Government should not be in business

When Nobel Laureate Friedrich Hayek visited South Africa in 1978 he shocked hard-line free-market proponents when he said “governments can do anything as long as they don’t prevent others from doing the same”. The great economist, author of The Road to Serfdom, then went on to explain that governments are not capable of competing successfully with private entrepreneurs. Without the protection of statutory monopolies their enterprises would go out of business.

Removal of barriers to entry
Hayek maintained that the removal of regulatory barriers to entry was more important than privatisation. In the absence of licensing, permits, and outright prohibitions, private firms would compete with government enterprises to supply better goods and services at lower prices.

Consider the probable effect on South Africa if we had open competition with no statutory protection for state industries. Telkom, Eskom, Transnet, Denel, Spoornet, the Airports Company, Portnet, South African Airways, the Post Office, and all the other state-owned and controlled industries would have to rely solely on their ability to compete effectively for the business of consumers. Poor service or excessively high prices would immediately attract alternative providers. Open entry for foreign firms would make the market even more competitive and the benefits to consumers even greater. In an open economy consumers would have an array of choices, better services, and lower prices. They don’t have that consumer paradise now because government has strayed from its proper role. It places its role as “owner” of enterprises above the best interests of consumers.

Government neutrality in the economy
If government were totally neutral in the economy, resources would be utilised to serve the best interests of citizens as consumers and would not be diverted to political uses. Such a neutral government would concentrate its attention on providing the best possible environment for the achievement of high economic growth. Personal choice, protected property rights and freedom of exchange are key ingredients of such an environment.

An important characteristic of the highest growth economies is that government involvement is limited. Taxes are low as a percentage of GDP, regulation and interference in business are minimised, and most importantly, government does not own enterprises. Having government own businesses is like having a soccer referee participate in the match he is supposed to be adjudicating. The result is not good for the players, it does not produce a good product, and the consumers do not get value for money.

Government’s neutrality should also mean its total disinterest in the identity of the owners of businesses, and this neutral stance would extend to foreign owners. As long as there are no barriers to entry, and open competition prevails, the ownership and control of businesses would gravitate to those who are most efficient at supplying the goods and services consumers want. And the satisfaction of citizens as freely choosing consumers should be government’s primary objective, whether they want material goods, services, higher levels of safety, or the right to pursue happiness in a manner of their own choosing.

Government has to stay out of the hurly-burly of business if it wishes to play its proper role of impartial arbiter, setting rules that will bring about the best outcomes for the whole population. This means that it has to dispose of its business holdings, not primarily to raise money, but to establish the kind of neutrality it needs to create the best environment for a dynamic economy. In the interests of citizens as consumers government should then not pass on any form of monopoly protection to purchasers of state businesses. The selling prices may be lower but the overall gains for the economy would be so great that extra taxes from a more rapidly growing economy would quickly extinguish the apparent loss of revenue.

Source: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement. The patrons, council and members of the Foundation do not necessarily agree with the views expressed in the article.

FMF Policy Bulletin / 04 August 2009