Generally speaking, nationalisation refers to any act by government to take control of any economic activity. Thus, it could include not only direct “ownership of the means of production”, but also taxation and regulation. But the more popular definition of nationalisation is the transfer of property from private to public (government) ownership. Depending on the intentions and attitudes of the government, this may be done by:
a. Purchase on the open market using tax money.
b. Expropriation without compensation.
c. Expropriation with compensation less than market value.
d. Expropriation with compensation of approximately market value.
e. Expropriation with compensation greater than market value.
Nationalisation can be used to harm the owners of the expropriated property, or it can be a disguised method of transferring wealth to them through overcompensation. Thus, it is not a foregone conclusion that all businessmen will be opposed to the nationalisation of their businesses, though they must always appear to be so in public. Certain individuals may personally gain from nationalisation, but the public as a whole cannot. Overall, the public loses.
The reason we lose is the same as for full socialism: economic information is cut off. Full socialism is just “full nationalisation”, and the effects of information loss are directly proportional to the level of government involvement in the economy. When a company is owned or controlled by the government, it becomes a source of “noise” that disrupts communications between producers and consumers. The more companies the government nationalises, the worse this disruptive effect becomes.
Even when it honestly tries, no government can ever run a business on a “commercial basis”. And if a government does try to “commercialise” one of its companies, it makes no sense for the government to own it. True commercialisation requires 100% privatisation; anything less is an open admission that the government still intends to exert its influence on the company’s operations. Politicians try to justify nationalisation in the first place by claiming it will change things. Any declaration that a company will be nationalised and then run on a commercial basis is a clear contradiction.
There are both political and economic reasons for this. Firstly, politicians are rarely able to resist the temptation to interfere in public businesses to achieve other ends. (The only politicians with the willpower to resist would also have the sense to privatise 100%.) Then, as government interference increases, the adverse economic effects become more apparent, though the cause might not be obvious to the public. This, in turn, usually leads to public demands for the government to “do something”: to put Band-aids on Band-aids.
Secondly, on the economic side, the situation of ‘shareholders” in nationalised industries is obviously very different from that of shareholders in the private sector. The legal implication of government ownership is that every citizen owns an equal share of the nationalised property. But this myth is quickly dispelled when a citizen tries to sell his share. He can’t; he doesn’t have the right of disposal. Any influences that the citizen exerts must go through the same electoral process as other political issues. Thus, upon nationalisation, the control of the nationalised company can never be the same as a private company in which the shareholders have a direct interest in its profitability and can more easily replace bad managers. Private shareholders also benefit from the presence of “corporate raiders” who buy the shares of companies they think are poorly run, take control and put in better managers. But nationalised companies face no threat of takeover if they are inefficient, and thus have less incentive to be efficient.
Who decides what kinds of industry a society shall have? Should it be decided privately or by the government? In the case of private companies, control is held by private owners who bear the costs and responsibility of their own decisions. But in the case of public companies, control is in the political arena. It’s everybody’s business, and therefore nobody’s business. No one with decision-making powers bears the cost of failure. How can this possibly be in the public interest?
Not only is a nationalised company less efficient than a similar private company, the mere existence of nationalised companies reduces the efficiency of all other companies in the economy. This is because the reduced opportunity to obtain services that have been nationalised increases costs and misallocates resources.
As government influence in the economy grows, it becomes impossible to avoid bureaucratisation of all companies, public or private.
Author: Richard J. Grant is Professor of Finance & Economics at Lipscomb University in Nashville, Tennessee, and is Publications Editor at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.
FMF Feature Article / 09 February 2010