Undercover Economist

The pendulum swings against privatisation

Political fashions can change quickly, as a glance at almost any western democracy will tell you. The pendulum of the politically possible swings back and forth. Nowhere is this more obvious than in the debates over privatisation and nationalisation.

In the late 1940s, experts advocated nationalisation on a scale hard to imagine today. Arthur Lewis thought the government should run the phone system, insurance and the car industry. James Meade wanted to socialise iron, steel and chemicals; both men later won Nobel memorial prizes in economics.

They were in tune with the times: the British government ended up owning not only utilities and heavy industry but airlines, travel agents and even the removal company, Pickfords. The pendulum swung back in the 1980s and early 1990s, as Margaret Thatcher and John Major began an ever more ambitious series of privatisations, concluding with water, electricity and the railways. The world watched, and often followed suit.

Was it all worth it? The question arises because the pendulum is swinging back again: Jeremy Corbyn, the bookies’ favourite to be the next UK prime minister, wants to renationalise the railways, electricity, water and gas. (He has not yet mentioned Pickfords.) Furthermore, he cites these ambitions as a reason to withdraw from the European single market.

That is odd, since there is nothing in single market rules to prevent state ownership of railways and utilities — the excuse seems to be yet another Eurosceptic myth, the leftwing reflection of rightwing tabloids moaning about banana regulation. Since the entire British political class has lost its mind over Brexit, it would be unfair to single out Mr Corbyn on those grounds.

Still, he has reopened a debate that long seemed settled, and piqued my interest. Did privatisation work? Proponents sometimes mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver. Realists might prefer to look at the evidence, and the ambitious UK programme has delivered plenty of that over the years.

There is no reason for a government to own Pickfords, but the calculus of privatisation is more subtle when it comes to natural monopolies — markets that are broadly immune to competition. If I am not satisfied with what Pickford’s has to offer me when I move home, I am not short of options. But the same is not true of the Royal Mail: if I want to write to my MP then the big red pillar box at the end of the street is really the only game in town.

Competition does sometimes emerge in unlikely seeming circumstances. British Telecom seemed to have an iron grip on telephone services in the UK — as did AT&T in the US. The grip melted away in the face of regulation and, more importantly, technological change.

Railways seem like a natural monopoly, yet there are two separate railway lines from my home town of Oxford into London, and two separate railway companies will sell me tickets for the journey. They compete with two bus companies; competition can sometimes seem irrepressible.

But the truth is that competition has often failed to bloom, even when one might have expected it. If I run a bus service at 20 and 50 minutes past the hour, then a competitor can grab my business without competing on price by running a service at 19 and 49 minutes past the hour. Customers will not be well served by that.

Meanwhile electricity and phone companies offer bewildering tariffs, and it is hard to see how water companies will ever truly compete with each other; the logic of geography suggests otherwise.

All this matters because the broad lesson of the great privatisation experiment is that it has worked well when competition has been unleashed, but less well when a government-run business has been replaced by a government-regulated monopoly.

A few years ago, the economist David Parker assembled a survey of post-privatisation performance studies. The most striking thing is the diversity of results. Sometimes productivity soared. Sometimes investors and managers skimmed off all the cream. Revealingly, performance often leapt in the year or two before privatisation, suggesting that state-owned enterprises could be well-run when the political will existed — but that political will was often absent.

My overall reading of the evidence is that privatisation tended to improve profitability, productivity and pricing — but the gains were neither vast nor guaranteed. Electricity privatisation was a success; water privatisation was a disappointment. Privatised railways now serve vastly more passengers than British Rail did. That is a success story but it looks like a failure every time your nose is crushed up against someone’s armpit on the 18:09 from London Victoria.

The evidence suggests this conclusion: the picture is mixed, the details matter, and you can get results if you get the execution right. Our politicians offer a different conclusion: the picture is stark, the details are irrelevant, and we metaphorically execute not our policies but our opponents.

The pendulum swings — but shows no sign of pausing in the centre.

Written for and first published in the Financial Times on 29 September 2017.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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