Austrian economics, socialists, profits and privatisation

Socialists deliberately ignore the benefits of privatization because like all cultists they deny any evidence that refutes their dogma, including the fact that socialist states always collapse. Unfortunately, their economic illiteracy can have a malicious influence on public opinion. This is why it’s not enough to empirically demonstrate that genuine privatization generates benefits. One must also explain why free markets produce these results, and this is where Austrian economics has been exceptionally successful.

Socialists and their statist cousins argue that privatisation imposes unnecessary burdens on the community because profits are a cost imposed on consumers by capitalists. (It’s a pity they don’t take the same attitude to statist policies like solar subsidies). Confusion about profits arises because most people, including those economists who should know better, think of profits as net revenue. This is not so. Profits are maladjustments (another Austrian insight) between supply and demand.

This means that when profits are being made factors are being priced below the value of their marginal product and the supply of the product is lagging behind demand. The market process signals this situation to other entrepreneurs who then move in to eliminate the maladjustment by competing away the profits until only enough remains to justify production. Firms try to counter this process by producing new and better products. Only by satisfying consumers better than their competitors can these firms succeed.

But socialists are not the only ones who are wrong on the nature of profit. A surplus over costs that would just keep businesses operating is called a normal profit by most economists. They then conclude that anything in excess of the normal profit is a super profit. Alan Moran of the Institute of Public Affairs has gone further and writes of high profits and super profits without even trying to explain what the difference is supposed to be. He also states that “high profits for successful firms are matched by losses for the unsuccessful” (Rocks in their heads: ministers’ miscalculation over resources tax leaves Labour in a hard place, Institute of Public Affairs, 2010.) This is adding confusion to confusion. Only in a stationary state do losses equal profits, regardless of how high those profits might be. As Ludwig von Mises explained:

In the stationary economy the total sum of all profits and of all losses is zero. In the progressing economy the total amount of profits exceeds the total amount of losses. In the retrogressing economy the total amount of profits is smaller than the total amount of losses. (Ludwig von Mises, Human Action, Henry Regenery Company, 1963, p. 251.)

It follows from the Austrian concept of profit that if any state run operation is making genuine profits then there is an obvious maladjustment between supply and demand. Consumers are getting too little of the product at high prices. As we have seen, the market’s solution to this situation is to compete away the profits by increasing investment, expanding output and hiring more labour.

This makes nonsense of the socialists’ argument that profits are a cost on the community that can be taxed away without damaging economic welfare. So what would happen if a state-owned firm was ordered not to make profits even though its monopoly allowed it to do so?

The result would be even more waste and misallocated resources, over manning, increased on-the-job consumption (perhaps much of it disguised as R&D), expansion into peripheral activities, etc. But allowing the market to eliminate profits would have the reverse effect and also speed up technological change. This brings us to entrepreneurship, an activity that can be neither nationalized nor replicated within a state structure. To speak of entrepreneurship, therefore, is to state that ownership not only matters but that it is absolutely vital to economic and social progress.

What socialist ‘economists’ ignore is that even when operating in a competitive environment, state companies are not presented with the same range of opportunities that private companies face as well as create for themselves. This is because the decision-making scope of state managers is not only far more limited than that of managers in private companies it is also operates on different levels. It is ownership that makes this difference because entrepreneurship can only be exercised through ownership.

When making a choice the owner, or one acting for the owner or owners, has to think in terms of displaced revenue, i.e., his opportunity costs. Without the ability of being able to freely dispose of property in any way he sees fit his range of choice is clearly limited. It means alternative opportunities of using the firm’s property (in the form, for example, of shares) to acquire or dispose of income are denied to state managers.

Hayek, a leading member of the Austrian school of economics, pointed out that the market is also a discovery process, the costs of which are spread among a multitude of firms and thus the economy. These firms innovate, invent, speculate, experiment and constantly change their factor combinations: each firm striving to win over more consumers by providing them with products at attractive prices that still make profits. It should be self-evident that entrepreneurship is the heart of this process.

Therefore, the absence of ownership denies state managers the means to make the kind of market calculations and decisions that made, for instance, Ford the pioneer in car production, Sony a Japanese colossus, Microsoft a software production giant, and Apple a leader in the field of computers and applications. Without entrepreneurship these companies and hence their products would never have come into existence.

For socialists to argue otherwise is to argue that if economic decision-making had been under the complete control of an all-knowing state, meaning politicians and a bureaucracy, we would still have obtained, for example, the range and multitude of PCs, software, peripherals and IT equipment that we now take for granted. But this is exactly what Obama apparently believes. This profoundly ignorant man is so deeply wedded to this socialist myth that he thinks that the so-called state can actually determine the economic and social consequences of any “transformative” technology and how and where it should be applied. This was made clear by his executive office which arrogantly announced:

It is the responsibility of government to ensure that transformative technologies are used fairly and employed in all areas where they can achieve public good. (Big Data: Seizing Opportunities, Preserving Values, Executive Office of the President, May 2014, p. 48.

The conceit and sheer stupidity of this statement should beggar belief. Apart from their infantile belief that they can know the unknowable they also do not understand why so-called state enterprises cannot mimic the real thing. As a substitute for entrepreneurship state industries are basically forced to rely on a process of simply calculating the monetary value of inputs and outputs and comparative rates of returns. This is a profound and insurmountable flaw. This approach cannot, as Austrian economics stresses, take into account the lost opportunities caused by state ownership nor cannot it mimic entrepreneurship. Therefore it cannot measure market efficiency. The extent to which these so-called enterprises are efficient is largely determined by being able

to observe the effects of similar improvements in similar private undertakings at home and abroad. In such concerns it is still possible to ascertain the advantages of reorganization because they are surrounded by a society which is still based upon private ownership in the means of production and the use of money. (Socialism: An Economic and Sociological Analysis, Liberty Classics, 102

Both reality refutes socialist fallacies and exposes socialists as delusional visionaries utterly ignorant of the nature of markets, entrepreneurship and the crucial role of ownership. But then again, socialists must live in a permanent state of denial while waiting for utopia to magically appear once they have reduced the economy to rubble.

5 thoughts on “Austrian economics, socialists, profits and privatisation”

  1. This is the first article I have read that explained the basic difference between behaviour in a state enterprise and behaviour in the public sector. I always google the stuff Gerry puts up to see if anyone else in Australia has published this material. Not a thing.

    By the bye, I have been visiting Catallaxy for some weeks now and there is not a peep about the Great Depression and spending, and Steve Kates has also stopped talking about the classical economists and depressions. There is nothing at all, really. They spent the last week chattering about plain packaging and cigarettes.

  2. This post raised important points that are completely knew to me. I read articles by alan Moran and other Australians promoting privatisation but none of them ever looked at this very important aspect of the subject.

  3. Took a gander at Catallaxy today. Steve Kates is rabbiting on about something called gross output as if he just invented sliced bread. But I am pretty sure Gerry wrote about something similar in Brookesnews.

    Then there was is this fella called Rafe fainting over the Austrian School. Looks like they trying to give the impression that they are the only ones in Australia who have read the Austrians?

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