU. I go into Target to buy sheets for my bed …..I pay target using a commonwealthn bank debt card. Target may bank with NAB for all I know.”

    This is another apples and oranges comparison. If two people are undertaking a transaction and they are with separate banks, then obviously both banks have a responsibility to facilitate the transaction.

    But if an individual is merely carrying out a transaction with their own bank, then another bank has no responsibility to be involved and is a third party to the transaction.

  92. Alice
    January 9th, 2010 at 10:46 | #92

    @Monkey’s Uncle
    MU – you repeatedly ignored in all of your replies…that banks saved a lot of costs (as mentioned above) by installing ATMS in the first place and you acknowledge that it would not cost the bank anywhere near $2 to process the withdrawal from another bank. MU this charge is not justifiable on any of your (feeble…sorry MU but they are) reasons offered.

  93. Sam
    January 11th, 2010 at 16:07 | #93

    In terms of mobile communications would you agree that there is little penalty in terms of infastrucure duplication if we have multiple providers and that the duplication that does occur provides some useful redundancy.
    That slightly reduces the efficiency loss I suppose, , but since handsets can’t roam over onto other networks there is not much effective redundancy. I would have to borrow a friend’s mobile.
    Further more do you see any benefits at all from a competitive environment in this example?
    None TerjeP. They are network plumbers. All the technology is invented overseas. Show me one example of innovation in the Australian Telco sector that wasn’t just a straightforward application of off-the-shelf technology.
    p.s. If we had a monopoly ATM network then who’s cash would reside in the ATM?
    I don’t have an opinion on that. Perhaps the backbone could be run by the mint?

  94. Monkey’s Uncle
    January 12th, 2010 at 12:58 | #94

    “MU – you repeatedly ignored in all of your replies…that banks saved a lot of costs (as mentioned above) by installing ATMS in the first place and you acknowledge that it would not cost the bank anywhere near $2 to process the withdrawal from another bank.”

    Alice, I didn’t ignore the fact that banks introduced ATMs to cut costs. I specifically addressed that. I won’t waste time repeating myself. Anyone still around is free to scroll up the screen to see what I wrote. And I explained why the fact that the marginal cost to the bank is well under $2 is irrelevant. I don’t ignore anything. You simply ignore the points raised and continue to repeat the same discredited assertions. And you continue to ignore the obvious point of why bank customers should subsidise non-customers.

    “MU this charge is not justifiable on any of your (feeble…sorry MU but they are) reasons offered.”

    What is feeble is the attempt to use any excuse to try to justify using someone else’s property free of charge whenever it is convenient.

    It would be like someone who is not even a Telstra customer demanding the right to make free calls on public phones. After all, I’m sure the marginal cost to Telstra of each additional user is pretty small. And I’m sure Telstra have saved money on technology and labour-saving, so they can afford to give something back.

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