Private versus public - effective public ownership?

I recently had a discussion with a proponent of public ownership. According to him, public ownership is more efficient and fairer than private ownership. Is that so?

Enjoy capitalism!
Enjoy capitalism!

Monument symbolism

There are two cemeteries in the UK that are unique - one is buried in one Karel Marx, on the second Adam Smith - two greats of political economy.

During his lifetime, Charles Marx prophesied the end of capitalism and private property. Adam Smith, on the other hand, was an "advocate of capitalism" and a pioneer of economic liberalism.

When you go to one of these two cemeteries, a voice is heard: "Admission one pound, please" (1990 price). The grave of one of the giants is well taken care of, his bust is polished several times a day, the grave is clean, tidy - "the invisible hand of the market has picked up the last speck of dust from his grave," Richard Morais wrote for Forbes magazine. This the cemetery is privately owned.

The second cemetery is quite the opposite - some of its walls and monuments resemble ruins, discarded cans and plastic bags are lying on the paths. The tomb of the great thinker there is again overgrown with rusty ivy. This the cemetery is in municipal ownership.

Who do you think is in the first, private cemetery and who in the second, municipal cemetery? Admission is charged if you want to see the tomb of Karl Marx. Free entry, on the other hand, is to Adam Smith's grave.

Charles Marx, prophet of communism, earns tens of thousands of pounds a year. Chinese tourists contribute the most to the profit.

Summary of Dennis Mueller

Of course, you can argue that, based on the two cemeteries, I cannot make a comprehensive judgment about the "effectiveness" of public property. However, let's look at one work published by Cambrige University Press.

In a 1989 Public Choice article, Dennis Mueller summarized the results of fifty studies, mostly from the United States and Germany, that compare the effectiveness of private and public property. Only two of them found higher efficiency of public enterprises and and 40 were private companies significantly more effectivethan their public counterparts.

A few examples: private cleaning service in German cities they were about 50% cheaper than urban ones. Regional electricity supplies in the US were at state - owned companies 40 - 75% more expensivethan for private companies. Fire protection operated by cities in Arizona was about 40 - 90% more expensive than private fire protection in the Seattle area. In Baden-Württemberg, labor productivity in private forestry was twice as high as in state forestry. Private water companies in US cities had 40% higher leverage productivity and 60% lower capital per worker than city water mains.

These are facts, the language of numbers. Perhaps it would be worthwhile to compare the effectiveness of the Police of the Czech Republic and the security agency ABL.

The link between costs and revenues

So why is private ownership more efficient than public ownership?

The answer is quite simple: there is private ownership the link between costs and revenues. This link is clear, strong: the owner retains the proceeds of his property. His property brings him income only if he keeps it in good condition, invests in it and takes care of it.

The owner wants a profit because the profit belongs to him and increases his wealth. Profit is created and increased only by increasing efficiency, ie so that the owner will constantly strive to increase revenue while reducing costs in his business. The efficiency of his business is thus directly in his interest.

The owner of the "Karl Marx Cemetery" knows that he will make a good profit only if he keeps the cemetery in good condition, ie if he "returns" part of the income to the cemetery.

The municipality that owns the "Adam Smith Cemetery" has no revenue because it does not collect admission fees. However, even if it collected it, I doubt that the city would put part of this revenue back into the maintenance of the cemetery: the municipality has (forced) income from numerous sources and its expenses go back to many areas. The municipal budget is a "melting boiler", vthe relationship between the revenues and costs of one particular good or service disappears, officials no link between costs and revenues they do not feel: their income is given by law (taxes), they usually do not bear personal responsibility for income or expenses and are not the nominal owners of the given goods or services. Ownership is not specific.

However, the same does not only apply at the municipal level, but also at the level of the state or international organizations (eg the UN or the EU). An example is the story of a French bank Crédit Lyonnais:

Crédit Lyonnais - A socialist experiment with a bad ending

Crédit Lyonnais, originally a private bank founded in 1863, passed into the hands of the state for the most part after World War II. In the 2s, then-French President Francois Mitterrand made no secret of his intention to make it an exemplary European-style bank that could finance the needs of the French economy according to government ideas.

Back in the early 90s, the bank reported profits. But it didn't take long. The bank's management was aware that it did not really have to worry about tough market competition, because the state and the state treasury are behind the bank.

And indeed - the bank's connection to the state budget worked reliably. Since 1992, the bank has started to make billions in losses, which were covered from the state budget. The bank embarked on risky financials investmentthat culminated in investing in the Hollywood film industry. Investment failed and the bank's losses increased. Although the state changed the bank's management, the "money line" between the bank and the state budget continued to function. Crédit Lyonnais is estimated to have cost French taxpayers tens of billions of dollars.

In the end, the French government was forced to announce a rescue program, which included the privatization of the bank.

- Holman, R. Economics. 4th updated edition. Prague: CH Beck, 2005 (page 364)

One of the hallmarks of private property is business flexibility, ie the ability to respond flexibly to changing demand. This ability is in the public domain loses mainly due to bureaucratic rigidity and the inability to respond quickly to changing market developments.

Example p Crédit Lyonnais he further showed us the mismatch between risks and returns, which is a sign of moral hazard. "Publicly owned" companies are venturing into risky ones investment with an unclear possibility of profit. Managers invest with the full knowledge that behind them is a "big brother" in the form of the state budget. The greater the power the state concentrates in its handsthe more it redistributes, the greater the tendency for moral hazard, as there are also greater possibilities to cover losses from public budgets.

Proponents of public ownership often make the argument that post-war developments in Brazil and the USSR prove the opposite - the effectiveness of public ownership. However, to compare a country that had tremendous power ambitions, wanted to "colonize the universe," and was one of the world's two largest forces until the end of its existence with Brazil, I find it a little funny. Let's try to compare the post-war development of the USSR and West Germany or the USA.

0 comments

  1. I would not write Brazil off like that, although the bureaucracy is plague. Russia and Brazil are also resource-inflated countries, both are used to "slavery" and more things would be found that violate the condition of ceteris paribus.

  2. Just a few examples of public and private ownership and public impact. Today, the privatization of VaK reached CZK 60 per m3 of water. The town refused to sell the water lines and the sewers and the treatment plant they bought at their own expense. The administration is taken care of by the municipal company - the result is CZK 35 / m3. 2. Municipal services (městská as) earned CZK 7 million a year. Most of the city budget. There was a "bargain" sale to one applicant for 35 million and an increase in subsidies by 20%. So is private property ALWAYS profitable for society?

  3. @ Stanislav Ševeček: yes, maybe it would turn out, as in telecommunications in New Zealand. When they privatized the local telecommunications company and opened the market to competition, the current monopoly laid off the vast majority of its employees. Nevertheless, more people work in the field today than before. The same effect was on railways and other industries. Unemployment has not risen.

    @Paeris Kiran: Yes, personal responsibility could change the behavior of bureaucrats. Again, I will refer to the reforms in New Zealand, where something like this works (although only for managers, they then closely supervise their subordinates).

  4. Stanislav Ševeček: Why not do anything with them? Let them find employment themselves. Let them try to come up with something that could be useful?

    (I just can't think of what these people could do… but in the long run, the situation will be remedied by low birth rates and a decline in the human population, it will rise again when there is an effective balance. Nature is not so dull. .)

  5. Kaktusak: You know that's how it goes… The Tsarist regime was an ALLY of Great Britain, France, the USA and they very rightly intervened in the interest of their ally. (Like the Soviets helped in Korea and Vietnam)

    In the same way, the Shah's regime was an ally of the USA, it is only right that he still considers those who overthrew him as enemies.

    And in the US, the British "intervened" after their independence - they still recovered 100 times faster than the Soviets, although the situation was practically identical.

    However, the point of the whole thing is elsewhere - one takes good care of what one is personally interested in in order for it to work well. State property would be more efficient - so that its managers and all employees will be paid exclusively according to its economic results - ie if they are lost, there will simply be no payment. You would see how efficiency would increase.

    The fundamental mistake is that civil servants have a certain salary regardless of their results. They need to be thrown into the same uncertainty as everyone else.

  6. Mr Kubč, you are certainly right - let the socially sensitive people squeal for the money - but what would you do with those crowds of other unemployed people - if everything were private and more efficient.
    😉

  7. Heisenberg: it will not just be a simple comparison of the entire cost, but some conversion per unit, where the amount of precipitation, etc. is not decisive.

  8. It is a pity that you have dropped the whole article (or all the studies you refer to) with a single reference to fire protection. Didn't you really think to look at where Arizona (Phoenix - average 210 mm precipitation / year) and where Washington (Seattle - average 1320 mm precipitation / year) lies? Even the below-average discussant will think that the more than a meter of water that falls in Washington every year will probably have quite an impact, especially on forest fires.
    Please do not make such unnecessary mistakes.

  9. Do you mix (intentionally?) Together the form of ownership and connection to the state budget. When a private individual or the state establishes a company as a public service, subsidizing it as needed, efficiency is lost. Many private companies receive government subsidies, even in the form of overpriced government contracts. Finally, lucrative state-owned companies tend to be quickly privatized (perhaps they have been deliberately mismanaged beforehand to "prove the inefficiency of state ownership"), leaving those that no one wants.
    Compared to the USSR, Brazil had a great advantage because no one waged a Cold War against it and was not previously destroyed by world wars and interventions.

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