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Europe's Nationalized Industries

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04/01/1985Steve H. Hanke

The Free Market 3, no. 4 (April 1986)

 

Europe's economic decline is the result of its propensity to nationalize private enterprises. In Europe, nationalized enterprises produce everything from pots and pans to cars and trucks. They even run hotel chains. The magnitude of this phenomenon is revealed in the figures for the public sector's share of national investment: from 65% in Austria to 55% in France to 25% in Britain and 20% in West Germany.

The nationalized trend in Europe is so pronounced that it cuts across all political parties, a fact not usually commented on by most journalists. In France, for example, when the socialist government came to power in 1981, it directly nationalized the bulk of the French banks and financial institutions, as well as a good many insurance and commercial companies. But public ownership also increased rapidly in the 1970s when the country was under a conservative government. The single largest expansion of state ownership was the government's gigantic rescue of the two largest French steel companies, Usinor and Sacilor, in 1978.

The method of French nationalizations in the 1970s was to expand and diversify existing publicly owned companies into new product markets and new countries, an approach apparently used by the conservatives because it was the least controversial way to expand public ownership.

The key to understanding the difference between public and private enterprises is property rights, and the fact that property rights arrangements are not neutral Public ownership leads to an inferior economic performance when compared to private ownership.

Nationalized enterprises, unlike private ones, are politicized. This means that politicians must be consulted and approve all major economic decisions. Governments, therefore, determine pricing, purchasing, plant location and closedown, diversification, incentive systems, executive compensation, product development, and financial policies. Labor relations are also regulated by politicians, and contrary to popular belief, they are much stormier than in private enterprises. Not surprisingly, successful managers of nationalized enterprises are called "quabs" (quasi-governmental bureaucrats), and not entrepreneurs.

Politicization and public ownership lead to an interesting set of comparisons between nationalized enterprises and similar private ones. Sales per employee are lower for nationalized firms. Adjusted profits per employee are lower. Per dollar of sales, operating expenses plus wages are higher. Sales per dollar investment are lower. Profits per dollar of total assets are lower. Profits per dollar sales are lower. Sales per employee grow at a slower rate. And, with the exception of nationalized oil companies, who often have considerable monopoly power, virtually all nationalized enterprises generate accounting losses.

The incentives associated with private property and competitive markets generate a superior performance because private survival is dependent on producing products whose value exceeds the cost of production. This is not the case with public ownership, where survival is a function of satisfying politicians, not consumers.

As a result of the perverse incentives associated with public ownership, public enterprises produce products whose value is less than their cost of production.

Nationalization and the shift away from the basic values of private ownership of enterprises in Europe are resulting in the economic malaise and decline. And this is leading firms in the U.S., which heretofore concentrated on Europe, to build new trading relationships. U.S. business-men are beginning to realize that their future lies in part with the dynamic, growing, productive capitalistic economies in the Pacific rim — for example, Japan, South Korea, Singapore, Hong Kong, Malaysia, and Taiwan.

However, liberal trade with the Pacific rim is constrained, if not threatened, by U.S. government policies that are the consequences of its own nationalized enterprises. Few realize that over 40% of the land area in the U.S. — an area six times larger than France — is publicly owned. Vast quantities of the U .S.'s timber, mineral, and energy raw materials are found on these nationalized lands. As a result of the politicization of these lands, laws have been passed that prohibit the export of oil from Alaska and unprocessed logs cut from federally owned lands.

These laws severely restrict our trade with countries in the Pacific rim because these countries have evolved — to accommodate their comparative advantages — into economies that import raw materials and process them for domestic consumption and export. For example, Japan experiences trade deficits in all major categories of manufacturing goods. This means that the Pacific rim countries typically want to import raw materials and export finished goods.

To promote liberal trading ties with the Pacific rim countries, the U.S. must move to immediately eliminate the existing, self-imposed embargo on the shipment of Alaskan oil and federal logs to the Pacific rim countries (and even" tually to denationalize our federal lands). This will increase the value of these natural resources and the number of jobs in the U.S. Moreover, it will dramatically reduce our trade deficit with Japan.

Although we might dismiss this last point as simply being something that neomercandlists incorrectly worry about, we should not blind ourselves to the political problems created by our trade deficit with Japan. This deficit is, in fact, effectively used to promote interventionist trade policies in the U.S. So, we must count as an indirect benefit from lifting our self-imposed embargo on the sale of Alaskan oil and federal logs the reduction in our trade deficit with Japan and the consequent reduced political demand for interventionist trade policies that will ensue.

The profound ideological changes that have been taking place in Europe and the resulting nationalizations have reduced the possibilities for improved liberal trade ties between Europe and the U.S. Consequently, U.S. business-men are building new ties with the Pacific rim countries. These ties, however, are threatened by policies stemming from the U.S.'s own nationalized lands. This evolving economic order is a reality that promises to pose a new challenge for the Europeans, one that has yet to be faced by European politicians, and also for Americans, who have yet to fully realize the significant problems that our own nationalized lands pose to an improved liberal trade regime with the Pacific rim countries.

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Contact Steve H. Hanke

Steve H. Hanke is a Professor of Applied Economics at the Johns Hopkins University and a columnist at Forbes Magazine. Follow him on Twitter at @steve_hanke

Cite This Article

Rothbard, Murray N. "Europe's Nationalized Industries." The Free Market 3, no. 4 (April 1986): 1 and 4.

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