The Australian case for nationalisation

The speed with which bank nationalisation has risen to the top of the policy agenda has found the economics profession largely unprepared. The literature on property rights that developed in the 1970s produced a range of arguments in favour of private as opposed to public ownership which had at least some influence on the widespread adoption of privatisation policies in the 1980s and 1990s. Although subsequent theoretical and empirical developments, such as the discovery of the equity premium puzzle and developments in agency theory cast doubt on the claims of the original literature, the profession had moved on, and showed little interest in revisiting the issues. As Joshua Gans observes,

the main contributions have come from Australian economists who did this research a decade ago only to be told by international journals that as privatisation had occurred everywhere by then, no one was interested in the conditions under which government ownership would be preferable.

and notes “I guess that view is wrong.” Unsurprisingly, I was among those who tried, with limited success, to interest the international profession in this question.

Looking at the history of the issue, it’s also not all that surprising that such debate as there was took place mainly in Australia. Until very recently, the economics profession has been dominated by the US, where public ownership is rarely part of policy debate, and by the UK, where the advocates of privatisation were dominant from the start. Australia is typically among the primary export markets for UK policy ideas, and this was certainly the case with privatisation. In Australia proposals for privatisation ran into serious political difficulties which created room for a critical analysis of central elements of the case for privatisation.

It rapidly became evident that the idea that privatisation was a method by which governments could raise money was not, in general, true – the earnings foregone through privatisation were often worth more than the sale price. And simplistic claims about improved efficiency only worked well for firms operating in competitive markets with little needed for regulation. Unsurprisingly, perhaps, public ownership was concentrated in industries with a high degree of natural monopoly and other problems that necessitated continuing government involvement.

Australia has made some notable contributions to economic thought, particularly the work of Trevor Swan (arguably the most significant economist never to win a Nobel prize), Colin Clark on national accounting, and before that the “Australian case for protection” developed by the Brigden Commission and later formalised as the Stolper-Samuelson theorem. In the 1970s, the “Gregory thesis” was an independent analysis of what became known internationally as “Dutch disease”. As these examples suggest, we tend to suffer a bit from being on the far side of the planet from the main centres of activity in the profession. It will be interesting to see if the Australian case for nationalisation gets any recognition now that the idea is in vogue in the Northern hemisphere.

I’ll try to post a list of useful references on this topic before too long.

71 thoughts on “The Australian case for nationalisation

  1. Donald#49 – Tony G #47 has never stated what size he would like the government to be – apart from extremely small to preferably non existent (and perhaps that is ultimately too big for Tony).

    Tony? Any ideas on size of government relative to rest of the economy? Perhaps you would prefer the self regulating market based financial sector elites to run the economy?

  2. John, if I may reply to Tony G by saying you just might be wright for a change for the Richard Craniums in NSW Labor Right have done an excellent job of bucking up the State. Maybe its time the left are given the chance to wright the past wrongs. Thumbs up for John Robertson.

  3. As mentioned in #12 by Alanna, SA used to enjoy a public electricity function; unfortunately the privatise-it-if-it-isn’t-nailed-down mob told us how cheap power would be yada yada yada if we privatised it.

    Power isn’t cheaper; it went up in hefty jumps. Furthermore, supply is limited now (manipulated?) which means on hot days we can expect a number of suburbs to suffer load shedding, the euphemism for turning the power off.

    If you choose to live in Adelaide then pick a suburb with essential services. Steer clear of any suburb with no industry, hospitals or really big shopping malls, as they are likely to be on the list for load-shedding.

    Please, please bring back public power utilities.

  4. Just correcting source of my quote at 50# – its New York Times not Wall Street Times (what was I thinking?)

  5. Donald#53
    I think they will go down the road of electricity privatisation in New South Wales, because its part of liberal platform to seek as much privatisation of public services as possible (ignoring the public good arguments because basically they dont think market failure exists). It will come undone, as the max profit motive wont see a need to maintain service to non profitable areas, and inflicts price rises on those with the least ability to pay, and in the end the government will have to renationalise it. We cant say “I told you so” just yet…but we will be able to later when the mess arrives. Unfortunately they wont even examine the South Australia experience. Its faith we deal with not rigorous analysis of the case.

  6. Donald 53

    Living in Adelaide I agree that power is neither cheap nor reliable. However the main reason for power loss is not supply – it is the condition of the grid, which was poorly or not maintained for most of the 90s. I am not in that field but engineering colleagues who are tell me that the current government does have a program to improve that but, as with old buckled train lines, it will take some years to catch up the backlog.

  7. So the plan is to overburden industry with tax and regulation and then when said industry can no longer function we call it capitalism gone mad and claim we need more regulation?

  8. Michael of Summer Hill @52 said

    “Thumbs up for John Robertson.”
    Add Roozendaal to that list.

    It is great see how people can be parachuted into a ministry without ever having to face the ballot box, it seems being appointed a union official will suffice, democracy Inc. NSW style.

    Alanna @ 51

    “Tony? Any ideas on size of government relative to rest of the economy?”

    As I said here @ 41

    “There is a strong case to bring the public sector back down to 20% of GDP.”

    To reiterate the point I was making @ 41.

    Since the early 1990’s the government has part privatised itself to the equivalent of about 10% of GDP and we we are now paying this to the private sector. The government is also still charging us for these services which it is no longer providing us. Considering it has not reduced the proportion of GDP it is slugging us, what is the government doing with the money? Hence, the strong case to bring the public sector back down to 20% of GDP.

    Alanna also said ;

    “Tony G continues to quote percentages with no reliable sources given and calls for mass sackings of public servants

    (How about using the ABS Tony? Thats what they do.)” see Table 27.19

    10% of GDP equates to about 30% of the public sector revenues. Alanna what 30% can we get rid of?

  9. Ben S, as I said last time, I think you need to start reading the papers again. A lot has happened since 2006, or whenever you last looked at the news. The lightly taxed, deregulated financial sector that everyone was going on about back then has collapsed in a messy and expensive heap. Sadly (or maybe not) social democrats had nothing to do with bringing this about.

    And, please, no comments on how, by the standards of the planet Libertaria, Bear Stearns, Lehman and so on were groaning under the burden of an oppressive state. By any relevant historical standards, these institutions were effectively unregulated.

  10. JQ Said;

    “these institutions were effectively unregulated.”

    exactly, government asleep at the wheel (again).

  11. Tony G also omits that the tax percentage of GDP also reflects a disproportionate burden on paye earners but neglects to mention the likely tax minimisation schemes including the use of offshore tax havens that welathy firms and individuals are so fond of. If the scandals erupting over these are not an indicator of a need for greater regulation of the corporate form I dont know what is. Plus Tony G, its the corporate institutions themselves lining up with their hands out for government bailouts – that is more of the ordinary taxpayers money. Tony wants a smaller government in numbers, but a smaller government doesnt necessarily mean less Tax. It might mean more tax burdens on “those who DO actually pay tax in this country” if the government becomes politically disposed to the unregulated corporate form like Howards did.

  12. Profits MADE here can remain undeclared here and often do and I object to this. Transfer pricing to parent companies or transfers made to offshore tax havens happens worldwide and many corporate entities pay next to no tax on enormous profits. That is unethical greed and I welcome initiatives by governments to close them down. Tax should never be one rule for the rich and a more expensive burden for the poor by mutual agreement between industry power brokers and sycophantic politicians.

  13. And, please, no comments on how, by the standards of the planet Libertaria, Bear Stearns, Lehman and so on were groaning under the burden of an oppressive state.

    Um… why not? Seems fairly appropriate to me!

  14. Ben S # 63 Planet Libertaria got us into this mess. So Lehman was groaning under the weight of bureaucracy (and Bear Sterns and all else who failed?) Right Ben – so the dreaded government caused these financial firms to fail and not before they managed to live like kings on the company’s money for a decade and extract huge surpluses for remuneration of executives – Ben you are dreaming. Such rampant excess is not the sign of firms struggling under the weight of bureaucracy.

    You must be joking. There isnt a point you make that has any sense at all.

  15. Socrates #56, you are correct in that part of the electricity problem in SA is a matter of distribution. Bottlenecks constrain delivery of supply on the highest load days. However, lack of supply can occur due to a large discrepancy between demand forecast and actual attempted consumption. Record breaking heatwaves are a case in point.

    This is one of the many parts of Aussie infrastructure that CSIRO track under the auspices of quantitative risk management, I seem to recall.

  16. Alanna,

    I don’t think I’ve actually said anything that could be described in any way as a point here so it’s no wonder my points aren’t making sense.

    By “Bear Stearns and all else who failed” could you possibly be talking about say… Fannie Mae and Freddie Mac? Those bastions of laissez faire capitalism. Uh huh.

  17. Is it always going to be a tug of war between privatisation and nationalisation? What about the mutual sector – building societies, co-operative banks, credit unions and emerging online financial institutions? I spent the 80s and 90s being opposed to rampant demutualisation. It struck me as obvious that building societies would be useful one day, when there was no clear commercial reason for a bank to hand out a mortgage. My dad used to reminisce about the days(early 60s) when you more or less had to beg the bank manager for a mortgage, and the building society had a huge waiting list. I fear we may be heading that way very soon. I’m not sure we need more economic arguments. We need people to set up again the financial institutions we have mostly lost. But I’m not particularly proselytising – I think it will happen anyway as people find it’s a realistic option.

  18. BenS#66
    Do you alternate between Tony G and Ben S? Or are you two different perosnalities with remarkably similar views?
    I note you also quoted tax as a percentage of GDP risisng from 6% around the turn of the century to 30% now. In fact that is very misleading because around the turn of the century we had no curbing and guttering, no paved roads, no electric lighting in the streets and suburbs, no water or sewerage to the suburbs and some inner city areas were a cesspit of disease.
    Is that what you want low taxes for Ben? I dont know which private company you think is going to roll this infrastructure out. Optus wont even take cable up private roads in central locations let alone in outer suburbs or regional areas.
    No you would want it all and low taxes Id guess.

  19. Oh and no railways to many areas around the turn of the century did not yet exist. Railways that provided a huge surge in all sorts of support businesses. All this publicly provided infrastructure that the private sector benefitted from for most of the century (and continue to benefit from in the form of lower costs) but given their short term profit agendas these days now businesses still call for lower taxes (despite the benefit of lower costs from public infrastructure) because all they care about is short term share price movements.
    No tax reduction would ever be enough such is the greed out there.
    Example. One of Australia’s early entrepreneurs – a Mr Mort (of Goldsborough Mort) – estabalished Bodalla cheese making as one of his buisiness intersts last century when entrepreneurs still actually beleived in running businesses not scam and sham structures. He purchased the land on which he established tenant farmers who had shares in the company. It worked well as an industry participant for generations and was finally being headed by two grandchildren in their 70s when along comes a Mr Gazal in the ?(1990s) and convinces the tenant farmers he would reinvigorate the company by a takeover offer. He pays 7.2 million after conning the shareholders that he would inject “new vitality” and “grow the compnay” but instead he promptly asset strips the company by holding a mass auction of land and property. He sold out the tenant shareholders land from under them – some who had been there for generations and produced happily for the company. He made 17 million on the deal along with Trevor Kennedy who reaped approximately 1 million and an island on a river near by (worth 3 million) for advising Mr Gazal.
    Nice one boys.
    That is a speculative short term personal wealth grab that has nothing whatsoever to do with production and this is what so many of our supposed entrepreneurs sank to in the era of financial de regulation from the 1970s on. They destroy good production, other peoples lives, have no interest in running businesses or production at all and only act to increase their own personal riches and to hell with any sense of social responsibility. Our so called great entrepreneurs and business people these days are commonly found doing jail time but their wealth remains intact for the next dirty deal when they get out (and even when they are still inside) because they have shifted their assets to their wives and other family members who keep the home fires burning while they shuffle around in pyjamas on weekend or home detention (spare me).

    This is the fault of too small a penalty and too little regulation but neither Ben S or Tony G would see it that way, faithful servants to the notion of smaller governments and less regulation, that they are.

  20. Alanna said

    “Do you alternate between Tony G and Ben S? Or are you two different perosnalities with remarkably similar views?”

    sock puppeteer[ring] is illegal on this site.

    I disagree with your view on history. A lot of Melbourne and Sydney and the other capitals were well developed at Federation. The Sydney rail company built rail in NSW before the government did.

  21. #70 Check your history Tony. Schedvin documents public sector investment from federation on very well. Rail was still being built well into the 1920s and certainly kerbing and guttering and the rest I mentioned in the urban areas. Do look it up Tony, but as I sugested to you earlier – no tax relief offered to the private sector would ever be enough.
    The private sector do two things well – profit maximise and cost minimise but the best cost of all is one they can make disappear altogether. Those two skills say nothing whatsoever about distribution and investment in shared social infrastructure. There is no point whatsoever in having two or three companies building water pipes to homes for example when economies of scale in capital and labour can be better achieved by a monopoly – in this case a public monopoly. The roads you mostly drive on Tony were built by the government as were the water pipes you access every day. Of course they cant just be constructed and not be maintained for the rest of the century – so whinging about taxes neglects completely the benefits that taxes bring, provided those taxes are not being wasted. Oh and it would appear there is just as much waste in the private sector as there is in government if recent events are anything to go by.

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