First Principles

Churumuri links to an article by Siddharth Varadarajan of the Hindu-

Before going down this route, however, it is essential that the case for privatisation be discussed anew from first principles. And that this discussion be conducted rationally, without the free market dogma and leftist sentimentality that has tended to cloud the real picture.

Broadly speaking, one needs to ask four questions. First, is public ownership of industry inherently inferior to private? Second, is private ownership the only way to deal with managerial inefficiency? Third, is there a difference in the positive and negative outcomes produced by privatisation through the strategic sale route and through the sale of shares to the public? Fourth, is plugging the fiscal deficit a sound rationale for disinvestment?

In his recent book, Privatisation in India: Challenging Economic Orthodoxy (RoutledgeCurzon, 2005), by far the most comprehensive and rigorous study of the issue in the Indian context, T.T. Ram Mohan of the Indian Institute of Management, Ahmedabad, conclusively debunks the assumption that the private sector is more efficient than the public. After carefully reviewing both financial performance and input-output related physical productivity in the two sectors, he concludes that “the evidence thus shows that the perception that the private sector is uniformly superior to the public sector … rests on a weak evidential foundation.”

The “first principle” is this. “Public” is an abstraction. An abstraction cannot own anything. Individuals own things. And institutions owned by individuals own things. Government is an political institution that “represents” the people. It is not a joint stock company or a partnership firm. Therefore, it must not own anything.

At least that is how it should be. But that is not the case in India. The people, through the government “own” everything – “public ownership.” But this “ownership” does not come with the rights that are part and parcel of regular ownership. I cannot sell off Air India even though I am part of the public. Since everybody owns everything, nobody owns anything. Call it the paradox of public ownership. In effect, politicians and bureaucrats own “public property.” And is it a surprise then that “privatization” is controversial, especially when a lot of money can be “made” in the sale of “family silver,” both by the politically connected bidders, and the sellers?

The government nationalized a lot of companies during the rule of the Nehru-Gandhi dynasty – banks, insurance companies, airline companies, oil companies – you name it. Nationalization is a euphemism for theft. Therefore, when stolen property is disposed of, it must not be called privatization, or disinvestment. One must call it denationalization, or un-stealing, or something. As to the questions Varadarajan raises, the first two are irrelevant – let those who own the company decide on inefficiency. And why does it matter if public ownership is “inferior” or “superior”? And to whom?

From the real first principle, if one wants to conduct a rational discussion free of “free market dogma” etc, the question arises as to how does government own everything when it cannot logically own anything? Answer that, and you will get the answer to problems in the public sector.

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  • Sauvik Chakraverti  On July 10, 2009 at 8:29 pm

    Excellent and timely post. Actually, public ownership is a hoax. All public properties, beginning with Rashtrapati Bhavan and ending with your local DC’s colonial bungalow, are very much private property being exploited as such by people who “claim to represent the public.” This applies even more to State-owned enterprises. Everything should be privatized.

    Further, the only real “collective property” is a public park or garden, and the “public thoroughfare” – the road. And we have no parks and we have no roads.

    And Our The State wants to teach!

    • Aristotle The Geek  On July 10, 2009 at 11:44 pm

      I am an extremist in this case – nothing is, or should be, owned collectively – that is without defined shareholding. Both Rand and Rothbard were for private ownership of all property, including gardens, roads …

      You might have read it, but Rothbard has a whole chapter on private roads in his “For a New Liberty.” And Walter Block recently came out with a book (pdf) on privatization of roads and highways.

      The main problem, like in almost every case, is – “public goods” cannot be priced rationally.

  • Mohit  On July 11, 2009 at 12:40 am

    +1 Aristotle. Keep ’em coming!

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