Posted by: graemebird | December 14, 2009

Totally Unexpected Influence-Ratrap Of Privatisation.

Sal says:

“Mr Bird:

You wrote on Prof Quiggin’s blog in the discussion on the Qld ALP’s asset sales:

“The goal of getting a high sale price is directly antithetical to the establishment of a functioning industry post-sale. The goal of getting a high sale price ought then be abandoned. ”

I’d be grateful if you explained your reasoning here.”

((((This is why your average non-nihilistic citizen has to show an interest in matters economic, and do so with the attitude that the alleged authorities on the matter are more than likely full of shit. . No working economist on this continent today would ever have asked me this question. Almost no-one on Catallaxy ever asked me a question as intelligent and important as this one.))))

SO I SEZ:

Thanks for your interest.

Now just bear in mind sal. That we want to block out most of the real world noise, and approximate an idealised monetary situation when we go in for conceptual economic analysis. We do this by imagining arrangements whereupon the total level of sales revenue in an economy is static in nominal terms.

We are not talking about GDP here. We are talking about total sales, including intermediate production. Total sales viewed in this way will give you a figure several times higher than GDP.
>>>>>>>>>>>>>>>>>>>>>>>

For the purpose of this analysis there is no need to dwell on the above too long.

But we who have dwelt on the subject come up with the conclusion, that under static nominal total sales revenue, most prices would be falling all the time.

We find under this analysis that the economy would be balanced in the following way. If one industry was a great deal more profitable in terms of profits, per capital invested, then capital goods would flow to this industry.

Each firm knows that prices are going to fall. That their own per-unit sale price is going to fall. Hence their main obsession would be to spend money now to reduce recurring costs later. They will spend money on capital goods which will allow them to reduce their prices.

We would then say that under a FUNCTIONING INDUSTRY (with the assumption of static nominal gross domestic revenue) high profits would lead to the extra flow of capital investment would lead to falling prices, and these falling prices will not moderate the profits necessarily of any individual firm. But they will normalise the profits of the industry.

Now supposing you want to get the best price for the sale of New Zealand rail.

If you want to get the best price do you then adopt a formula for wannabe entrepreneurs to be able to make farmers offers for a new rail system? Do you put private-eminent-domain at 300% premium, to allow the rail startup to sieze yet vastly overcompensate the farmer to get a track through his place??? Of course you would do it so that the provision was never used. But without the provision, in a skinny land like New Zealand how can a second rail start up?

If you want to get the very best price for selling off New Zealand rail do you suddenly have an “aha” moment?

Do you suddenly say I will choose this time THIS TIME, to get all my ministers speaking to every mayor, and middle class business organisation and all the little people. Will we shun overseas show-pony behaviour and talk to all our mayors and councils and just try to get them to look at all the private and public land on the coast.

And will we ask them to pre-approve as much land as possible on the coast. Not for the ACTUALITY that a wharf will be built there. But just the possibility that a wharf may be built there and no zoning restrictions. Because we all know that the sea shits on even rail for heavy slow cargo. So do we choose that time to run that major campaign?

NO WE ARE NOT GOING TO DO ANY OF THAT STUFF. If we are thinking about sale price we are not going to do any of the things which would make the market a FUNCTIONING INDUSTRY.

Now in a functioning industry no firm within that industry is allowed to fail to accumulate real-tangible capital goods. No firm can avoid having to spend money now to cut recurring costs later.

Every individual firm must innovate, and innovate constantly, and never leave off the innovation for a moment, since his peers are in the same boat.

So if all industries were “FUNCTIONING INDUSTRIES” and no industry was not, then the rich man would be no threat to the poor man. Since to maintain his wealth he would have to constantly reinvest his winnings in such a way as to pull down prices for the poor man.

But probably less than 30% (thats off the cuff) of what we have on the fly is functioning.

Now consider your new New Zealand rail. Anyone wanting to compete doesn’t just have to sidle up to farmers and buy options to a path through their land ranging from a 50 to a 100% premium.

No fuck no. They’ve got to go through three levels of government AND through each and every farmer to get this gig on the fly. Supposing sal that your rich aunty died and left you many millions of dollars? Could me and you go driving around the coast looking for an appropriate site to put up a container-capable wharf?

Well we could. But no fucking good it would do us in terms of getting wharf construction up and running.

So you see that the very act of selling, in a motivated way, for the motivated purpose of getting a good price, sets off a chain reaction of influence, and this influence mitigates against the very possibility of ever having a functioning industry at the end of the process. In fact without massive political will and influence the sale for the purpose of a good sale price will set up a path-dependency situation that will make it vastly less likely that we will ever have a functioning industry after the sale. The Merrill-Lynch gang and the Rothschild dynasty will advise the Queensland Premier in such a way that post-sale, their can never be a blossoming and righteous rail industry ever again in Queensland.

I believed in privatisation. And the strict economic case was overwhelming. But now when we take it to not just an economic level, but indeed to the level of political-economy. Well we see that we have set off a chain of dysfunction. And its upsetting because I don’t know how to get out of it.

SAL SEZ:

“Thank you that is a brilliant explanation. But what I do not understand, Mr Bird, having said all that, is why you would support a sell-off or privatisation in the first place.”

SO I SEZ:

t was because they were speaking my language. The bigtime privatisers got out of University only a couple of years before me.(((( No scratch that. They got out just after me. The younger guys tended to be a couple of years older than me. But I didn’t stay to get my Masters, and left for Australia. It was only after I left for Australia that the privatisations began.)))))) These were people who knew which way the wind was blowing.

On strict economic grounds you would be better to have as much as you can in private hands. But the estimate that privatising was therefore an uncontroversial net benefit “misunderestimated” the idea that the ubiquity of privatisation would actually impede ideas towards more fullsome reform.

Supposing we say that “private is good, public is bad” and when we say that we are thinking about the communists trying to make shoes or cars or what have you. Well the generalisation holds true.

My generation of economists got lazy. They said that private was good and public was bad. And so they decided that they would make “more than the minimum wage” hocking stuff that was not theirs and that they did not build.

In all this activity a terrific mental block was built. A mental block that was so frightfully strong that it blocked out the original intent of the project. And the original intent was not to hock the old stuff. The original intent was to set up the conditions to get the new stuff built.

If we want to have the infrastructure that would put Singapore and any other pretender to shame we must understand the following:

Its not about hocking the old stuff.

Its about getting the new stuff built.

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