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The Forum > Article Comments > Economic rationalism has little left to offer > Comments

Economic rationalism has little left to offer : Comments

By Andrew Wear, published 6/11/2007

Economic rationalism is looking increasingly irrelevant in Australia.

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Mr Smith

You say that “Not one privatised entity offers a better or cheaper service than it did under state ownership”. Do you remember how expensive, inefficient and customer-unfriendly phone services used to be under the government-run Telecom Australia? You practically needed a mortgage to phone overseas, and waited weeks for a new line.

I also recall the incompetent and expensive service that used to be provided by our state-run bank, and the utter indifference to consumer convenience of the government-run Water Corporation. This was the last utility I use to accept credit card payments and telephone or Internet payments. Why? Because it didn’t suit them, and customers had no choice but to pay in whatever manner suited the Corporation.

What you were taught at school about comparative advantage still holds true. You many not like China’s poverty or labour standards, and nor do I, but compare them to where they were 30 years ago and the improvement is breathtaking. And China hasn’t devalued its currency, it has actually lifted its exchange rate slightly in recent years, though not by as much as the USA and some others would like.

I agree that “deregulation” per se is neither good not bad, and that regulations should be examined to see if there is worthy and objective case for removing them. That is exactly what happened under National Competition Policy, and may damaging and costly regulations were removed as a result.
Posted by Rhian, Wednesday, 7 November 2007 3:08:58 PM
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Rhian - it is simply a coincidence that the privatisation of Telstra occurred at the same time as the telecommunications revolution surrounding the internet and mobile phone technology. In this, there has been some gain from competition between providers of mobile phone technology... At the same time, though, the cost structures of the industry have been driven up by duplication of infrastructure. Public ownership of infrastructure, at least, would have seemed more sensible.

re: water - I think with essentials such as water and energy - privatisation has seen prices rise rather than fall... And the ideal of the 'sovereign consumer' is far from the reality. There are some things consumers - and citizens - like to be able to take for granted. Here, and elsewhere, including privatisation of roads, there are some areas where competition is not the answer to everything.

In particular, see my article on the Privatisation of Public Space:

http://www.onlineopinion.com.au/view.asp?article=6600
Posted by Tristan Ewins, Wednesday, 7 November 2007 3:20:39 PM
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Privatisation is a wonderful thing when there is competition. The justification when there in no or little competition is dubious. The two airlines policy gave an excellent illustration of this.

One was government owned. The other privately owned. While there was a 2 airlines policy both kept themselves happy gouging the poor Australian air traveller silly. The 2 airlines policy was ditched, and after what I thought was a remarkably long time competition finally took effect. The price drops were remarkable.

The price drops caused one worst run airline to go belly up. And - it wasn't the government owned one. In fact the government owned one is still the strongest airline in Australia today.

I see little evidence that in general a government owned organisations are in general any better or worse efficiency wise that a privately owned one. Medibank is another example of this. It is a government run entity in a highly competitive marketplace that has consistently managed to have the lowest premiums.

There is of course strong evidence that competition is better than a monopoly. But some times you can't avoid a monopoly. And when there is a monopoly there is a real difference between government owned and privately owned. A government organisation is ultimately answerable to the voters. A privately owned organisation is beholden only to its shareholders - they care for their customers like ranchers care for their cattle. To put it another way, imagine HIH or Erron running amok without competition to reign them in.
Posted by rstuart, Wednesday, 7 November 2007 4:48:24 PM
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Tristan

My point about higher prices and poorer services pre Telstra was made primarily in response to Mr Smith’s claim that “Not one privatised entity offers a better or cheaper service than it did under state ownership”, which is demonstrably wrong.

I agree that the technological and structural changes in telecommunications are at least partly behind the lower prices and better service we now enjoy. I believe that these changes were themselves driven worldwide by moves to deregulate, and in may case privatise, telecommunication services, so the causal links can’t be easily separated.

I also agree with you and rstuart that public ownership (or tight regulation) of “natural monopolies” such as phone networks and water supply and sewerage networks is a good idea, and did not support privatising Telstra’s monopoly elements.

I agree, too, with a lot of what you say about public space, which has echoes of the standard economic case for government provision of public goods (defined by economists as non-rivalrous and non-excludable goods and services, not just nice things supplied by government! - http://en.wikipedia.org/wiki/Public_good).

The key question in water pricing is the relationship between price and cost. Government-owned water utilities have failed to price water in line with its cost of supply, mainly overlooking environmental cost, and sometimes adequate depreciation. As a result, consumers have been subsidised, with the consequence that demand has been artificially boosted, and there has been insufficient investment in supply – hence the water restrictions in most capital cities. Furthermore, new additions to the water supply through measures such as desalination cost considerably more on average than the cheaper and more accessible sources tapped in the past, so average costs are starting to rise. Where this is the case, rising prices may be a good thing, and for this reason I believe you’ll see water prices starting to rise even in cities where supply is still government controlled.
Posted by Rhian, Wednesday, 7 November 2007 4:59:51 PM
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The 'get big or get out' catchcry that came out with economic rationalism had ignorant bank Johnnies in our district scaring hell out of very efficient small farmers to sell out cheap to many wasteful big farmers, to this day getting so far in debt the banks are forced to keep them on.

And because it is too much ready money whether borrowed or not that helps to cause inflation it is the bankers that are causing it, as well as the competitive greed that is the humanistic cause of it.

It is thus that our districts have lost their family companionships as well as their sporting clubs, lost their medicos who will not work on credit as bush doctors used to do.

As Adam Smith did say, though it is human greed that is necessary to fuel competition, do not let the greed become more important than mankind's natural gift of grace and kindness.

Cheers - BB, WA
Posted by bushbred, Wednesday, 7 November 2007 10:01:54 PM
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Rhian

I do remember Telecom Australia and I also recall that all of improvements that occurred under Telstra coincided with majority government ownership - which only reinforces rstuart 's point that it is competition that matters.

Merely changing the ownership of an enterprise doesn't necessarily improve anything. The idea that private ownership is a virtue in itself is probably the most irrational aspect of "rationalism"

It has also become one of the most unpopular. If it weren't for the presence of certain regulations people in rural areas would wait several years for a new line or never get one. And they were wise enough to know that full privatisation wouldn’t help their cause.

My original point regarding universal labour, quality and environmental standards in international trade remains. There is no justice in exposing our producers to competition from low-grade exploiters that we wouldn’t dream of tolerating in our own country. It's a double standard and China to be fair, is not the only culprit.

Rather than just ‘importing deflation’ as some economists refer to it, we are as customers participating in the exploitation of foreign workers (children included) and the destruction of their environment.

On the other side of the coin it is easy to understand the anger of Australian, Third World and other producers regarding those that subsidise their exporters (eg. Chinese manufacturers and US farmers). Exchange rate manipulation no matter who does it is in effect, just another form of subsidy / protection.

I suppose the rationalists might agree with that last point but the real point I’m making (aside from the matter of minimum standards) is that ‘free trade’ cannot be unilateral. Free trade concessions need to be reciprocated or they will remain infinitely problematic.

- Mr Smith
Posted by MrSmith, Thursday, 8 November 2007 1:38:09 AM
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