Keep the home fires burning | From Wikimedia Commons, the free media repository
In the media last month we read the unsurprising news that privatised utilities corporations are not necessarily putting value for money for their customers ahead of their pursuit of profits. Apparently, they have “overcharged” (whatever that means) their domestic customers by as much as 5%, and small businesses by as much as 14%, amounting to £1·7Bn each year.
There has been a predictable storm of criticism over this, which will doubtless have as much impact as last year’s storm, the storm of 2013, 2012, 2011, 2010 and so on. In short, most years, if not every year, since privatisation there has been concern that Jo and Sam public are being short-changed by privatised corporations.
The role of business and the role of the state
However much we might complain, we cannot blame privatised multi-national corporations for doing what they are set up to do, maximise profits. If we expect anything else of them, surely it is we who are being naïve. As the economist Milton Friedman points out in his 1962 book Capitalism and Freedom:
there is one and only one social responsibility of business, to use its resources and engage in activities designed to increase its profits so long as it … engages in open and free competition, without deception or fraud
Compare this to the legitimate object of government which is, according to Abraham Lincoln:
to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves in their separate, and individual capacities
In short, business and legitimate government have different goals. These goals will only coincide if, by incredible coincidence, the shareholders of the corporation and the voting public are identical groups of people, and each with an identical number of shares. Otherwise, we cannot expect private corporations to operate in the best interests of the British public. This is, of course, especially true where such corporations are foreign owned – in which case we might conclude it is unrealistic to expect them even to act in the best interest of the UK.
It’s a business out there
The suggested remedy to this overcharging is, so we are told, to rely on the famous self-correcting market. Apparently, it is up to Jo and Sam public to call large multi-national corporations to account by being continually vigilant about their pricing policies and frequently changing provider.
The difficulty with this is, how far can we take it? Suppose Jo and Sam do the decent thing; they shop around, only to find that they should not have trusted the price comparisons on the web. Rather than supporting Jo and Sam, it seems some comparison websites are being run in such a way as to undermine, not support, the (so-called) competitive process.
This need for care is indicative of Jo and Sam’s having to make a general lifestyle choice. To avoid being over-charged, Jo and Sam must learn how to operate, not only as energy economists, but also as pensions experts, insurance brokers, mortgage consultants, educational economists, health economists, &c. &c. &c. In short, Jo and Sam, if they don’t want to be over-charged, must become experts at everything and exercise constant vigilance. In return, the state will subject them to surveillance, as they can’t be trusted either.
A trusting person and their money are soon parted
Jo and Sam’s requirement of engagement with the drudgeries of life is in accord with the modern responsiblisation agenda, under which the public are expected to shoulder the “freedom” of not being able to rely on the state to protect their interests. A lack of mistrust can cost one dearly in this world; not only will Jo and Sam be to be offered poor or over-priced service, but they must also take the blame for not being careful enough.
This is a hopelessly inefficient system. As Adam Smith observed, it is in specialisation and the division of labour that the market works best, not by all Britons determining to become a financial analyst (alongside their ‘day job’), simply to protect themselves.
We need more of this sort of thing
In any event, it is by no means clear everyone can develop all the economic analysis and financial skills required. In practice, some people are better at that sort of thing than others. The elderly, for example, are less likely to be Internet-savvy and are therefore less likely to access relevant information. In such a situation, economic theory would seem to indicate those with below average financial skills (and bear in mind, half of all people are below average) will wind up subsiding the economically astute. This would certainly explain why the financially gifted might be in favour of such a system as we have.
What is this thing called ‘efficiency’?
Privately owned utilities are often assumed to be more efficient than publicly owned utilities – that is the rationale of privatisation. However, there is little, if any, evidence of this for the UK; rather the reverse. This is the case, even if we ignore the costs of constant monitoring outlined above.
In any event, it is a false comparison because the efficiency of a private corporation is measured by its profits (by whatever means they are achieved); conversely, the efficiency of publicly run utilities is measured by their social output. Social output might include, for example socially responsible tariffs and employment policies.
We are not saying here that privatisation does not benefit anyone, simply that as a whole, privatisation of UK utilities does not appear to benefit the people of Britain. And, if Milton Friedman is right, this is exactly what we might have expected.
1 Friedman, M. (1962) Capitalism and Freedom, Chicago: University of Chicago Press
2 Lincoln, A. (undated) Fragment on Government, in Basler, R.P. (ed.) (1953) The Collected Works of Abraham Lincoln, Vol.2, p.22021
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