A Level Economics 48: Nationalisation

Nationalisation refers to the process in which the government takes ownership and control of privately-owned companies, industries, or assets. It involves transferring the ownership and operation of these entities from private hands to the public sector.

Argument for Nationalisation: The argument for nationalisation is primarily based on the belief that certain industries or services are best managed and operated by the government to serve the interests of the public and the nation as a whole. Proponents of nationalisation often cite the following reasons:

1. Public Interest and Welfare: Nationalisation aims to ensure that essential goods and services, such as healthcare, education, and utilities, are provided to all citizens at affordable prices and without discrimination. It prioritizes public interest and welfare over profit motives.

2. Natural Monopolies: Some industries, like water and electricity distribution, have natural monopolies due to high fixed costs and economies of scale. Nationalisation can prevent private monopolistic practices and ensure equitable access to such services.

3. Strategic Importance: Nationalisation is often advocated for industries considered strategically important for the country's security, economic stability, or technological advancement. This includes sectors like defense, energy, and transportation.

4. Market Failure Correction: Nationalisation can address market failures, particularly when private firms fail to provide essential services adequately or when industries experience excessive volatility.

5. Long-term Planning: The government's involvement can facilitate long-term planning and investment in infrastructure, research, and development, which may be challenging for private firms with short-term profit goals.

6. Income Redistribution: Nationalisation can be seen as a mechanism to redistribute wealth and reduce income inequality by ensuring profits benefit the wider population rather than private shareholders.

Historical Examples of Nationalisation:

1. Post-World War II: After World War II, the UK undertook significant nationalisation efforts, bringing key industries like coal mining, railways, and steel production under public ownership. The goal was to rebuild the nation's infrastructure and secure critical industries.

2. 1970s Oil Crisis: In response to the 1970s oil crisis, several countries, including Venezuela and Mexico, nationalised their oil industries to gain greater control over energy resources and protect national interests.

Current Examples of Nationalisation:

1. Healthcare: Countries like the United Kingdom and Canada have nationalised their healthcare systems to provide universal healthcare to all citizens, regardless of their income or social status.

2. Public Utilities: In some countries, utilities such as water and electricity supply are nationalised to ensure that these essential services are accessible and affordable to the entire population.

Evaluation of the Argument for Nationalisation: The argument for nationalisation has both strengths and weaknesses:

Strengths:

• Ensuring Essential Services: Nationalisation can guarantee essential services for all citizens and reduce the risk of profit-driven price increases or exclusions.
• Strategic Control: In certain industries, nationalisation provides greater control and stability, safeguarding national interests and security.
• Long-term Planning: Nationalised industries can prioritize long-term investments and research without short-term profit pressures.

Weaknesses:

• Efficiency Concerns: Nationalised industries may suffer from inefficiency and bureaucratic practices, resulting in suboptimal performance and higher costs.
• Budgetary Burden: Nationalisation requires significant government funding, which may lead to increased public debt or budgetary challenges.
• Lack of Competition: In some cases, nationalisation may lead to a lack of competition, hindering innovation and consumer choice.

The debate over nationalisation is complex and often depends on specific circumstances and industries. Some proponents argue that nationalisation is essential for the provision of crucial services and strategic control, while opponents stress the potential inefficiencies and risks of excessive government control. A balanced approach might involve a combination of private and public ownership, with appropriate regulation to ensure the best outcomes for the economy and the welfare of citizens.

We need to nationalise Google, Facebook and Amazon. Here’s why

A crisis is looming. These monopoly platforms hoovering up our data have no competition: they’re too big to serve the public interest

Nick Srnicek in The Guardian


For the briefest moment in March 2014, Facebook’s dominance looked under threat. Ello, amid much hype, presented itself as the non-corporate alternative to Facebook. According to the manifesto accompanying its public launch, Ello would never sell your data to third parties, rely on advertising to fund its service, or require you to use your real name.

The hype fizzled out as Facebook continued to expand. Yet Ello’s rapid rise and fall is symptomatic of our contemporary digital world and the monopoly-style power accruing to the 21st century’s new “platform” companies, such as Facebook, Google and Amazon. Their business model lets them siphon off revenues and data at an incredible pace, and consolidate themselves as the new masters of the economy. Monday brought another giant leap as Amazon raised the prospect of an international grocery price war by slashing prices on its first day in charge of the organic retailer Whole Foods.

The platform – an infrastructure that connects two or more groups and enables them to interact – is crucial to these companies’ power. None of them focuses on making things in the way that traditional companies once did. Instead, Facebook connects users, advertisers, and developers; Uber, riders and drivers; Amazon, buyers and sellers.

Reaching a critical mass of users is what makes these businesses successful: the more users, the more useful to users – and the more entrenched – they become. Ello’s rapid downfall occurred because it never reached the critical mass of users required to prompt an exodus from Facebook – whose dominance means that even if you’re frustrated by its advertising and tracking of your data, it’s still likely to be your first choice because that’s where everyone is, and that’s the point of a social network. Likewise with Uber: it makes sense for riders and drivers to use the app that connects them with the biggest number of people, regardless of the sexism of Travis Kalanick, the former chief executive, or the ugly ways in which it controls drivers, or the failures of the company to report serious sexual assaults by its drivers.

Network effects generate momentum that not only helps these platforms survive controversy, but makes it incredibly difficult for insurgents to replace them.

As a result, we have witnessed the rise of increasingly formidable platform monopolies. Google, Facebook and Amazon are the most important in the west. (China has its own tech ecosystem.) Google controls search, Facebook rules social media, and Amazon leads in e-commerce. And they are now exerting their power over non-platform companies – a tension likely to be exacerbated in the coming decades. Look at the state of journalism: Google and Facebook rake in record ad revenues through sophisticated algorithms; newspapers and magazines see advertisers flee, mass layoffs, the shuttering of expensive investigative journalism, and the collapse of major print titles like the Independent. A similar phenomenon is happening in retail, with Amazon’s dominance undermining old department stores.

These companies’ power over our reliance on data adds a further twist. Data is quickly becoming the 21st-century version of oil – a resource essential to the entire global economy, and the focus of intense struggle to control it. Platforms, as spaces in which two or more groups interact, provide what is in effect an oil rig for data. Every interaction on a platform becomes another data point that can be captured and fed into an algorithm. In this sense, platforms are the only business model built for a data-centric economy.

More and more companies are coming to realise this. We often think of platforms as a tech-sector phenomenon, but the truth is that they are becoming ubiquitous across the economy. Uber is the most prominent example, turning the staid business of taxis into a trendy platform business. Siemens and GE, two powerhouses of the 20th century, are fighting it out to develop a cloud-based system for manufacturing. Monsanto and John Deere, two established agricultural companies, are trying to figure out how to incorporate platforms into farming and food production.

And this poses problems. At the heart of platform capitalism is a drive to extract more data in order to survive. One way is to get people to stay on your platform longer. Facebook is a master at using all sorts of behavioural techniques to foster addictions to its service: how many of us scroll absentmindedly through Facebook, barely aware of it?

Another way is to expand the apparatus of extraction. This helps to explain why Google, ostensibly a search engine company, is moving into the consumer internet of things (Home/Nest), self-driving cars (Waymo), virtual reality (Daydream/Cardboard), and all sorts of other personal services. Each of these is another rich source of data for the company, and another point of leverage over their competitors.

Others have simply bought up smaller companies: Facebook has swallowed Instagram ($1bn), WhatsApp ($19bn), and Oculus ($2bn), while investing in drone-based internet, e-commerce and payment services. It has even developed a tool that warns when a start-up is becoming popular and a possible threat. Google itself is among the most prolific acquirers of new companies, at some stages purchasing a new venture every week. The picture that emerges is of increasingly sprawling empires designed to vacuum up as much data as possible.

But here we get to the real endgame: artificial intelligence (or, less glamorously, machine learning). Some enjoy speculating about wild futures involving a Terminator-style Skynet, but the more realistic challenges of AI are far closer. In the past few years, every major platform company has turned its focus to investing in this field. As the head of corporate development at Google recently said, “We’re definitely AI first.”


Tinkering with minor regulations while AI companies amass power won’t do


All the dynamics of platforms are amplified once AI enters the equation: the insatiable appetite for data, and the winner-takes-all momentum of network effects. And there is a virtuous cycle here: more data means better machine learning, which means better services and more users, which means more data. Currently Google is using AI to improve its targeted advertising, and Amazon is using AI to improve its highly profitable cloud computing business. As one AI company takes a significant lead over competitors, these dynamics are likely to propel it to an increasingly powerful position.

What’s the answer? We’ve only begun to grasp the problem, but in the past, natural monopolies like utilities and railways that enjoy huge economies of scale and serve the common good have been prime candidates for public ownership. The solution to our newfangled monopoly problem lies in this sort of age-old fix, updated for our digital age. It would mean taking back control over the internet and our digital infrastructure, instead of allowing them to be run in the pursuit of profit and power. Tinkering with minor regulations while AI firms amass power won’t do. If we don’t take over today’s platform monopolies, we risk letting them own and control the basic infrastructure of 21st-century society.

BCCI monopoly and judicial review

Suhrith Parthasarathy in The Hindu

By controlling competitive cricket in India, with minimal regulation, the Board of Control for Cricket in India has enabled itself to encroach upon constitutionally guaranteed civil liberties

The Supreme Court of India, in holding that the Board of Control for Cricket (BCCI) in India is bound by the rigours of public law, in a landmark judgment on January 22, may well have helped steer cricket administration in the country into a new age of greater accountability. In recent years, the BCCI has suffered an enormous loss of credibility. Its management has been riddled with several cases of egregious conflicts of interest. And the Indian Premier League, organised under the Board’s aegis, has become renowned for its wanton excesses. As a result, any trust that was reposed in the Board by the public has over the last decade been completely obliterated. Viewed intuitively, the Supreme Court’s intervention certainly seemed necessary to restore “institutional integrity” to the management of cricket. Counter-arguments, however, abound. In spite of the BCCI’s quite palpable maladministration, many appear to see the court’s verdict, which seeks to imbue in the Board a more onerous public responsibility, as an improper exercise of powers of judicial review. Although these arguments can appear pedantic, they also carry particular jurisprudential weight. Critics say, as the BCCI argued for itself, the Board is merely an exclusive society governed purely by a set of by-laws, which are in the nature of a private contract between an elite set of members. According to the BCCI, it owes an obligation only to those members that subscribe to its by-laws; and even these obligations are restricted by the nature of the responsibility imposed therein.

Outside statutory control

In the case of other private societies, such a contention would typically be valid, as most such entities generally derive their authority solely from contract. But concentrating only on the source of a body’s power can lead to gross distortions. This is especially so in the case of the BCCI, which operates in a nebulous space outside statutory and constitutional control, but nonetheless wields enormous monopolistic power. In completely controlling competitive cricket in India, with nearly no regulation whatsoever, the Board has appropriated unto itself a unique ability to make substantial encroachments into civil liberties guaranteed by the Constitution. It can certainly affect, for instance, free of all checks and balances, the rights of Indian citizens to participate in games of cricket, with a view to ultimately securing employment as a cricketer.

Public bodies in India are generally held accountable through a process known as judicial review. Originally, under English Common Law, principles of which have been substantially adopted by Indian laws, the Crown possessed a discretionary power to issue “prerogative writs.” These were extraordinary orders directing the behaviour of different wings of the government, including inferior courts and public authorities. Through this power, which was subsequently transferred to the judiciary, the courts sought to impose a high standard of transparency, reasonableness and proportionality in action on public authorities.

In India, the Supreme Court and the different State high courts have been vested with a similar power to issue writs through Articles 32 and 226 of the Constitution. Article 32 grants a person the liberty to approach the Supreme Court directly when his or her fundamental right has been violated. Ordinarily, this relief is available only against the “State” (defined in Article 12 to include “the government and Parliament of India, the government and the legislature of each of the States, and all local and other authorities within the territory of India or under the control of the Government of India.”) Article 226 affords a wider relief. It allows a person to approach a high court seeking a writ against any person or authority for any purpose.

Each of these articles has been the subject of substantial debate by the Supreme Court. In the case of Article 12, the court has held that it is only those bodies that are created by a statute, which enjoy their own lawmaking powers, and are pervasively dominated — financially, functionally, and administratively — by the government that can be described as a “State.” Practically, what this has meant is that private bodies, even if they were capable of invading fundamental rights, through acutely entrenched processes of discrimination, would not be held accountable for such violations. Even Article 226, which grants the high courts the authority to issue writs, has been circumscribed to include within its jurisdiction only those authorities that perform overwhelmingly public functions. But even these bodies would not be bound by many of the fundamental rights— such as the right to equality — but would be governed only by other constitutional and statutory rights specifically guaranteed against them, and the more general common law principles of reasonableness and fairness in administrative action.

Inroads into fundamental rights

The question of whether the BCCI is “State” for the purposes of Article 12 was already conclusively determined in 2005 by the Supreme Court in a case initiated by Zee Telefilms Ltd. Here, a five-judge bench found that the BCCI was not an instrumentality of the State, and was therefore not subject to most of the fundamental rights guaranteed by the Constitution. This also meant that petitioners aggrieved by a decision of the Board could usually not approach the Supreme Court directly for relief. What the ruling ignored however is the fact that some private authorities, such as the BCCI, which exercise public functions independent of governmental regulation, could use their monopolistic position to make critical inroads into fundamental rights, particularly by curbing access to livelihood or to a public resource that citizens are ordinarily entitled to use. The danger in such an approach was, in fact, recognised as far back as in 1787 by Lord Chief Justice Hale in his treatise, De Portibus Malis, where he wrote that when private property is “affected with a public interest, it ceases to be juris privationly.”

Therefore, in the recent litigation initiated by the Cricket Association of Bihar, the Supreme Court, although bound by its earlier decision in Zee Telefilms, is correct in holding that the BCCI is amenable to judicial review under Article 226. It now becomes incumbent upon the Board to act with a sense of fairness and equity, and to ensure that it does not abuse its dominant position.

Some fear that this decision of the Supreme Court would open up the floodgates, bringing a number of societies and other such private associations within the courts’ powers of judicial review. But, as the English barrister Michael Beloff once wrote, “It is an argument, which intellectually has little to commend it… For it is often the case that once the courts have shown the willingness to intervene, the standards of the bodies at risk of their intervention tend to improve.”

Common law has historically imposed a duty on those exercising powers of monopoly — whether self-arrogated or through governmental intervention — to act fairly and reasonably. Our courts must now extend this rationale to hold not only the BCCI accountable, but also other such private associations, which in exercise of monopolistic powers, impinge upon the citizenry’s most basic civil liberties.

Nobel Prize winners say markets are irrational, yet efficient

S A Aiyar in The Times of India

Are stock markets irrational, driven by greed and fear, subject to euphoria and panic? Or are they highly efficient indicators of intrinsic value? Both, says the Nobel Prize Comittee for Economics, with no sense of contradiction.

It has just awarded the prize jointly to economists with opposing views. Robert Shiller is famous for two versions of his book 'Irrational Exuberance'. The first version appeared in 2000 at the height of the dotcom boom, and correctly predicted that this was a bubble about to burst. The second version came in 2005 just as the housing market was skyrocketing, and predicted (again correctly) that this too was a bubble likely to burst resoundingly.

This confirmed Shiller's status as a behavioural economist. Such economists laugh at the notion that human beings are rational economic actors, as portrayed in textbooks. No, say behaviourists, humans are driven by fads, prejudices, manias, and irrational bouts of optimism and pessimism. Yet Shiller is going to share the Nobel Prize with Eugene Fama, famous for his "efficient markets hypothesis." This states that markets are like computers processing information from millions of sources on millions of economic actors, and hence produce more efficient long-run valuations than the most talented genius.

Fama's market behaviour is fundamentally random, so future trends cannot be predicted by even the cleverest investors. He implies that choosing stocks by throwing darts at a stock market chart can beat the recommendations of top experts. This has been verified by some, though not all, dartthrowing contests.

Corollary: ordinary investors must not pay high fees to experts to pick winners. Instead they should invest passively in a group of shares (like the 30 shares constituting the Bombay Sensex or Dow Jones Industrial Average), and ride these bandwagons without paying any fees. This has led to the spectacularly successful emergence of Index-traded funds (like those run by Vanguard in the US). Such funds are indexed to share groups like the Sensex or the Banks Nifty. Rather than try to pick individual winners in say the auto, pharma or realty sectors, index funds invest passively in a group of auto, pharma or realty companies. This has proved successful and popular.

Two groups criticize the efficient markets hypothesis: big investment gurus and, paradoxically, leftists viewing financial markets as instruments of the devil. Investment gurus like Warren Buffett in the US or Rakesh Jhunjhunwala in India claim to have beaten the market average handsomely, thus disproving the efficient markets hypothesis. Not so says Fama: in any large collection of investors there will always be some who perform above average and some below average - this is a matter of statistical chance, not skill. Moreover, investment gurus have so many contacts that they may have insider information enabling them to beat the market by unfair means.

As for Shiller's successful predictions, Fama says capitalism is driven by booms and busts. To predict at the height of a boom (like Shiller) that a bust will follow is banality, not genius. It is as unremarkable to predict during every bust that a boom will follow.

After the 2008 global financial crisis, the new conventional wisdom is that governments need macro prudential policies to check future financial crises, and that finance should be more strictly regulated than ever before. However, the counter is that the financial crisis occurred even though the financial sector was already the most regulated (with 12,000 regulators in the US alone). Governments had encouraged reckless lending by guaranteeing large banks and investment banks against failure, and by creating governmentbacked underwriters like Fannie Mae who shouldered any burdens caused by mass default.

Perhaps the Nobel Prize Committee is right in implying that markets can be both irrational and efficient at the same time. Since humans are irrational, they will always create markets that have booms and busts, marked by irrational optimism and pessimism. An efficient markets defined by Fama and his followers is not one that produces steady growth without booms, busts or crises. It is efficient only in the limited sense that, whether the markets are calm or irrational, they represent the processed information of millions of actions of millions of actors, and this is inherently more efficient than the efforts of any individual investor.

The argument is analogous to the one against communism or dictatorship. Communists believed that the great and good politburo, motivated entirely by the public interest and not profit, would run the economy better than the chaos, irrationality and imperfections of the capitalist market. Yet the market, with all its flaws and irrationality, proved infinitely more efficient.

Fama holds that this is true of financial markets too. This is compatible with Shiller's analysis. Markets can be both irrational and efficient.