– Northern Dragon © 2019. All rights reserved.
There is a common superstition doing the rounds in our modern, Western democracies today. It is kept alive by hearsay, by greed, and – sadly – by the “wise words” of economists and politicians who have never actually been out in the real world and worked for a living. And it is repeated, again and again, as a sacred litany against all ills in our economy:
“Privatisation is good!”
Which is, frankly, rubbish.
Touting privatisation as the magic wand to creating efficient and good services is the modern-day equivalence to dancing around the maypole and hoping for fertile crops. There is absolutely nothing magical about privatisation. It is simply and purely the sale of a public service organisation to the private sector – with all of the overhead and extra costs which that incur.
“Wait, what?” I hear you exclaim. “What overhead? Privatisation reduces cost! Doesn’t it?”
Not in this world, no, it doesn’t. And probably not in the next one either.
Privatisation does precisely two things: it replaces the existing management with one, which is focused on costs and earnings. And it adds extra costs in the form of dividends to shareholders and higher management salaries.
So really the question is: will the new management be able to rationalise the organisation and make it more efficient? And will that be able to cover the extra costs?
The answer to that depends mainly upon whether the organisation has already been through cost-cutting and efficiency-improving exercises before it got privatised. If it has… then any changes done by the new management are likely to be marginal at best. Which leaves only two ways to recoup the extra costs incurred by the privatisation: either cut-backs in the services offered – or higher prices…
… Or both, actually. In the usual order of things, first services are slashed, and then prices are raised.
And that is, very often, the only real effect of privatisation: less service to the public and more money to management and shareholders.
“But surely it works in some cases?”
Yes, it does. Like all things in life, the picture is never black and white. There are examples of successful privatisations. But in all the cases I am aware of, those few successes could equally well be gained by rationalisations within the public service organisation instead.
“But what about the ‘invisible hand’ of Capitalism? Won’t free competition by itself ensure the best and cheapest possible service?”
No, it won’t. First of all, “free competition” is very unlikely in the context of public services – as those are usually natural monopolies. And secondly, there is no “ensuring” that the best company will win – for reasons which I laid out in my earlier post here.
In fact, the only things which privatisation actually ensures are negatives: significant issues with the quality of service, creation of private monopolies, and loss of democratic influence. To mention but a few. And none of these are really surprising, if you think about it for a moment.
For any public service organisation, its raison d’être is – to service the public. Rather self-evident, yes? But what is the purpose of a privately owned organisation? Private companies exist, solely and purely, as a benefit for their owners. Any public services offered are strictly secondary to that. If there is a conflict of interest – as in, say, “do we really want to service the outlying regions at high cost, or should we just focus on those areas where we can gain a profit?” Guess whose interest will weigh the most then? It won’t be the public.
The lack of any real interest in serving the public – apart from as a means for profit – is drastically worsened by another aspect of the privatisation: the privatised service is most likely a de-facto monopoly. Why? Because public services typically start out as natural monopolies in the first place. Prime examples: water, electricity, gas, landline telephony, public transportation, roads, police, the judiciary, airports, harbours…
Taking any of those and privatising them will create a natural monopoly. In some cases, like with airports and harbours, it may be possible to use another point-of-service instead – but it will be far away, and the costs of doing so may well be prohibitive. So again: effectively a monopoly.
It is possible, of course, for the government to step in and create an artificial marketplace on top of the monopoly. If, for instance, the national power grid is privatised – as has been done in some countries – then the government may stipulate that the owners must allow private, competing power companies to lease usage of the net at a fair price. Which, in effect, adds additional overhead to manage and oversee the administration of that.
And then, there is the whole issue of democratic influence. For instance, how important is public transportation in the area where you live? Would you like to have a say in how often and where the buses go, or the trains? Or, for that matter, regulate the prices to make public transportation an attractive alternative to cars – thus driving down both CO2 emissions and traffic congestions in the cities? Good luck with any of that, once those services have been privatised!
Privatisation means – lack of control. We no longer own those services; some other, private company does. So we better hope we won’t depend upon them…
Categories: Reflection
Tags: capitalism, conflict of interest, costs, democracy, issues, monopoly, overhead, private sector, privatisation, profit, public service, society, superstition
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Northern Dragon 
It also leads to a focus on the short term, since contracts are time limited. What does a private contractor care what impact its decisions will have in thirty years?
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Oh, good point Ellen! Yes, quite correct.
Thank you 🙂
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A pleasure. I enjoy your blog.
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You are preaching to the converted with me, Northern Dragon. I am wading through the mire of the wrecking ball of privatisation here at the moment and I dread to think that the ultimate result will be reduced services. I see it all around me, yet so many ordinary folk seem blind to it. The right wingers want to privatise everything so that the mythical budget surplus can be realized and they can rightfully claim the title of “good economic managers,” – which they appear hell bent on achieving, no matter the cost. The more centrist and left side of politics are denounced as high taxing, and running up debt by refusing to privatise. I have seen public transport ruined, infrastructure abandoned, power companies neglect maintenance of existing networks and don’t even begin to examine the debacle of the broadband network – in which they hailed “copper” as the future.
You could also be describing what is happening close to me in employers! Is the pitfallls of privatisation not obvious to the masses because those who have the power, are also the management who benefits and sell it as efficiency? Why isn’t there more criticism of this failed system when even as a highschooler/undergraduate with a limited knowledge of economic theory, I could see it was never going to work. [I will concede that there is some progress in terms of weight given to the impact of environmental costs on developments these days than previously, with impact assessments compulsory, but even this voice can be adulterated by pro-development engineering firms completing assessements when it is also they who might stand to gain further work from development proposals going ahead.] Hmphf.
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Greed, I think. And, of course, one should never underestimate the human proclivity for following the herd rather than thinking… Since the Fall of Communism, we have seen a steady attack on left-wing ideas and ideals.
But I think there is also something else. Consider – economists, like scientists everywhere, want to get recognised, gain fame and admiration and the prospect of better salaries. But unlike the hard sciences, economics is not easily measured and tested; it is a social science. Which means there is very little to prevent an economist like, say, Milton Friedman from posing utterly absurd economic theories and getting them accepted as the new gospel. The only actual requirement is, that he can get someone else in the media to repeat what he is saying – and when you advocate for an unbounded free market economy, that is not so hard to achieve…
The belief in austerity is another example.
I have found a link for you. It gives a relatively clear and simple explanation of the economic theories developed by the British economist John Maynard Keynes during the Great Depression: https://www.thebalance.com/keynesian-economics-theory-definition-4159776
He was truly remarkable, and his theories make sense – and work in actual practice. Give it a try, and feel free to ask questions.
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Ooooh. Thank you. I remember the Keynesian stuff being mentioned in school – albeit breifly, but I steered well clear of economics at that time!
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I will head over and have a look at the links over the weekend. Thanks so much, N. Dragon. I have a fairly busy schedule until Sunday.
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great post,keep it up…!!!
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