Private ownership and its critics

Gerard Jackson
BrookesNews.Com
Monday 17 April 2006

Comments by Labour Party officials and unionists regarding economic policy convey a strong impression that ownership does not really matter. Of course, there is nothing new about this fallacy. Some years ago Deborah Brewster from Murdoch’s Australian seriously asserted “that there is little evidence that privately owned companies are more efficient than government-owned ones.”

She then used state-owned Renault and Volkswagen as supporting evidence. Her assertion, in turn was based on the alleged views of Professor Greg Bamber, Griffith University Graduate School of Management. (I say alleged because I have no knowledge of Bamber’s work). To these commentators and those like them competition and entrepreneurship can by some mysterious means be divorced from ownership.

Therefore, according to this strange logic ownership doesn’t matter so long as competition prevails. It thus follows that state-owned companies do not have to be privatised because competition makes them efficient. It completely eludes these people that competition can only exist where markets prevail and the essence of the market is private ownership.

The only alternative to private ownership is central planning, that is, socialism. But as von Mises pointed out, without markets there can be no rational allocation of resources with the result that economic chaos emerges followed by collapse. This is what really happened to the Soviet Union.

It should take very little insight to realise that any degree of economic efficiency found in state-owned companies like Renault, especially when operating in competitive conditions, is entirely due to the existence of competing private companies and the existence of markets for factors of production. Without markets the state-owned companies would be unable to make rational economic calculations. Without the presence of private companies striving to make profits the state companies would not be able to make the kind of commercial decisions that their entrepreneurial competitors have to make each day of their existence.

In reality, then, the state-owned companies try to ape their competitors’ entrepreneurial successes. For example, the Japanese car companies are not demanding protection from Renault or Volkswagen. One is therefore driven to ask (no pun intended) why these companies are not more successful against private companies given their privileged position as industrial wards of the state.

The answer is that even when operating in a competitive environment, state companies are not presented with the range of opportunities that private companies face as well as create. This is because the decision-making scope of state managers is not only more limited than that of managers in private companies it is also operates on different levels. It is ownership that makes this difference because it is ownership that affects choice.

When making a choice the owner, or one acting for the owner, has to think in terms of displaced revenue. Without the ability of being able to freely dispose of property in any they see fit their range of choice is clearly limited. It means alternative opportunities of using the firm's property (in the form, for example, of shares) to acquire or dispose of income are denied to state managers.

In short, the absence of ownership denies state manages the means to make the kind of market calculations and decisions that made, for instance, Ford the pioneer in car production and Microsoft a software production giant. Without individual ownership these entrepreneurs could not have existed and their products would never have been born.

Basically, all the accounting approach can do is measure the monetary value of inputs and outputs and compare rates of returns. It cannot take into account the lost opportunities caused by state ownership. Therefore it cannot measure market efficiency. The accountant who considers otherwise is deluding himself as well as revealing his ignorance of the nature of markets, entrepreneurship and the vital role of ownership.

Clearly, ownership not only matters it is the key to the competitive process. It is a great pity that our economic commentators have no understanding of this vital fact. Do these unthinking critics of private ownership really imagine that if the state had controlled computer development we would have the range and multitude of PCs that now exist? I think not.

Gerard Jackson is Brookes’ economics editor