Wednesday, December 1, 2010

The Dubious Morality of Crown Corporations

I’ve always been concerned by arguments for doing something that involve morality. The argument if often made that if profits were going to be made by providing something, it is only moral that government should capture those profits. This of course got me thinking about the moral issues associated with crown corporations. There are at least a couple of big holes in using morality as an argument in support of crown corporations.

One of the key public goods that governments provide is a common set of rules and their enforcement. This includes the rules that govern how businesses operate. An unbiased set of rules and equitable enforcement are a central part of what makes effective states like Canada so wealthy. Thus it isn’t entirely unreasonable to think of government as a referee in sports. The system only works when we can trust the ref to be impartial.

Crown corporations are like the referees deciding they wanted to play, not ref. Another way of thinking about it would be if you’ve been at a game in which the referees were closely related to one of the players. Sometimes it works out OK, but a lot of the time it doesn’t. If we can’t trust the referee to be impartial, the system starts to break down. Crown corporations may thus be more damaging to the entire system than most of us realize. Were all investors treated fairly when GM become an American “crown corp.”? Nope, some were more equal than others.

Another consideration is the nature of business itself. Most businesses don’t workout and close. Many crown corps don’t work so well either. The difference is often the scale of the failure and who loses. When we’re talking about scale, governments don’t tend to think small and have access to an incredible amount of start up capital. In case there are some that don’t recall a crown corporation of size failing I’ve got a few examples. Bricklin Motors in New Brunswick was one example, yep that’s the same guy who was responsible for North American introduction of the Yugo. Spudco in Saskatchewan (a place generally known for pretty good government) provides another example. Of course many people tend to forget that FANNIE MAE and FREDDIE MAC (a big part problem of the boom and subsequent collapse of the American housing market) were the American version of crown corps.

Private businesses fail and so do crown corps. What’s the big deal? The big deal is where the money comes from. Private firms collect money from investors voluntarily, government collect money from citizens involuntarily. Nobody (well, there are some odd folk out there) pays taxes because they want to. People pay taxes because if they don’t the government will take their stuff and possibly throw them in jail. When I think a private firm is going to do something dumb, I can choose not to invest, in many cases I can even bet against the success of the firm. If my government decides to do something dumb, as a tax payer I’m on the hook and there isn’t much I can do about it. If we were talking about public goods, I wouldn’t be as bothered by this, but we’re talking about the provision of private goods here, things like cars, potatoes, and such.

The final point I’ll make is that government activity does tend to reduce private sector activity. Crowding has a long history in economics. There are two recent papers that provide important empirical data on the topic (Furceri and Sousa 2010 and Cohen, Coval, and Malloy 2010 ). Given that government spending crowds out private sector activity we might want to think really carefully about launching more crown corporations.

There are at least 3 reasons why crown corporations aren’t necessarily moral. I’m not even talking about the effectiveness of crowns. I’m talking just about the moral implications. When governments launch crown corporations they become referees choosing to play the game they’re supposed to supervise using money collected involuntarily to supplant other economic activity. Sounds morally dubious to me.


Lars said...

Yet why should morality come into play one way or another?

I know this is the argument you were making but you sort of lost sight of that as you went through all the reasons of why Crown Corps aren't necessarily "moral" entities. Cases can be made for and against the "moral" corporation both in public and private sector. I'm sure you aware of all the dubiously moral activities that the Soviet Union's state enterprises engaged in.

We can also find homegrown examples such as DOMCO (Or whatever of the other 30 names you can call it) repeatedly engaged in the virtual destruction the environment in which its workers had to live near.

However, you can turn to the private sector and find just as many dubious moral acts.

This is where you "lost" (as in needed to be found again) the point you were making.

Who cares if morality comes into play?

Morals are subjective. They aren't some higher truth (unlike Plato would have us believe).

The choice of someone to buy Fair Trade T-Shirts simply means they're willing to pay a higher price for a shirt. At the end of the day, if more of that money actually does end up in the hands of the worker (I have my doubts), they've simply deprived other low income workers of employment and/or wages.

Subjectivity is the bane of the marketplace, because by placing an importance on subjectivity you are essentially biasing information. By biasing information, you're depriving yourself of perfect or objective information (or nearness to perfect information, as this is also a utopian ideal). Markets without perfect information have difficulty operating efficiently.

Also, your final point isn't really about morals. If the services are provided, who cares if the private sector or public sector provides them?

economistatlarge said...

Fair comments for the most part - I did drift a little bit, but I don't think as much you arguing. But arguing is fun :)

I think you may have missed my last point a little - maybe I was trying to be too gentle. Point government spending with all it's backing crowds out private sector activity which has to EARN its backing or at least con it into being. Therefore crowns with their extra muscle do damage beyond providing goods and are there for immoral.

Lars said...

Point government spending with all it's backing crowds out private sector activity which has to EARN its backing or at least con it into being.


If I'm interpreting this correctly (my translation):

The threat of massive capital backing through government support essentially allows Crowns to drive our competition by driving up the [i]risk[/i] of backing private sector activity.

IE: Because Crown X invests in widgets and has vast capital resources at it's disposal, it makes it difficult for Private Corporation Y to raise capital from investors willing to take the risk (which is driven up due to a strong competitor) of competing with Crown X in the widget industry.


If that's what you're saying it's fairly valid, especially given the increasing amount of investment that has dried up in Venezuela due to nationalizations and government investments.

economistatlarge said...

I think we're on the same page now.

Uzair said...

The case where I think Crowns would be more morally acceptable would be some 'basic necessity' type public goods that are a natural monopoly due to their high start-up capital requirement. I have in mind things like electricity, heating, water, etc (I say some because it goes 'food, clothing, shelter', and I'm certain we don't want our clothing to be government owned). In these cases at least, I would grant the Crowns moral grounds for a couple of reasons:
1. The government/ taxpayers put up the capital to build the infrastructure (electrical grid, water pipes, etc), and so they should get a return on that.
2. Being basic necessities, we recognize that these goods are required by everyone, and so we need to meet a certain demand. Therefore, it may be necessary to cut profit margins in the face of public interest.

Two cases where this definition would hit a grey area is food and healthcare, because both are basic necessities, but not as start-up capital intensive.

Gary Tompkins said...

Another issue is that once Crowns are established, it is difficult to get rid of them once their policy usefulness disappears. When I first arrived in Sask, we had a Crown computing company because there were econs of scale 15 years earlier. The fight against privatization was bitter. Similarly, why do we need SaskTel, other than there are a lot of stakeholders who vote? Why when the need diminshes (into of cell phones) do they find other things to do (home security, cable TV) that have dubious public policy use?

economistatlarge said...


It's getting harder and harder to come up with examples of goods that are true natural monopolies any more. Phones used to be the best example in that you needed one and we didn't want to have to run 6 sets of lines. Cell phones are a natural competitor. The only one I can think of that's left is power transmission and even that has problems any more...

Anonymous said...

Natural monopolies: power, internet, water, gas, roads... I'm sure I could think of more if I took more than 40 seconds. Is there some research I don't know of that says that utilities aren't natural monopolies anymore?

I might be able to make a good argument for health care being something of a 'natural monopoly', as well, but of course it's not nearly so simple.

economistatlarge said...

@the troll.

Unfortunately, a number of the things you reference don't really fit for natural monopolies.

Internet access can be an is provided by multiple companies. Power generation need not be a monopoly, we can and do have multiple generation facilities. There's no real reason why these can't be separately owned. Drinking water is provided in a variety of ways by different competing firms. You can and often do have different firms providing natural gas, the distribution might be a natural monopoly like power distribution.

Finally, roads are definitely not a natural monopoly. There are lots of privately run toll roads out there and I really don't think we want only one road.

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