Socialists and communists believe that private ownership of the means of production is harmful to society. Thus, Indira Gandhi nationalized vast swathes of the economy, including Air India. Till today, the government of India owns and operates a vast number of "public sector undertakings" (PSUs) - all of them making losses. They refuse to privatize. Indeed, the very word is never used in our public discourse.
The truth is that socialists and communists are dead wrong. Private ownership of the means of production is NOT exploitative of anyone. You can remain in ownership of these assets only so long as you satisfy consumers better than your rivals. If you fail, the ownership of these factories will immediately go to a better company. The real gainers are the consumers. It is their decisions to purchase or to abstain from purchasing that ultimately determine who will own the means of production. This ownership is a "public mandate." Workers gain too - because workers are the biggest group of consumers. Modern capitalism is mass production for mass consumption; and production for the masses means production to satisfy the needs of workers.
Now, look at public ownership of the means of production. Who gains from this and who loses? Who gains while Air India or the local electric company are publicly owned, and who loses? If this question is truthfully answered it will be seen that in all cases of public ownership of the means of production the only gainers are the ministers and bureaucrats who run these State-owned companies, and their trade unions. The biggest losers are the consumers. Tax payers lose too - as in the case of Air India, the electric companies, or even the railways.
That is, the working classes lose from public ownership. Indeed, working classes have historically prospered only under Capitalism and the private ownership of the means of production. Every American worker owned a car by the 1940s because of Henry Ford.
Thus, in the true interests of the masses of poor people in our country, every PSU should be privatized. The State should not own anything - no factories, no hotels, no airlines, no railways, no electric companies, no land: NOTHING. The State should only perform its basic function: to apprehend and bring to Justice all enemies of the Market Order. Further, it should provide accurate land titles - titles, that is, of Private Property. There is NO ROLE for the State in economic affairs.
I agree that there are many situations when privatization is better than government holdings. However I can give you many examples where the government must step in to ensure a free and fair market.
ReplyDeleteThis occurs when:
1. The industry favors a natural monopoly
2. The industry is an oligopoly
3. The participants in a market face the prisoner's dilemma when it comes to a certain type of activity.
For example, take the phone and Internet companies in the US. In many areas, there is just ONE provider. There cannot be more than one because it's not unprofitable for there to be more - or because they've agreed not to intrude on each other's turf (cause it ultimately leads to a price war). The end result is that the US has one of the lowest broadband speeds as well as the most expensive service in the developed world.
Another disadvantage of not having government regulation is when a new industry is developing. AT&T in the US for example owns both Internet and phone businesses. As a result it engages in anti competitive practices such as blocking VoIP. It's only because of pressure from the FCC that it had to relent. And even then they did it reluctantly and half heartedly.
I've lived in India all my life and thought that privatization was the panacea to all of India's economic problems. Now that I'm here in the US, I can see what excessive privatization is done. It's not healthy and in many cases, only a government option can keep prices in check and prevent the private players from colluding.
There are many more examples that I can give you. Many many more. Trains in the US run at a top speed of just 75 mph! Compare this to other trains in France for example where the government runs the service. Again - the reason is because the trains in the US are privatized. There's no money in fast trains and the US consumers have no choice. Sometimes, you just HAVE to let the government do something that private players will not do...
My mistake - that's 35 mph not 75 :)
ReplyDeletethe state is a dangerous animal.one cant expect it to stay out of economic matters alone.if one suspects central planning is bad for the economy,why would it be good for "national defence" or justice system or any such goods?
ReplyDeletei've a feeling anarcho capitalism is the only consistent possibility for freedom lovers. or.i am dreaming of Utopia :(
@ Bhagwad Jal Park: Milton Friedman has discussed this in detail in Private monopoly vs Public monopoly. The point he makes is, even if a private monopoly dominates for some time, there is every possibility that new entrepreneurs would wipe it out; it's just a matter of time.
ReplyDeleteInstead, if you become impatient and want an urgent change and thus entertain government control or public monopoly, there is every possibility it will continue for infinity.
So, private monopoly is lesser of two evils with hope.
@Satyajit
ReplyDeleteHow would you handle a situation where there is a natural monopoly or massive barriers to entry?
America has had 250 years for real competition to come up in some sectors but without success.
Question is how Natural is 'natural monopoly'?
ReplyDeleteI found a good reading in mises.org The Myth of Natural Monopoly, Thomas J. DiLorenzo
It examines utilities like electricity, cable tv, water etc
http://mises.org/journals/rae/pdf/rae9_2_3.pdf
@Bhagwad: Natural monopoly is a bogus argument. Railways in the US have been outcompeted by highways, cars and civil aviation. The same should happen in India. Even landline phones are no longer natural monopolies in India - we have a private as well as a public provider of basic telephony (and internet broadband) in all Indian cities.
ReplyDeleteSecond: Oligopoly does not imply collusion. As long as entry to new competition is open, there is no need for the State to enter.
Third: Market competition is not correctly understood by "game theory."
@Sauvik
ReplyDeleteNatural monopolies certainly aren't a bogus argument. Are you implying that there is never a scenario in which a natural monopoly can exist? Or are you implying that the government must not enter even natural monopolies?
Suppose rail networks had to be improved so that people could take the rail and reduce global warming?
"Oligopoly does not imply collusion"
The free market theory only works under the following scenarios:
1. No barriers to entry
2. Large number of suppliers
There are a few others, but these are the important ones. We all learnt this in Economics.
However, it goes without saying that for many industries oligopolies are the norm only because of huge barriers to entry. Surely you don't disagree that barriers to entry can be insurmountable for new participants?
Let me know if you need examples.
Complete privatization or complete nationalization are only ideals that work under simulated environments that don't take into account the realities of the world we live in. It's naive to suggest that one must privatize everything. Even US (which leads the world in privatization) has to have many services under the government.
Here's a question for you - do you think the fire fighting service should be privatized? After all, there's no implicit right in law for a person to be free from fires...! So if a person can't afford to pay a fire fighting service, why not let his or her house burn? Why should the government interfere?
"Third: Market competition is not correctly understood by "game theory."
What do you mean by this? Are you denying that game theory is a valid economic tool, or are you claiming that it's imperfect? If the latter, could you let me know why you think it's imperfect? Which part of the theory do you disagree with?
@Bhagwad: I oppose all barriers to entry. I do not think governments should operate railways to reduce global warming - a fictitious scare, anyway. In India, it would be better if fire-fighting services were provided by insurance companies. And "game theory" is bunk. Markets are not games. Both parties win in trades. In games, one invariably loses. Don't study game theory. It will only lead you into a mental trap.
ReplyDelete@Sauvik
ReplyDeleteLet's not get into the global warming debate here. Somehow it's always the privatization gurus that disbelieve it. The US is the only country where people have such disbelief. Not a coincidence.
But humor me for a moment. Imagine it is real for a moment. And suppose we need to change our lifestyle. Will the private companies step up to the plate?
So you think fire fighting should be privatized. Excellent. What about roads? Isn't that a natural monopoly? Or should different companies have different parallel roads going to the same place competing on the basis of tolls paid?
Finally, can you give me some references to prove that game theory is bunk, or is that just your own opinion? Who has told this to you?
@Bhagwad:
ReplyDeleteYour theory about Oligopoly can be very easily refuted with numerous examples. Pepsi Vs Coke. Virtually the only two players in the market for decades, and the competition was so fierce that it benefited the consumers. The prices of PCs kept going down (and still keeps going down) even with Microsoft and Intel acting as pseudo monopolies, with very little true competition.
As Sauvik mentioned, the railways in the US were driven out of people transportation due to more efficient market options such as airways and cars. Given the size of the land mass, and the time it takes for moving from one place to other, Railways would have been operational ONLY if uncle Sam kept them artificially alive.
As to your statement:
The free market theory only works under the following scenarios:
1. No barriers to entry
2. Large number of suppliers
I am not sure where you get this from. It almost seems like you are confusing free market economics with perfect competition. All businesses have some barriers. Incumbent players make capital investments which create barriers for new entrants. I have not problems with companies creating legitimate barriers. Other creative entrepreneurs find ways to overcome those barriers. What bothers me is the artificial barriers created by government. This helps both the incumbent players as well as the rent seekers (read as: government), and penalizes entrepreneurs and consumers.
Pure "natural monopoly" is as theoretical a concept as pure competition. Natural monopoly is defined as a situation where the costs keep going down with production increase, indefinitely. Can you name one industry which is a "natural monopoly"? Don't even think about utilities. They are NOT natural monopolies.
Finally, about game theory/prisoner's dilemma. I don't agree with Sauvik on this topic. Game theory is a tool used by people to analyze situations and make business decisions. I can think of several situations where it plays a clear role. However, I don't see why that should imply government intervention. If I am an airline, and am trying to compete with Southwest in the ultra low price segment, I can use game theory as a tool to predict what the appropriate response might be, and plan for that situation. Can you give an example of a business situation where game theory leads to the call for government intervention in the economy?
What you have missed out in your argument is the need for government involvement in the case of public goods. We can have a very healthy debate about what is a public good and what is not. Smart people may also disagree on those, but it would still be a valid discussion.
The global warming issue that you briefly brought out fits another category of negative externalities (provided you believe in AGW and its alleged negative impacts). You can argue that there is a legitimate role for government to play in that space (the extent of that role, again, needs to be debated)
Nice & concise article. Just to correct one factual mistake, Indira Gandhi did not nationalize Air India. It happened in late 40s and early 50s under Nehru,
ReplyDeleteThank you, Sridhar. @Bhagwad: When people undertake "lifestyle changes" the Market always steps in - as with "organic food."
ReplyDeleteAbout "game theory": I suggest you read Ludwig von Mises' "The Ultimate Foundations of Economic Science" where he rubbishes it as a concept that is essentially "anti-economic."
The pdf is here: http://mises.org/books/ultimate.pdf
See Chapter 6.
Thanks Sridhar. Though you've given the example of pepsi and coke, I could just as easily give you examples of oligopolies colluding - so one example of it not happening isn't proof that it never does.
ReplyDeleteNonetheless, thanks for pointing out the definition of a natural monopoly.
Any situation where the prisoner's dilemma applies in a business scenario where you need an external force to ensure compliance with an action that no company would take individually can be a case for government regulation.
A good example would be the EPA needing to intervene and create emission standards for businesses who by themselves would never do so and would stall forever.
Also to answer Sauvik, what if people need lifestyle changes forced on them as part of a larger plan such as using more public transportation?
@Sauvik You didn't address my roads example. Do you believe that roads should be privatized?
Also, I think you need more than one book to show Game theory is untenable since it's a respected branch of economics. Does this book have backing? Do other economists agree with it?
@Sauvik
ReplyDeleteWe live in a world of realities. Sometimes the government makes choices for people. Such as deciding which chemicals are dangerous. What food preservatives are ok etc. What safety standards airlines must be forced to adhere to. Similarly, if the planet is in danger, governments all over the world will have no choice but to force people.
No democratic government will do it lightly and if they do, they'll have a damn good reason. People will never make tough lifestyle choices unless they're forced to do it.
The Prisoner's dilemma dictates it.
I once again refer you to the EPA's ordinance on clean air. You have to admit that business would NEVER do it by themselves. Which is why the EPA had to step in at all.
Regarding roads.
"My blog stands for "public roads" because we pay taxes"
You mean you support anything becoming public if taxes are paid? Clearly not.
"...because different routes will compete"
Leaving aside the massive waste of infrastructure, effort, and time, sometimes there is obviously just one best route to take. The person holding that one route will clearly be unshakable.
In this case, the first mover advantage is insurmountable since road space is finite and you can't have thousands of roads all connecting the same two spots. Please think through the implications of what you're suggesting.
Finally, I'd still like to hear some independent verification of claims that game theory is bunk.
To take an example, are you suggesting that the prisoner's dilemma doesn't exist at all? Do you need examples?
Sorry for the long-winded reply, but this part answers you AGW concerns:
ReplyDeleteRegarding Global Warming (or Anthropogenic or man made global warming)... It is immaterial whether any one individual believes in it or not. The question for me is that of burden of proof. There is a status quo, and if someone wants to turn the way we live our lives
upside down because of an impending threat, then I believe that the clear burden of proof lies with the person wanting to change the status quo. Based on all I have heard and read so far, there is no clear evidence that we all need to change our lives drastically and spend trillions of dollars today. More
importantly, there is no evidence that making those changes will yield any tangible results either. The whole episode of Climategate has brought into light numerous questions about the state of science and scientists' motivations regarding AGW. Let me give you an anology. If we know that a meteor is going to hit the earth and cause huge damage, the governments should take over the world and do whatever is needed to avoid that collision. I agree to the governments having almost limitless powers under various kinds of emergencies.
But until and unless we know with some degree of certainty what the emergency is, what the risks involved are, and what if anything can be done to mitigate the risks OR avoid the emergency completely, I am very skeptic about the force the government should unleash on individuals and private businesses. There are many groups of people I don't trust, but politicians are on the top of that list. If they want to spend more money or get more powers than they already have, they should show more evidence than some doomsday theory.
Thanks,
Sridhar.