Private or public ownership 2

A response from John Medway (MSc Econ), together with a chat, have made things somewhat clearer. He draws attention to the big thing I’d missed out, the market.

John kindly allows me to quote his email:

No, there isn't a simple answer. However...:-


1) In a well-functioning free market a Darwinian process operates. Efficient companies evolve through natural selection - the inefficient ones go to the wall. This doesn't automatically happen in the public sector, though governments can intervene to rectify the grossest inefficiencies by replacing staff etc.


2) In any organisation there is a "client-agent problem". How do you get your staff to perform well and in furtherance of the aims of the organisation? This was Jim Hacker's problem with Sir Humphrey, who was usually able to bend decisions in favour of his own and fellow mandarins' interest. I think this happens in the private as well as the public sector but the Darwinian process in the private sector keeps it in check.


Perhaps we there have the makings of a simple answer. By allowing a private sector to flourish, we allow a process of evolution to take place to ensure that producers become ever more efficient.


However where there are natural monopolies this Darwinian process can't work effectively. Furthermore, if we try and create artificial competition (eg through bidding for railway franchises) we may gain something but we may lose something along the way. It is said that Switzerland runs its public services very well as purely public operations and in doing so has created a public service ethos in its workforce that others envy. The French experience is less clear cut. French railways seem very good by our standards but are also reputed to be overmanned and very heavily subsidised. No simple answer there.

And poor service on French railways, I’d add -- offhand officials, terrible at communications when there’s a holdup. Contrast DeutscheBahn, in my experience (never been on a train in Switzerland).

As John added when we talked, a considerable and critical slice of British organisations is natural monopolies to which market forces can’t readily apply.

Private or public ownership

I'm constantly realising basic things I don’t know about economics.

Here’s one. Why do we have private firms? Shouldn’t public organisations be better because they don’t have to make a profit so all their takings can go back into the enterprise? and because they can be run entirely for the public good and not for private profit? Just think of those cases when public/private are clear alternatives, such as utilities and railways.

Is it because public organisations are inherently inefficient (badly run) that they’re so out of favour? And that it necessarily takes the profit motive to get people to run things well?

Public companies (which aren’t of course public in the sense that the NHS is -- or was) have shareholders. The money people have paid for the shares is what the company runs on, as well as its takings. The reason people buy the shares is that their value may grow and that the company pays dividends. A public enterprise doesn’t have to pay dividends.

A public enterprise does, however, have to have money -- the equivalent of the money a company gets from the sale of its shares. The money comes, most likely, from loans on which the interest is paid out of the takings, if any (from train fares, for instance) and taxes. (A company, too, of course, may borrow money, on which interest has to be paid, but for simplicity let’s leave that out of account.)

Are companies deemed to be more efficient because the sale of shares does away with the need to borrow money and hence the cost of interest? and because the cost of paying dividends is less than that of paying interest?

If I don’t understand stuff like this, the case for economics in schools seems clear.

If someone enlightens me, I'll gladly post their corrections.

Closing public libraries

On the Today programme this morning (Radio 4) Zadie Smith had these things to say amongst her comments about the closure of public libraries:

I would never have seen a single university carrel if I had not grown up living 100 yards from the library in Willesden Green.

[It’s] difficult to explain to people with money what it means not to have money. ‘If education matters to you, they ask, if libraries matter to you, why wouldn’t you be willing to pay them if you value them?’ They’re the kind of people who believe value can only be measured in money.

Like many people without money, we relied on public services... as a necessary gateway to better opportunities. We paid our taxes in the hope that they’d be used to establish shared institutions from which all might benefit equally.

Community is a partnership between government and the people and it’s depressing to hear the language of community, the so-called big society, being used to disguise the low motives of one side of that partnership as it attempts to renege on the deal.

To listen look for ‘People voting with their feet’ on library cuts Wed, 30 Mar 11 here.