Economic Theory

Nationalisation misallocates capital – for the same reason that slavery misallocates labour

Everyone objects to slavery. Employment should be voluntary.

This liberal attitude towards labour does not extend to capital. A recent survey by the Legatum Institute showed that most Brits think people should be forced to invest in businesses on threat of imprisonment.

That’s not quite how they put it. Instead, the survey respondents said that railway companies, energy companies, water companies and banks should be nationalised. This is also the Labour Party policy, as Shadow Chancellor John McDonnell reminded us in media appearances this weekend. Yet nationalisation is nothing but compulsory investment.

Consider the Post Office. A labour government would buy it with money raised from extra government borrowing. This would shift exposure to the commercial success of the Post Office from people who voluntarily invested in it to taxpayers. If the profits of the Post Office exceed the interest payments on the extra government debt, taxes will be lower than they otherwise would have been; if they are less, taxes will be higher. And taxes are not voluntary. Fail to pay them and, ultimately, you will be imprisoned.

Nationalisation is to investment what slavery is to employment. In a society that valued liberty, this might suffice to discredit nationalisation. But in modern Britain, it does not. You need to show that investment will be worse if it is compulsory rather than voluntary. Fortunately, that is easy, and precisely because of the analogy between slavery and nationalisation.

In a free labour market, employers must pay employees at least the opportunity cost of doing the job – that is, they must pay at least as much as the employee’s highest paying alternative job. Otherwise, the employee would move to that higher paying alternative. This means that workers take the jobs where their labour has the most value, since those are the jobs for which employers will pay the most.

By contrast, because a slave owner need not pay his slave, he can keep her even when other employers could make better use of her labour. Slavery thus misallocates labour. Coercion is inefficient. Even those who care nothing for liberty should still object to slavery.

The same goes for investment. A business that attracts capital from voluntary investors must offer them a return at least as high as the opportunity cost of their investment – at least as high as investors could get from their best alternative investment.

By contrast, a business that can imprison people who do not invest can raise capital even when other businesses would make better use of it. In other words, nationalisation misallocates capital. Even those who care nothing for liberty should still object to nationalisation.


Former Director of Research

Jamie Whyte is the former Research Director at the Institute of Economic Affairs. Prior to joining the IEA, Jamie was the leader of ACT New Zealand as well as the Head of Research and Publishing at Oliver Wyman Financial Services. He has previously worked as a management consultant for the Boston Consulting Group, as a philosophy lecturer at Cambridge University and as a foreign currency trader.

4 thoughts on “Nationalisation misallocates capital – for the same reason that slavery misallocates labour”

  1. Posted 13/02/2018 at 10:12 | Permalink

    First as ideology, second as clickbait.

  2. Posted 15/02/2018 at 13:11 | Permalink

    Jeremy Corbyn’s nationalisation policies are grounded in cold, hard economic sense. Europe proves it

    We do have public ownership in UK rail and energy markets. It’s just that the government ownership is by foreign governments

  3. Posted 16/02/2018 at 16:18 | Permalink

    Paul, I agree with much in the article you link to. But if the author answered two of the questions he ends on with a “yes”, he would also agree with me, those questions being:

    “Will the absence of the risk of bankruptcy result in budget indiscipline from public managements? Will public managers be more attuned to the whims of ministers and the interests of employees rather than the needs of customers?”

    He doesn’t answer these questions with a “no”. He doesn’t answer them at all.

  4. Posted 18/02/2018 at 10:42 | Permalink

    Except by your own logic Paul we should privatise our healthcare system to better match the Netherlands, or heavily regionalise it like the Scandi countries do. Infact most of the countries don’t just nationalise whole industry but have government owned business in the market

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