Economic Theory

The economics and politics of nationalisation and privatisation

On 30 November, the Aldenham School Business Society in Hertfordshire invited the IEA’s Kristian Niemietz to give a talk on nationalisation and privatisation.

The article below is based on his opening remarks. 


Introduction: how the pendulum swung back

One of the most fundamental questions in economics is: who should own and run enterprises? Who should own an economy’s productive assets? Should they be owned by the state? Or should they be owned by private individuals, competing with each other in an open marketplace? Should the state be a dominant player in economic life, or should it be a referee?

People have given different answers to these questions at different times. In Victorian Britain, private enterprise was the dominant form of economic organisation. Then in years after the Second World War, the British state took over large sections on the economy, and state ownership became an important part of economic life. In the 1980s and 1990s, the pendulum swung back again towards private enterprise, with a large wave of privatisations.

After that, for a long time, it looked as though the issue was more or less settled. Until a few years ago, there was a widespread perception that the proponents of privatisation had largely won this argument, and that nationalisation-vs-privatisation debates were not really a thing anymore. There were, of course, always some proponents of nationalisation. They never disappeared. But it was not seen as a priority issue.

This had a number of reasons.

Part of it was simply reputational. Until quite recently, the idea that the state should run companies was considered a bit stuffy and old-fashioned. It had a whiff of 1970s Britain. People who proposed nationalisations seemed stuck in the past, nostalgic for the Britain of their youth.

In the 1990s and 2000s, there was also an international policy trend towards privatisation, especially in the former socialist economies of Central and Eastern Europe, but also in emerging economies in Asia and Latin America. Against this backdrop, it would have been a form of exceptionalism to suggest that only Britain should move in the opposite direction.

Thus, for a while, even the political Left preferred to avoid the issue. When Tony Blair tried to modernise the image of the Labour Party in the 1990s, a big part of that strategy was to deliberate distance himself from his party’s previous pro-nationalisation stance. Ed Miliband was clearly to the left of Blair and Brown, and probably not wholly averse to a renationalisation agenda, but even he did not present himself as “Mr Nationalisation”.

His successor, of course, very much did, which is what put the issue back on the political agenda in 2015. This felt like a very sudden change at the time, but it was not. It is a very consistent finding, from lots of different surveys, that nationalisation is hugely popular. If you ask people whether they think that this industry or that industry should be (re-)nationalised, the share of respondents saying “Yes” is usually between 60-80%. This was already true before Corbyn, and it remains true today.

So, with nationalisation back on the agenda – let’s go through the arguments on both sides.

Arguments for and against nationalisation

Proponents of nationalisation make three main arguments:

  1. The owners of a private company are not interested in your wellbeing. They are not interested in the common good. They are interested in their own profit. Nationalisation, according to this argument, means taking away the profit motive, and replacing it with an orientation towards the public good.

  2. A private company is only focused on its core business, not on wider social issues. They are not interested in combating climate change, or levelling-up, or whatever else we may consider desirable. A state-owned company, on the other hand, can focus on whatever we want it to focus on. Its actions can be integrated into the pursuit of wider social objectives.

  3. Parts of the economy that affect society as a whole should be run by society as a whole. Private companies are only accountable to their shareholders, state-owned companies are accountable to parliament, and therefore, indirectly, to all of us.

Proponents of privatisation dispute all three arguments:

  1. Eliminating the profit motive does not eliminate self-interest. It may eliminate financial self-interest, but it only replaces it with self-interest of a different kind. Self-interest does not have to be financial. We all know this from our personal lives. We all act in self-interested ways sometimes, and most of the time, this has nothing to do with money. Self-interest can mean lots of things: minimising work effort, pursuit of power, pursuit of status, pursuit of ideological preferences, to name just a few. All of these can be present in nationalised industries. In a competitive market, they are held in check.

  1. Nationalised industries will get politicised. They will get recruited into the pursuit of political objectives. For example, there is a study which looks at hospital closures in the UK, and which shows that marginal seats are much less likely to be affected by those than seats which always vote for the same party. That’s weird, you may think. Surely, the allocation of hospital resources should be driven by clinical considerations. What does the political makeup of a place have to do with it? But it makes political sense. Hospital closures are unpopular, so if you are in government, you will try to concentrate them either in safe seats that will vote for you anyway, or in seats that you have written off as a lost cause. If governments want to pursue social objectives, they should do so directly, not via some business. Businesses should just focus on whatever it is that they do.

  1. Accountability through politics is an extremely weak form of accountability. Yes, in principle, we could imagine a situation in which one party wants to run the nationalised industries in one way, while a different party wants to run them in a different way, and you could compare the two strategies and vote for whichever seems best to you. But if you did that – you would be a very unusual voter indeed. Most of the time, political decisions are nowhere near as specific as that. Most of the time, we listen to a few political speeches, and then we vote for whoever seems vaguely competent and trustworthy to us. If you can name three or four policies of whoever you vote for, you are already a very well-informed voter. The accountability of the marketplace, where you can just switch suppliers if you’re not happy, is much stronger and more meaningful.

So much for the theory. What about the UK’s actual experience with privatisation?

Privatisation in the UK: the evidence

The leading expert on this is probably Prof David Parker, who has summarised and evaluated tons of empirical evidence. The short summary of his work is: there have usually been quite substantial improvements in productivity and other metrics after privatisation, but it is often very difficult to link this definitively to privatisation, as opposed to some other factors. So the evidence is not conclusive. Neither proponents nor opponents of privatisation can honestly claim that they have been unambiguously proven correct.

But one theme that comes up repeatedly is that the successes of privatisation are clearest in those cases where it has not just meant a change in ownership, but also the replacement of a government monopoly or oligopoly with a competitive market. Where it has just meant replacing a public monopoly or oligopoly with a private one, the case is far less clear. So airlines might be on one end of this spectrum, water on the other.

Nationalisation: all things to all people

But even if we take the most difficult examples, where the case for privatisation is least clear-cut – I do not believe that renationalisation is the answer. Rather, I believe that there are some industries where there just isn’t a great model.

I strongly suspect that the main reason why nationalisation is so popular is that most people massively overestimate the profit margins in the industries in question. They believe that if you took away those profit margins, you could drastically slash consumer prices. However, in most industries, profit margins are quite low, and in the industries for which the pro-nationalisation majorities are largest, they are at best 3-4%. So wherever the potential for large price cuts may be – this is not it. Proponents of nationalisation are looking in the wrong place.

Nationalisation is one of those policies from which different people expect different things, often contradictory ones: lower prices, decarbonisation, more investment, revenue for the government, higher wages in those industries… But these goals are in conflict with each other. If decarbonisation is the aim, you cannot also claim that nationalisation would slash consumer bills. Because decarbonisation is expensive, irrespective of whether you do it under private or under public ownership. Some argue that nationalisation will pay for itself, because of the revenue stream it creates for the government. But if so, again, you cannot also promise to slash prices. Because if you do that, it clearly will not pay for itself.

And so on. Nationalisation is popular, because its proponents do not usually address these trade-offs. They just promise all things to all people. They are often keen to emphasise that it will not be a re-enactment of the 1970s, but something different. But I have yet to come across a proponent of nationalisation who can explain what exactly they would do differently.


Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

1 thought on “The economics and politics of nationalisation and privatisation”

  1. Posted 02/12/2022 at 11:18 | Permalink

    Even if all other things were equal, private companies are preferable because they always have an incentive to become more efficient in order to make more profit. Even were those extra profits to go solely to already rich people, they have to do something with the money, such as invest it in other companies or spend it on goods and services, all of which have the effect of making their employees and customers better off (as well as the investors).

Leave a Reply

Your email address will not be published. Required fields are marked *