How Natural Is It For Government To Be In Business? 

In India, there is much excitement over the government’s in-principle decision to privatise state carrier Air India. Newspapers are agog with excitement at the prospect. In contrast, nearly a month ago, in the surprise national election in Britain, the ruling Conservative Party almost lost its mandate to govern. Millennials voted overwhelmingly for the Labour Party. In the words of fund manager Tim Price, director of investment at PFP Wealth Management, “two in five Britons voted for a party led by unrepentant Marxists”.

So, in the birthplace of Adam Smith, the author of The Wealth Of Nations and the progenitor of the theory of the invisible hand, people were willing to contemplate bringing the government back into running the economy. In contrast, in its former colony, there is much enthusiasm for the government shedding its ownership of the national air carrier. What gives? The difference between the two situations, in one word, is context.

In Britain, 30 years after the capitalist revolution in which both the core tenets of capitalism—survival of the fittest and market-determined prices—and its moral foundations were discarded, people are willing to re-experiment with socialism. It is not a surprise since even at the height of the revulsion with the era of labour unrest and stagflation in the 1970s, the Conservative Party did not utter the word “privatisation” in its manifesto for the election held in 1979.

In his book, An Extraordinary Time: The End Of The Postwar Boom And The Return Of The Ordinary Economy, Marc Levinson wrote: “The term ‘privatisation’ had originated in Nazi Germany but was not widely used after World War II; the Conservative manifesto published during the 1979 campaign refrained from using it altogether.

The word may have been deemed inflammatory, for when Conservative politician Nigel Lawson was given a high treasury job in May 1979, his portfolio was defined to include ‘disposal of assets’, not ‘privatisation’.

India’s “disinvestment” is not very different from “disposal of assets”.

Further, during the decade of the 1970s, when rising cost of living became a big issue in Western societies, the extent of price controls adopted in those countries would put the “anti-profiteering authority” under the new Goods and Services Tax regime in India to shame.

Levinson tells that, “Norway imposed price freezes three times in three years. Austria slapped fines on businesses that raised prices too high. Belgium ordered companies to notify the government of price increases. Spain empowered cities to decide how much food should cost in local shops. Britain froze prices, wages, rents, and dividends.” In short, the West is not our beacon.

In the Indian context, one thing is common to both the public and the private sector enterprises. In both, barring a few exceptions in the private sector, there has been no separation of ownership and management. Owners have treated their enterprises as an extension of their personal wealth. The only difference is that in the case of the public sector, the real owners are the taxpayers and the government is the agent.

As is the case with private sector managers in Western societies who have rewarded themselves independent of their contribution to shareholder wealth, in the Indian context, bureaucrats and politicians have enriched themselves through public sector enterprises at the expense of the ultimate owner, the taxpayer. Air India is, indeed, a case in point.

However, despite the personal enrichment of many promoters at the expense of their firms, the nature of ownership matters to the operating culture of commercial enterprises. All told, the incentive to improve productivity and profitability and the accountability for doing so are more likely to prevail in the private sector than in firms that are majority-owned by the government.

There have been exceptions in the Indian public sector where strong leadership has turned firms around. But, these exceptions actually prove the point that when governments step back and grant operating freedom, competent firm-level leadership succeeds in restoring profitability.

If one thinks about it, the natural order of economic affairs is wholly libertarian—free of regulation. The life of hunter-gatherers or foragers was the ultimate libertarian utopia. There was no regulation and no government. Human greed and possessiveness allowed “government” to emerge. As humans took to farming, they grew roots in particular locations and abandoned their earlier nomadic existence. Their concern for the protection of property and title grew. Naturally, laws, rules and regulations were needed to confer and protect title and provide physical security to property. Ergo, we had to have governments. But it is always desirable for humanity to operate closer to what nature ordained.

So, the government’s job is to allow the self-organising principle of human ingenuity and societies to play out and remove the hurdles. In other words, the soil is always there: human ingenuity, entrepreneurial and survival instincts. The government only has to remove the weeds and pests. Then, water, sun and soil will take care of the harvest. In the last 13 years, India has moved a long way away from this organising principle of economic activity. Probably, the anti-profiteering authority is its pinnacle. The privatisation of Air India should mark the beginning of the reversal of this trend.

This article was originally published on Mint and has been republished here with permission.