A simple point on railway nationalisation

One point people bring up when they advocate renationalising railways (or renationalising stuff in general) is that when private companies run something they take a chunk of the total surplus in profit, but if the government were in control, that could go to them. But there’s a very basic reason why this isn’t the case: opportunity cost.

A firm, in doing business, puts capital to use. It uses a mix of physical and human capital and devotes it toward achieving tasks in order, usually, to turn a profit. The best way to measure the amount of capital tied up in a project is the market’s assessment thereof—the firm’s market capitalisation—although of course we know that market prices are never perfectly accurate, since they are only on their way to an ever-changing equilibrium, and they may not have got there yet. And what’s more, not all the relevant information will always be in the public domain.

For rail franchises—or TOCs (Train Operating Companies), as they seem to call themselves—it is relatively hard to pinpoint the exact amount of capital they are using, as they are usually subdivisions of a larger structure. But suffice to say, running trains involves tying up money on the order of billions, whoever does it (i.e. it includes Directly Operated Railways, the state body that is currently running the East Coast Mainline pretty well). You have to rent the rolling stock (trains), pay the staff, buy the fuel, pay to use the track and so on.

From this capital you get a return. TOC margins average about 4% over the last ten years. The average company got more like 10%. FTSE100 companies seem to enjoy higher returns. Of course, operating profits are not share returns, but they tell more or less the same story. The extra couple dozen billion the government would need to spend on trains could equally be spent on equities or anywhere else for more or less the same risk-adjusted return. The return they got here could be put into trains.

But even doing this makes no sense. If the government returns that couple dozen billion to the population at large, the government can tax the income that the private citizens make on the wealth, at a glance dealing with the problems of governments holding wealth—principally: they are not very good at picking winners. Or they could pay off debt and reduce their repayment costs—since the risk-adjusted return of gilts is priced in just the same way as other assets.

Either way, and whether or not rail re-nationalisation makes sense from any other perspective, it is simply not the case that government, by nationalising rail, could get a bit of extra cash to put into our network.

Looking at the world through neo-liberal eyes

Adam Smith Institute President, Dr. Madsen Pirie, explains why he is willing to own the usually-derogatory term neo-liberal, and explains why the world actually shows us the success of the much-maligned perspective.

I spoke at Brighton University as part of their seminar series on neo-liberalism.  The term ‘neo-liberal’ is usually used in a derogatory sense, though I chose not to use it that way.  I was the only speaker in the series to speak in favour of neo-liberal ideas, and my title was “Looking At the World Through Neo-Liberal Eyes.”  I began by quoting an old Chinese proverb: “Never criticize a man until you have walked a mile in his shoes.  That way you are a mile away when you voice your criticism; and you have his shoes.”  I invited the audience to see the world briefly as it looks through neo-liberal eyes.  These were the points I made.

1.  Value is in the mind, not within objects.

Value is not a property of objects or a quality they possess.  Although we talk of objects “having value,” we mean that we value them.  Value is in the mind of the person contemplating the object, not in the object itself.  If value resided in things, it could theoretically be measured objectively and we would all agree on what it was.  There would then be no trade, for exchange takes place when each person values what the other person has more than they value what they are offering in exchange.  A trade gives each of them something they value more, and thus wealth is created by the exchange.  When people make the mistake of supposing that value resides in objects, they ask how it arrived there, and come up with fallacious ideas such as Marx’s labour theory of value.  An object can take masses of labour to produce, but if no-one values it, it will be worthless.

Read the whole thing.

What glories this capitalist free market thing hath wrought

There’s nothing worse than being exploited by some running lackey pig dog of a capitalist, as Deirdre McCloskey reminds us:

The aim of the true Liberal should not be equality but “lifting up those below him.” It is to be achieved not by redistribution but by free trade and compulsory education and women’s rights.

And it came to pass. In the UK since 1800, or Italy since 1900, or Hong Kong since 1950, real income per head has increased by a factor of anywhere from 15 to 100, depending on how one allows for the improved quality of steel girders and plate glass, medicine and economics.

In relative terms, the poorest people in the developed economies and billions in the poor countries have been the biggest beneficiaries. The rich became richer, true. But the poor have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, low child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university and respect.

Never had anything similar happened, not in the glory of Greece or the grandeur of Rome, not in ancient Egypt or medieval China. What I call The Great Enrichment is the main fact and finding of economic history.

It’s that penultimate sentence which is so important. There have most certainly been many attempts at designing economic systems: there have been even more that just sorta happened out of voluntary interactions. But there’s only one of them that has actually managed what we are all the lucky, lucky, beneficiaries of. That is, one economic method of organisation that has led to a substantial, sustained, increase in the standard of living of the average woman on the Clapham Omnibus.

Nothing else, nothing planned nor nothing unplanned, has managed this. And that really is the main fact and finding of economic history. It’s the one unique even in it too. McCloskey, you and I, we might differ on the details of how it all happened but we shouldn’t allow minor disagreements over precedence between the flea and the louse to obscure the manner in which we’re all feeding off that larger truth. That nothing else does work as well as those largely bourgeois virtues plus economic and social liberty.

What would we consider a successful railway system?

Under many measures, the railways have performed remarkably since privatisation. It is not surprising that the British public would nevertheless like to renationalise them, given how ignorant we know they are, but it’s at least slightly surprising that large sections of the intelligentsia seem to agree.

Last year I wrote a very short piece on the issue, pointing out the basic facts: the UK has had two eras of private railways, both extremely successful, and a long period of extremely unsuccessful state control. Franchising probably isn’t the ideal way of running the rail system privately, but it seems like even a relatively bad private system outperforms the state.

GBR_rail_passenegers_by_year

Short history: approximately free market in rail until 1913, built mainly with private capital. Government control/direction during the war. Government decides the railways aren’t making enough profit in 1923 and reorganises them into bigger regional monopolies. These aren’t very successful (in a very difficult macro environment) so it nationalises them—along with everything else—in the late 1940s.

By the 1960s the government runs railways into the ground to the point it essentially needs to destroy or mothball half the network. Government re-privatises the railways in 1995—at this point passenger journeys have reached half the level they were at in 1913. Within 15 years they’ve made back the ground lost in the previous eighty.

But maybe it’s not privatisation that led to this growth. Let’s consider some alternative hypotheses:

 

Was it a big rise in the cost of driving?

 

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Was it the big rise in GDP over the period?

 

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Was it just something that was happening around the developed world?

 

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Was it purely down to extra cash injections from the state?

 

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Has it come at the expense of safety?

 

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Has it come at the expense of customer satisfaction?

 

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Has it come at the expense of freight?

 

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Is it all driven by London?

 

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Democracy’s not all it’s cracked up to be you know

As Churchill pointed out democracy does have something going for it, that it’s better than all other methods anyone’s ever tried. But that doesn’t mean that it’s perfect, not by a long shot. And interestingly we’ve that nice Owen Jones making the point for us:

The Aids crisis was building; more than half the population believed homosexuality was “always wrong”, peaking at 64% in 1987 when just 11% opted for “not wrong at all”; and later that decade the homophobic legislation, section 28, was introduced.

Meaning that under the pure rules of democracy that Section 28 legislation was entirely justified. Indeed, it should have been introduced as it was obviously the majority view of the people. All of which is a problem with democracy: for there are quite obviously times when that will of the majority conflicts with the civil liberties of various minorities. Meaning that we have to decide which we are going to regard as more important, those civil liberties or that will of the majority.

Those times that we have to decide coming in a variety of flavours. We could most certainly gain a majority for the idea that we should string the paedos up without much of a trial. There’s actually a substantial campaign to insist that legal protections for accused rapists should be weakened, even to the point (not in the UK thankfully, not yet, but in the Antipodes) that the presumption of innocence should be dropped. Here at home we have a campaign to insist that prostitution among consenting adults must be made illegal: quite clearly a violation of that right to ownership of ones’ own body and the income therefrom. And there’s been campaigns against the rights of property ownership for most of the past century. A subset of which today is the idea that the shareholders in a company may not decide how much they wish to pay the managers in their own employ (in the name of “equaliteeee” of course).

And the campaign against the arbitration part of the Transatlantic Trade and Investment Partnership is exactly a complaint that that treaty would insist that governments must obey the law of the land over and above whatever democracy demands as changes.

Jones has provided us there with a useful example of when those civil liberties are more important than whatever it is that the mob thinks. We should remind him of this point when he next, or his ilk, suggests taking away our economic liberties. Just because the Demos can be whipped into howling for it does not make a policy one we should enact.