Why business should not be the government’s business

India is to privatize most of its state-run and state-owned companies -- the important part here is the state-run. I speak as someone who works at the place that rather invented the whole privatization idea, the Adam Smith Institute. For the problem is very rarely that the state owns a particular economic organization, it’s that it runs it.  

It is possible to argue that certain activities are particularly profitable and that it should be the people -- in the form of the state -- that gain those profits. To so argue is rather to misunderstand the composition of the economy. Profits after depreciation, that is after the reinvestment that is necessary to keep things running, are rarely more than 10% of an economy. 

So a concentration on who gets those profits is to be looking at something not all that important in the first place. Certainly, it is possible for an excessive focus on who owns that 10% to then miss the much more important question of the growth rate or efficiency of the economy as a whole. 

It’s also true that there are other, better ways of dealing with the issue. For there are times when it is entirely righteous that the state, as the representative of the people, should get the profits. For example, the presence or not of natural gas in a place doesn’t depend upon anything but the vagaries of God or geology. 

So there’s no good reason why any individual should profit from the presence. There is profit that exists from it though, so the government should get that portion. This is why we tax resource rents, charge royalties to those who extract natural gas and other such resources. Our definition of resource rent is that profit which comes from the mere existence, royalty the movement of that profit to the state.

But that we charge such royalties, righteously and justly, does not then mean that it should be a state-owned company doing the extraction. We just want that done as efficiently as possible and by anyone who will pay the necessary royalty. 

It’s also possible to argue that something is so important that no profit should be made by anyone. This is difficult to support, because profit is just that the output is worth more than the inputs -- the thing produced is more valuable than what was used to make it. We always want this to be true. Further, that desire for profit means that a close eye is kept on the use of those inputs. 

But the real argument in favour of privatization is the one so often used against it. That there are things that the government should be doing for political, not economic, reasons. There are, of course, some things that the government can do and which can only be done by the government. But there are many more things that can be done either by the state or by private economic actors. 

The argument sometimes made being that the government should do it because there are larger, political issues at stake here, things that the private sector won’t take into account. Thus, say, we should have a state motor car company as Malaysia tried, in order to build the manufacturing base of the nation.

This is exactly the argument against state companies, even as it is used as the clinching argument in favour of them. Because economic and business decisions taken for those political reasons are highly likely to be the wrong ones. The incentives in politics are different from those in business after all.

For example, it’s common enough to hear a politician describing how he is going to create jobs. The problem with this being that we don’t want to create jobs. We want to get things done, certainly, but a job is a cost of getting something done, not a benefit of it. 

If someone is employed to do this thing, then they cannot be working elsewhere doing that other thing. So, employing them in a job to do this means that we cannot have that other thing -- it’s a cost. In my native Britain, we are often told that renewable energy generation is better than fossil -- which it might well be -- because it creates more jobs. 

But using more people to produce electricity is a cost of creating electricity, not a benefit. So even if renewables are better overall, they’re still worse, not better, for this reason.

It’s also true that politics is about voting constituencies and those only exist for things that already, themselves, exist. That means that political direction of business overemphasizes existing businesses and ways of doing things and is underinterested in new ways. 

There are people who benefit from the old, existing way, the people who will benefit from the new aren’t either aware of their connection or very interested either. State business tends to be too static that is, not vigorous enough in advancing the new.

India is privatizing most of its central state sector of business. This is a good move, not because government should not profit from the existence of a business, but because the economy does not profit from government running a business. 

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.