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Comment by bsbechtel | Hacker News Reader

The problem with privatization is it often involves granting monopoly powers to a private company instead of opening up the market to private competition. This in some ways is even worse than leaving the entity under government control because there is an incentive to squeeze as much profit as possible out of the entity and no pressure from competition to keep the private entity honest. Privatization in itself is not a problem, and neither is inequality (in modest form, created by competition, not unfairly), but creating an environment where the quality of goods and services suffer for the consumer/citizen because those providing those goods and services don't have an incentive to do a good job.

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This and there is another reason why privatization creates inequality. It is a proven method for the oligarchs to rob public assets. First they put their friends as key figures of a public company. These people let the company rot, so its price on the market goes down. Then the oligarchs buy it at a ridiculously low price.

They even made it with an entire country: Russia. And this is why they ( the western backed oligarchs ) are screaming against Putin ( and the oligarchs backed by him ) since then.

Another country where this was done almost successfully is Slovenia. But then the Great Financial Crisis happened and the "ridiculously low price" actually turned out to be too high as the companies started going bankrupt.

Put this way, the relationship where A squeezes B can still hold regardless of whether A is an single company, many companies or a whole industry. Examples abound.

Unleashing the market provides no magic bullet. This is especially true when there only 1 customer for the service and it's long term contract based.

In theory, when there is only one customer for the service, prices will be artificially low, not artificially high.

As a clarification: You mean in the absence of a negotiated contract that allows the price gouging the government often gets handed in the deals it negotiates, yes?

But when you privatize a public utility you have many customers and a single provider - the exact opposite. Hence higher prices and/or worse service.

The top level comment was pointing out that privatization isn't necessarily the issue, it's that the government picks one company, and hands them a monopoly. That is what creates the situation you're describing. I have no idea why it's done this way (without devolving into pure cynicism). I guess maybe it's easier to administrate? And it allows the government to technically still own the utility, which they've just farmed out? Once you let a bunch of businesses take over, you're never really getting it back. The real answer is probably just: Laws.

Assuming the supply is competitive sure ... Otherwise you're in the worse of both worlds.

Privatization can be a problem depending on how much competition there will be, and how efficient existing arrangements are. Prices can only be squeezed so much.

Some people act as if unlimited competition will drive prices to zero, but it won't - it will just drive it asymptotically closer to the marginal cost of production, which isn't necessarily all that far away from what you pay today.

And on the way towards that limit, unpleasant things can happen. The benefits of "cheating" of all sorts, from reading the tender specification like a malicious genie to tax fraud and worse, grow higher the closer you get to the marginal cost of production boundary.

At some level of competition, the cost of policing - keeping actors honest - eclipses the savings.

And government control is no guarantee of low prices. Real estate in China would be one example, or oil prices would be good examples.

Real privatisation (meaning not a granted monopoly) is as close as we seem to be able to get to good prices, choice, and some incentive for these businesses to do well.

How that can be implemented in practice is often a tough question, mostly in the industries most complained about : phone, cell, internet. All of which has government or private monopolies in the chain, and in virtually every case those are the source of the complaints. But no worries: in Australia the NBN (the new government monopoly) is/was going to fix everything ! Of course, now the government is fucking with it and serious cracks are showing : it seems to create an unfair advantage for the incumbent telecom operator, who doesn't seem to be paying the same prices as everybody else ... (and of course it's the fault of party X, never mind that now both parties have messed with it)

> The problem with privatization is it often involves granting monopoly powers to a private company instead of opening up the market to private competition.

Private competition almost always ends in monopoly or trust anyway.

Private competition isn't a stable state. When two companies are competing, both are trying their best to put the other out of business. It should be no surprise at all when that eventually happens.

Monopoly, on the other hand, is a stable state--it takes extraordinary circumstances, usually government intervention, to overturn a monopoly. Even if a small competitor manages to eat a chunk of a monopoly, the monopoly company can simply buy them out in most cases. Giant corporations can even become unassailable by government, as their wealth allows them to lobby for laws that favor them.

The alternative is for corporations to form a sort of truce, where they don't touch each other's slightly different markets, effectively granting each other a monopoly in each other's areas. The clearest example of this is cable companies not laying cable in each other's territory, but there are plenty of other examples--Coke/Pepsi, IBM/Intel. This is also a stable configuration which is more sophisticated than a monopoly. The benefit to corporations is that it reduces their risk--having to overturn competitors means taking the risk of overplaying your hand--but there's no real benefit to consumers.

So ultimately, I'm not sure it makes sense to say that monopolies are the problem and not privatization. Privatization ends in monopoly.

> Private competition almost always ends in monopoly or trust [truce? oligopoly?] anyway.

Doesn't seem so to me. As far as I can tell, all real life monopolies or oligopolies only exist because of intervention by the police state. The canonical examples that come to mind would be Microsoft (only possible because of copyright, a monopoly granted by the police state) and Standard Oil (only possible because of mining concessions, a near monopoly granted by the police state).

Here in Germany, Deutsche Bahn (the rail operator) had a practical monopoly on long distance travel, all thanks to a special law granted by the police state. Said law has been repealed by the EU a few years ago (2009 or so), and the competition from long distance buses is fierce now.

Can you name any monopoly that ever existed and wasn't created by the police state effectively granting it?

(For this argument, it doesn't matter if these police state granted monopolies are a good thing in some sense. I don't think so, but the point is really that competition works unless it is artificially restricted.)

> other examples--Coke/Pepsi, IBM/Intel.

How does Coke/Pepsi even come close? I see quite a number of caffeinated sugary soft drinks on the market (all equally disgusting). IBM/Intel? Well, IBM had something resembling a monopoly in the mainframe era. I wasn't around back then, but most computers were probably sold to the police state. Intel has had a near monopoly on desktop computers for the past 25 years or so, but only because Microsoft DOS/Windows wouldn't run on anything else, so this is actually an extension of the Microsoft monopoly mentioned above.

I'm not sure about the cable companies. Theoretically, is anyone allowed to run a cable from A to B? If no, you can only ever have one cable provider in a given region, again, thanks to artificial rules made by the police state.

I'm genuinely curious about any examples of monopolies that developed in a free market.

> Here in Germany, Deutsche Bahn (the rail operator) had a practical monopoly on long distance travel, all thanks to a special law granted by the police state. Said law has been repealed by the EU a few years ago (2009 or so), and the competition from long distance buses is fierce now.

Competition within the rail industry? I doubt it.

I'd be extraordinarily surprised if any other rail operator arises in Germany--the only way I can see this happening is if a larger rail operator from another country enters Germany. This is a pretty strong example of a monopoly.

> I see quite a number of caffeinated sugary soft drinks on the market (all equally disgusting).

Look at who bottles them. The vast majority are bottled by either Coca Cola or Pepsi.

There's been a surge of attempts at "craft" sodas lately, but most have had little success or been bought by one of the giants.

> I'm genuinely curious about any examples of monopolies that developed in a free market.

See above.

> Competition within the rail industry? I doubt it.

Not within the rail industry---ownership of the track network makes that impractical. I'm saying DB was protected from other modes of transportation, which ensured their monopoly. The service being sold is not rail transportation, it's transportation.

> The vast majority are bottled by either Coca Cola or Pepsi.

Looking from Germany, there are Vita-cola, Afri-cola, Fritz-kola. All independent from Coke or Pepsi, and that's only the colas I can think of. All sorts of lemonades serve the same market.

> See above

What?! Deutsche Bahn is a (near) monopoly precisely because of support from the police state, Coke/Pepsi is not a monopoly, not even close. Neither of these are examples of a monopoly that developed in a free market!

Here in Germany the soda market isn't such a mono-culture, e.g. in my home state the best-selling cola-type drink is made by a local company. Sure, you can get Coca Cola and Pepsi nearly everywhere, but every large supermarket chain has their own brand (made by a variety of companies) and the cool brands aren't the ones owned by multinationals.

This is entirely false, and there are stacks of economic literature spanning a 200 year timeframe and covering every economic ideology that have explored why it isn't like that, and surprise surprise there actually is a consensus. High barriers to entry are the cause of natural monopolies. And not every industry has high barriers to entry. And oligopolies and collusion have never been stable.

> This is entirely false, and there are stacks of economic literature spanning a 200 year timeframe and covering every economic ideology that have explored why it isn't like that, and surprise surprise there actually is a consensus.

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it." -- Upton Sinclair

> "It is difficult to get a man to understand something, when his salary depends upon his not understanding it." -- Upton Sinclair

Ah, so you're in the "reject science" camp. Gotcha.

To clarify for anyone who might be confused like saosebastiao about what I'm saying: the consensus saosebastiao is claiming exists is exactly what you would expect from economists who are trying to make money for themselves.

It's additionally worth noting that a) there is not a consensus, and b) consensus is not part of the scientific method.

There is a consensus, and in social sciences like economics, consensus absolutely matters because universal truths do not exist.

And no, the incentives of academic economists are not aligned with industry like is claimed. If that were true, the majority of academic economists would not be Keynesian welfare-state supporting democrats like they currently are in the US.

Ironically in simultaneous parallel to the 200 years of economic literature we have explaining why it isn't like that, we have 200 years of recorded history explaining why it is like that. When scientific theory and facts come into a disagreement, theory walks away defeated. But when economic theory and facts come into a disagreement, the opposite occurs -- the facts must be reinterpreted properly to fit the theory, of course, so economists may continue on as highly educated cheerleaders for wealthy capitalists. Oligopoly and collusion is nothing more than a succinct description of actual economic history.

Economic literature isn't just philosophical or theoretical, it is empirical as well. The only empirically falsifiable theory here is that monopoly is natural for all businesses. The world's oldest profession, prostitution, has never been run by companies the size of Standard Oil. Neither has wheat, sugar, electricity production, coal, iron, or copper. Only revisionist history would take such a limited view of the economic scope of the world. If monopoly were the economic end state of all industries, surely some of these old industries would have been monopolized by now...or at least they would have been before Anti-Trust law was a thing. Note that that has not ever happened.

A natural monopoly only exists in the face of high barriers to entry. Those barriers may be natural, or they may be political, but either way they must be high. Some may be high enough to only have a few competitors, but compete they must do. Collusion is mathematically and empirically unstable. In fact, the economic criteria for cartel success is a) how much profits increase, and b) how long they last. There would be no need for `b` as a success criteria if they were stable.

> The world's oldest profession, prostitution, has never been run by companies the size of Standard Oil.

This is because of government intervention (it's illegal for Christ's sake).

> Neither has wheat, sugar, electricity production, coal, iron, or copper.

Wheat has been regulated forever.

Sugar--are you not aware of the corn lobby?

Electricity production: this is pretty well monopolized regionally.

Coal: not yet.

Iron: USS wasn't a good enough a monopoly for you?

> A natural monopoly only exists in the face of high barriers to entry. Those barriers may be natural, or they may be political, but either way they must be high. Some may be high enough to only have a few competitors, but compete they must do. Collusion is mathematically and empirically unstable. In fact, the economic criteria for cartel success is a) how much profits increase, and b) how long they last. There would be no need for `b` as a success criteria if they were stable.

What makes you think that a large company will not create high barriers to entry in their field? When a company reaches a size where they can lobby the government successfully the field ceases to be an even playing field.

> This is because of government intervention (it's illegal for Christ's sake).

In the US, of course. There are plenty of places where it is legal, but no monopolies have formed. Even before it was illegal, there was no monopolization. If the timeframe for inevitable monopolization is on the order of millenia, like it has yet to do with Prostitution, well then consider me unimpressed by the argument.

> Wheat has been regulated forever.

Forever? I'm pretty sure wheat farming predates the existence of the idea of government regulation. And yet, no monopolies. Ever.

> Electricity production: this is pretty well monopolized regionally.

Distribution is pretty well monopolized (hey, what do you know...an industry with high barriers to entry!). Production, not even close.

> Sugar--are you not aware of the corn lobby?

You're still just talking about the special case of the US. Open your eyes.

> Iron: USS wasn't a good enough a monopoly for you?

US Steel wasn't even a monopoly in the US (it peaked at 67% of the US market)...nowhere close to a monopoly world wide.

> What makes you think that a large company will not create high barriers to entry in their field? When a company reaches a size where they can lobby the government successfully the field ceases to be an even playing field.

So what you're saying is that non-natural Monopolies are the end state of government intervention. I agree. Natural monopolies can exist due to or in spite of government intervention.

You're setting an unreasonably high bar for what you're willing to define as a monopoly.

Yes, most of my examples aren't global, but that's largely a function of regulation: the US is the only country with permissive enough economic policy to allow spontaneous monopolies and a large enough economy to be worth creating a monopoly in.

As for historical monopolies on the order of millennia: the modern corporation hasn't existed for millennia and indeed societal, technological, and infrastructural advancement was necessary before we could reach a point where a large scale monopoly was possible. It's hard to run a monopoly by carrier pigeon.

>> What makes you think that a large company will not create high barriers to entry in their field? When a company reaches a size where they can lobby the government successfully the field ceases to be an even playing field.

> So what you're saying is that non-natural Monopolies are the end state of government intervention.

It's ironic that in your excitement when you thought you had caught me in a mistake, you simply missed my point and failed to respond to it.

Given your general tactics in this debate have been rude and childish, I'm not going to continue debating with you further, but here's a question for you to ponder: in your hypothetical unregulated corporate free market, what prevents large corporations from changing the market so that it's no longer a free market?

> You're setting an unreasonably high bar for what you're willing to define as a monopoly

No I'm not. A monopoly by definition requires no competition, and monopolistic profits are not possible with competition. They could possibly occur with cartels in markets with high barriers to entry, but cartels are unstable because the markets benefit cartel-breaking behavior more than they benefit cartel behavior.

I find it absolutely rational of you to not want to discuss any further. It's the natural end state of stubborn ignorance. I've already demonstrated that not all markets end in monopoly, but only those with high barriers to entry. If any reader wants more examples, they can google the term Commodity.

And there is a tendency towards (politically-created) monopoly because only monopolies can concentrate enough wealth to buy elections. Natural or political, the only way to do away with monopolies does not have to do with public/private, but with campaign finance reform.

Absolutely agree. Markets are great when they meet the conditions for proper competition; and privatisations frequently occurs in sectors that don't meet those conditions; e.g railways.

Markets are also problematic where customer feedback (money) is not rewarding quality increase (e.g. when teachers are rewarded when setting artificially good grades).

That's balanced by the fact that the certificate of learning will be valued less. If that doesn't happen, you should reconsider whether people are actually purchasing an education, even if that's what it looks like.

The balancing may work if you have a degree from a university known for inflated grades, but consider a system where your highschool degree of a certain type automatically qualifies you for university education. Grades do not matter anymore but the students with inflated grades may have had a worse preparation for higher education.

Edit: in my example the university could change from accepting all students with correct diploma to doing admission tests to resolve. I know nothing of the feasibility of this though.

Grades do not matter anymore but the students with inflated grades may have had a worse preparation for higher education.

Then people will choose their high school depending on whether they need that extra preparation, and those schools will have more students or be able to charge more.

Indeed the waiting lists for good schools are long. Depending on government the bad schools may cost the same though, and there may be enought students (parents) not knowledgeable enough to fully populate the other schools. Market opportunity there of course, if one can recruit enough good teachers.

cough enterprise software cough

> because those providing those goods and services don't have an incentive to do a good job

For me it's more like

because those providing those goods and services don't have the sufficient time and resources to do a good job.

It's someone behind me telling me that worse is better, good enough is fine and acquire instead of finish.

Monopoly is granted by governments creating laws that prohibit smaller companies from competing on the free market.

Quality of goods and services suffer when there’s government protection placed on companies.

These are problems the government creates, not private enterprise.

.. no. The market is not always free or frictionless in its natural state. Especially for big network-based operations like railways. Railways are impossible in a "completely free" market without compulsory purchase. So they end up as at best heavily regulated entities and at worst the strange shell company system of the UK TOCs.

Markets are also not naturally free when customers can't sensibly opt out of the use of the service (water, arguably heathcare). Non-market systems may be built for the positive externalities on the rest of society which can't be captured by market pricing (education).

Railways is a completely arbitrary example. If they would be impossible (which i sincerely doubt) without government involvement, the free market would find alternatives. That’s the beauty of it. It’s how progress happens.

Education is not an externality, and should be handled by the free market, not the government. Public education is in a horrible state everywhere you go, precisely because it’s public.

The phrase "Education is not an externality" is so baffling to me. The education system is of course not an "externality"--those are two completely different classes of things. On the other hand, the process of education is definitely, definitely, definitely tied to externalities--along with infrastructure, it's the prime example of what an externality is, to the extent that I'm not sure you know what that word means. Do you not think an educated population has benefits not captured by the decisions of the market?

You can build neither roads nor railways without either compulsory purchase or a single market entity which owns a significant chunk of all the land in the country. Otherwise you just get obstructed by holdouts and "nail houses".

To commit to private-only education would result in a country with a very large section of the population uneducated. It's also a massive waste of human potential. Sources? Most of pre-20th-Century Europe, and much of the less developed world.

You can build neither roads nor railways without either compulsory purchase or a single market entity which owns a significant chunk of all the land in the country. Otherwise you just get obstructed by holdouts and "nail houses".

So you'd either move around them or pay them enough. It'd be significantly more costly, but "impossible" seems like a stretch.

I'm not saying it'd be better, mind you; one can still be a staunch believer in the importance of the State. But to claim that the human species would stop transporting stuff if eminent domain was unavailable sounds to me as lack of imagination.

It's unfortunate you're being downvoted here. The market for railways is not railroads and trains, it's transportation. People and goods will find the most efficient way to move around regardless of government involvement.

People and goods will find the most efficient, available way to move around. Regulation can sometimes make more efficient ways available where the market cannot.

Man, you're so right and so wrong at the same time!

So spot on about railways example: the real problem to solve is transportation, not railways, and a different form of transport could replace railroads.

So spot off about education: it damn is an externality! Try living in two societies/regions with different average levels of education and see how it feels. Also try starting different kinds of businesses in places where the pople are on average more or less educated. Also try implementing things like pollution reduction strategies or crime fighting strategies for places/communities with varying levels of education!

Yeah, it does not always work in the most obvious ways: a college educated person will not always make a better decision than someone who dropped out of high school. But the high school dropout from an on-average well educated society will most of the time be more of a person you want to be around with / sell to / buy from / live on the same planet with, than anyone from a less educated one.

Replace "educated" with "science literate" for the clearest particularization of what I've just said, as other types of education have more variability in effects on people and are easier to "get wrong".

Education is a service. People want to become doctors and engineers, because that pays well. It’s profitable to become educated, thus it’s profitable to provide education. Parents will want to provide education for their children, just like they provide them with food, shelter, healthcare, or save money for them. Education, really is no different. I have no idea where this notion comes from that making education private means it stops exiting. Making education private provides competition in the market, and more choice for people seeking it.

What’s the correlation between crime fighting and education levels? What you seem to be suggesting is that people need to go through some sort of a brain-washing process in public schooling to be good members of society, which is scary.

Again, we can look at history or the less developed countries: people might want education, but not be able to afford it.

Same for food, healthcare, or shelter. With education there's more than enough incentive for private enterprise to provide it to invest in future workers.

(IMHO) Absolutely everything in that response is completely wrong:

1. Railways are a real and concrete example of wrongheaded privatisation.

2. More congested roads are not an alternative to efficient rail services.

3. The greatest technological innovations of our time from cancer drugs to satellites to the internet are spin-offs from government funded research. I could bore on all day about this...

4. A good education system is an externality in that society as a whole benefits from highly trained doctors, engineers and even in my view artists and poets. It is a profoundly social enterprise that we all have a stake in.

5. Public education maybe messed up in the US (I don't know it well) but it's doing just fine through much of Europe and the UK - or even in profoundly free market economies like Singapore. Indeed the UK in particular where the tensions in education exist over school placement and better/worse schools within the public system illustrate that educational variation is usually down to social status and economics - not public ownership.

3. The greatest technological innovations of our time from cancer drugs to satellites to the internet are spin-offs from government funded research. I could bore on all day about this...

Of course. The rich use the State to publicly fund research (socialize losses) which they then commercialize and profit from. Otherwise they'd have to actually pay for the research themselves.

Railroads are not impossible...just unlikely. There are a handful of railroads that were built using entirely private negotiation.

https://en.wikipedia.org/wiki/Natural_monopoly

It is my opinion that many organizations that you would consider a "Natural Monopoly" can, by nature, only provide a fair service/cost without being optimized out by the free market.

The two examples provided in the wiki page are not what I'd consider to be concrete:

   - Electricity: Solar Panels will replace these companies when they provide a poor enough, or expensive enough, service
   - Water: Allow people to tap wells on their property. Put them in charge of their own water. You can also run your own septic tank.

Your examples aren't well thought out. Solar panels can't provide electricity at night, so you still need a network (for the time being - hopefully batteries change this sometime soon). Most properties don't have wells, especially in the cities, so you'll always need a functional water network. Networks result in natural monopolies, unless correctly controlled/legislated.

Batteries change this currently. Many people I know have solar installations.

And as for well taps, each building network can tap their own water.

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