Friday, June 24, 2011

Welfare Impact of the British Privatizations 1979-1997

Review of The Great Divestiture. Evaluating the Welfare Impact of the British Privatizations 1979-1997 by Massimo Florio. MIT Press 2004, $39

Professor Florio appears to have proven that Thatcherism, or at least that aspect of Thatcherism covered in his book, namely the privatisation of state-owned firms, signally failed to increase productivity, which was its main battle-cry. Its principal effect was to divert a stream of income from the poorest 20% to the richest 10% of the British population. This occurred in three ways: firstly by selling off the gasworks, coal mines, water systems, etc. at very low prices to investors, many of whom were rich; secondly by freeing these firms from the politically imposed constraint of subsidized rates for pensioners, the unemployed, etc. On the contrary, the new owners sometimes imposed regressive rates, so that the poor paid more per unit than the rich! Thirdly, privatisation allowed top management to raise its own salaries.

One of the calamities brought about by Thatcher’s privatisation was a dramatic rise in the rates of the water utilities. However Professor Florio does not condemn this phenomenon out of hand, as a consequence of mere greed. Rather he points out that most of these rate increases were the consequence of investments either long-overdue or that had become necessary to bring Britain up to the new EU standards.

One of his conclusions is that private ownership of large utilities offers no advantages over public ownership, since in Britain the government officials who ran the companies were competent and devoted and their successors, while competent, were grasping and self-centred (often they were the same people, who remained at their posts but altered their behaviour!). Furthermore the companies remained subject to government regulation, since they were mostly monopolies, and ownership was dispersed among many small stockholders, so that the latter were unable to impose their interests, leaving effective power with the managers.

This conclusion appears to contradict studies that indicate that public utilities are generally less efficient that private ones (except for power companies)[*]. Nonetheless these studies are mostly of small local utilities, where private ownership really means effective control by the capitalist, thus assuring the benefits that private ownership theoretically confers. We must conclude, especially in view of the desirability of a progressive rate structure, that large utilities are best left in state hands, with the proviso that the bureaucracy be neither incompetent nor venal. Unfortunately this condition is not fulfilled in much of the underdeveloped and “transitional” worlds. On the other hand the corruption of public officials there is often matched by the corruption of capitalists, as seen in the expropriation of small shareholders by large ones in many Russian firms.

The notable and sustained improvement in the efficiency of Canadian National railways likewise seems to indicate that inefficiency of large state firms is a curable disease, given the political will to reform.

The cited efficiency studies appear, however, to suffer from a notable defect: they disregard the welfare losses attendant upon privatisation, the greatest of which is that labour tends to become degraded and precarious under the untrammelled tutelage of the profit motive. Barbara Ehrenreich worked incognito in various jobs while gathering material for her revealing book on blue-collar work conditions Nickel and Dimed -- On (Not) Getting by in America. Her experiences included a stint as a sales clerk at Wal-Mart. She discloses that that great paragon of American free enterprise prohibits its employees from conversing on the job! When a large military hospital in Washington, DC privatised its cafeteria operation a few years ago, the scullery crew, consisting of mentally handicapped people, was summarily dismissed.

Is this the kind of efficiency we want?

October 2005

[*] See Charles Wolf, Jr.: Markets or Governments. Choosing between Imperfect Alternatives, MIT Press 1988, pp. 202-210.