Seas of Red Ink

Nationalized Companies: A Threat to American Business, by Joseph Monsen and Kenneth Walters, New York: McGraw-Hill, 178 pp., $17.95

Throughout a trip home to Britain by this reviewer in November 1984, two issues dominated the local news: the (then) nine-month-long mineworkers' strike, and the preparations for the sale to the public of British Telecom—Britain's nationalized telephone system—in the world's largest-ever stock offering.

These issues drove home a key point of Joseph Monsen and Kenneth Walters's useful book, Nationalized Companies—that nationalized firms are political, not commercial, in nature. They also revealed how effective British Prime Minister Margaret Thatcher has been in tackling the state-owned monopolies, a development ignored by the book's authors.

Nationalized Companies provides a valuable and readable guide to the realities of state ownership in Europe. Large firms, and sometimes entire industries, were taken into the public sector for a number of reasons. In some cases, the authors note, it was to counter the financial collapse of a major firm (such as Britain's Rolls Royce in 1971). In other cases, especially in France, nationalization has been used as a key instrument in trying to develop new markets and core industries. But perhaps most important of all, selective nationalization has been used by European socialists in an effort to determine the course of the entire economy—to "occupy the commanding height of the economy," as Britain's Labour Party put it in announcing a sweeping program of nationalization in 1945.

Monsen and Walters do not dwell on the philosophical or theoretical questions surrounding state ownership. Instead, they look carefully at its track record, providing comparative data on the performance of firms and examining issues such as management strategy, pricing, and control. A clear picture emerges. The balance sheets of nationalized industries are consistently a sea of red ink. "In 1980, more than half of these companies reported losses that ran into the hundreds of millions of dollars, and some over a billion dollars." Productivity is abysmally low in such companies, and labor relations poor. The only reason many of these firms remain in business at all is that they enjoy a state-sanctioned monopoly.

The causes of this poor performance will likely come as no surprise to REASON readers, but this book will help to bring it to the attention both of the nation's business students and of those who flirt with notions of "public ownership" of key firms. The root problem is politics. "Close observation of Western Europe reveals one very clear point: Nationalized firms are always the tools of politicians."

The power any capitalist or business group has over an economy, note the authors, "pales in comparison" with the control a government can exercise through ownership of such industries. Inefficiency becomes structural when politicians manipulate prices to please the public (although as far as service is concerned, "haughty indifference to consumers is par for the course"), or when they locate factories in politically sensitive districts or force companies to provide uneconomic services to favored segments of the population.

The recent British miners' strike, however, shows how political control of an industry can also backfire. Since workers in a government-owned and subsidized company do not have to depend on the firm's profitability for their continued employment, and since state industries generally form the foundation of the economy, nationalized firms tend to be a magnet for politically motivated unionists. Some of these leaders take the view that nationalized firms should provide a social service to the nation by guaranteeing "jobs" even if no productive work is available.

Some also see the industries as vehicles to challenge government economic policy. This translates into strikes that are not intended to hurt the employer (that is, the government) but are aimed at causing maximum irritation to the public in order to bring political pressure to bear on the government—and anyone who has stood for hours in a strike-bound London railroad station or airport will know how effective that can be.

The miners' strike epitomizes all the forces that come to play in this situation. Led by Arthur Scargill, who left the British Communist Party because it repudiated Stalin, the miners were demanding that all mines should be kept open as long as an ounce of coal still exists to be extracted—no matter how uneconomic that would be. Scargill made it clear that beyond the immediate objectives of the strike, the aim was to break the government of Margaret Thatcher. That was no idle threat. A Scargill-inspired strike in 1974 so disrupted the British economy that it brought down the last Conservative government, headed by Edward Heath.

While the authors do a good job in analyzing the factors that contribute to the poor performance and chronic labor problems of nationalized firms, the book is much less satisfactory when it tries to speculate on the implications for the United States. And it largely ignores recent moves toward denationalization in Britain (already under way before this book was published). The authors correctly note, for instance, that America has generally used regulation to influence the course of key industries such as utilities, rather than the European practice of government control. But while recognizing that government ownership inevitably leads to political manipulation, Monsen and Walters seem to swallow the industrial-policy notion that "specific policies must be designed for particular industries which need to be preserved and modernized." Moreover, they appear to believe that these policies could be free of special-interest politics.

The authors have also overlooked the potential of the Thatcher government in changing the dynamics of nationalization. Many governments in many countries have tried to roll back nationalization by selling off state firms to large private investors—only to encounter public pressure and employee opposition to such "giveaways." Often, renationalization took place under later governments.

Thatcher, however, has "privatized" firms by providing powerful financial incentives to employees to own stock in denationalized firms (95 percent of British Telecom's employees bought stock in the recent flotation). The Thatcher plan, significantly, favors millions of small buyers over a few large corporate investors. The result? A reduction in employee opposition, and strong resistance likely to future nationalization proposals. In short, Thatcher has broken out of the political straitjacket of "public ownership" by actually transferring ownership to the public.

Nationalized Companies is a useful book. It provides data and case studies that will be helpful to any scholar of government planning. But—perhaps of necessity—it tells only half the story. The reaction against state ownership in Europe, and the innovative political means being used in that campaign, is only now being told in the pages of REASON and other journals.

Stuart Butler is director of domestic policy studies at the Heritage Foundation. His book Privatizing Federal Spending was published in May by Universe Books.