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Socialists
deliberately ignore the benefits of privatization because like all cultists
they deny any evidence that refutes their dogma, including the fact that
socialist states always collapse. Unfortunately, their economic illiteracy
can have a malicious influence on public opinion. This is why it’s not enough
to empirically demonstrate that genuine privatization generates benefits. One
must also explain why free markets produce these results, and this is where
Austrian economics has been exceptionally successful.
Socialists
and their statist cousins argue that privatisation imposes unnecessary
burdens on the community because profits are a cost imposed on consumers by
capitalists. (It’s a pity they don’t take the same attitude to statist
policies like solar subsidies). Confusion about profits arises because most
people, including those economists who should know better, think of profits
as net revenue. This is not so. Profits are maladjustments (another Austrian
insight) between supply and demand.
This
means that when profits are being made factors are being priced below the
value of their marginal product and the supply of the product is lagging
behind demand. The market process signals this situation to other
entrepreneurs who then move in to eliminate the maladjustment by competing
away the profits until only enough remains to justify production. Firms try
to counter this process by producing new and better products. Only by
satisfying consumers better than their competitors can these firms succeed.
But socialists
are not the only ones who are wrong on the nature of profit. A surplus over
costs that would just keep businesses operating is called a normal profit by
most economists. They then conclude that anything in excess of the normal
profit is a super profit. Alan Moran of the Institute of Public Affairs has
gone further and writes of high profits and super profits without even trying
to explain what the difference is supposed to be. He also states that “high
profits for successful firms are matched by losses for the unsuccessful” (Rocks in their heads: ministers’ miscalculation over
resources tax leaves Labour in a hard place, Institute of
Public Affairs, 2010.) This is adding confusion to confusion. Only in a
stationary state do losses equal profits, regardless of how high those
profits might be. As Ludwig von Mises explained:
In the
stationary economy the total sum of all profits and of all losses is zero. In
the progressing economy the total amount of profits exceeds the total amount
of losses. In the retrogressing economy the total amount of profits is
smaller than the total amount of losses. (Ludwig von Mises, Human Action, Henry Regenery Company,
1963, p. 251.)
It
follows from the Austrian concept of profit that if any state run operation
is making genuine profits then there is an obvious maladjustment between
supply and demand. Consumers are getting too little of the product at high
prices. As we have seen, the market’s solution to this situation is to
compete away the profits by increasing investment, expanding output and
hiring more labour.
This
makes nonsense of the socialists’ argument that profits are a cost on the
community that can be taxed away without damaging economic welfare. So what
would happen if a state-owned firm was ordered not to make profits even
though its monopoly allowed it to do so?
The
result would be even more waste and misallocated resources, over manning,
increased on-the-job consumption (perhaps much of it disguised as R&D),
expansion into peripheral activities, etc. But allowing the market to
eliminate profits would have the reverse effect and also speed up
technological change. This brings us to entrepreneurship, an activity that
can be neither nationalized nor replicated within a state structure. To speak
of entrepreneurship, therefore, is to state that ownership not only matters
but that it is absolutely vital to economic and social progress.
What
socialist ‘economists’ ignore is that even when operating in a competitive
environment, state companies are not presented with the same range of
opportunities that private companies face as well as create for themselves.
This is because the decision-making scope of state managers is not only far
more limited than that of managers in private companies it is also operates
on different levels. It is ownership that makes this difference because
entrepreneurship can only be exercised through ownership.
When
making a choice the owner, or one acting for the owner or owners, has to
think in terms of displaced revenue, i.e., his opportunity costs. Without the
ability of being able to freely dispose of property in any way he sees fit
his 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.
Hayek,
a leading member of the Austrian school of economics, pointed out that the
market is also a discovery process, the costs of which are spread among a
multitude of firms and thus the economy. These firms innovate, invent,
speculate, experiment and constantly change their factor combinations: each
firm striving to win over more consumers by providing them with products at
attractive prices that still make profits. It should be self-evident that
entrepreneurship is the heart of this process.
Therefore,
the absence of ownership denies state managers the means to make the kind of
market calculations and decisions that made, for instance, Ford the pioneer
in car production, Sony a Japanese colossus, Microsoft a software production
giant, and Apple a leader in the field of computers and applications. Without
entrepreneurship these companies and hence their products would never have
come into existence.
For
socialists to argue otherwise is to argue that if economic decision-making
had been under the complete control of an all-knowing state, meaning
politicians and a bureaucracy, we would still have obtained, for example, the
range and multitude of PCs, software, peripherals and IT equipment that we
now take for granted. But this is exactly what Obama apparently believes.
This profoundly ignorant man is so deeply wedded to this socialist myth that
he thinks that the so-called state can actually determine the economic and
social consequences of any “transformative” technology and how and where it
should be applied. This was made clear by his executive office which
arrogantly announced:
It is
the responsibility of government to ensure that transformative technologies
are used fairly and employed in all areas where they can achieve public good.
(Big Data: Seizing Opportunities,
Preserving Values, Executive Office of the President, May
2014, p. 48.
The
conceit and sheer stupidity of this statement should beggar belief. Apart
from their infantile belief that they can know the unknowable they also do
not understand why so-called state enterprises cannot mimic the real thing.
As a substitute for entrepreneurship state industries are basically forced to
rely on a process of simply calculating the monetary value of inputs and
outputs and comparative rates of returns. This is a profound and
insurmountable flaw. This approach cannot, as Austrian economics stresses,
take into account the lost opportunities caused by state ownership nor cannot
it mimic entrepreneurship. Therefore it cannot measure market efficiency. The
extent to which these so-called enterprises are efficient is largely
determined by being able
to
observe the effects of similar improvements in similar private undertakings
at home and abroad. In such concerns it is still possible to ascertain the
advantages of reorganization because they are surrounded by a society which
is still based upon private ownership in the means of production and the use
of money. (Socialism: An Economic and
Sociological Analysis, Liberty Classics, 102
Both
reality refutes socialist fallacies and exposes socialists as delusional
visionaries utterly ignorant of the nature of markets, entrepreneurship and
the crucial role of ownership. But then again, socialists must live in a
permanent state of denial while waiting for utopia to magically appear once
they have reduced the economy to rubble.
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