Why Government Ownership Always Fails

June 22, 2009

Federal ownership of industry is not uncharted territory. Europe, for much of the Twentieth Century, was a vast experiment in nationalization. It never works, but the reasons for failure are not always grasped. When the Labour Party in Britain entered into its long period of nationalization, the motives of its leaders were not bad. The unions did not desire economic stagnation and lower standards of living. Nor were they fools.

There is a weak profit motive in industries which governments own or in which government has a strong voice in management, but that is not always the paramount concern in the hearts and minds of workers and managers. During the Second World War, for obvious reasons, the war industries of America and of Britain were closely regulated by government. Motives higher than personal profit drove production. Companies and their workers placed moral objectives above the bottom line.

The profit motive is absent in totalitarian regimes. If Stalin was persuaded that the White Sea Canal was a vast boon to the Soviet economy, who was going to tell him otherwise? If Mao believed in the Great Leap Forward that backyard steel mills make sense, which terrified party crony was going to contradict him? It is salient that the intention of the leader does not matter. Stalin and Mao were moral monsters, of course, but if they had been serene saints, their plans would still have brought ruin and waste.

But sometimes this worked. During the Great Patriotic War (what the rest of us call the Second World War), Soviet workers labored under terrible conditions for long hours and turned out weapons which matched any free nation, like the T-34/85 tank or the Sturmovik warplane. Political terror helped Stalin, but the genuine willpower of the Russian people was very potent in winning this war of production.

Even in command economies, workers and managers may often wish as much for success as if they were shareholders in a privately held corporation. In fact for most employees of corporations, the bottom line is not all that important. They go to work. They do their jobs. They hope that their work is appreciated and rewarded, but such a return on their effort is often missing.

It is not the profit motive, per se, which makes a free economy so vastly superior to a planned economy. The profit motive is a strong incentive to hard work, especially in small businesses and in professions, where the profit largely is the wage. Innovation is also much more likely to arise in small businesses than in giant corporations or, even worse, in nationalized industries.

But it is a mistake to assume that this is because corporate bosses and government officials lack any grand vision (indeed, sometimes it is that very grand vision which is the problem) and it is certainly a mistake to assume that the men who run giant institutions are stupid. The problem with government and bureaucracies is because these lack what markets provide: information.

Consider Obama's Stimulus Plan. Governments who receive funds must say how many jobs are created or preserved with the federal dollars. But surely this number is only a guess, and given the unintended consequences of vast spending, it is likely a poor guess. Yet how will the impact of the Stimulus Plan on jobs be calculated? By using the data supplied by these state and local governments. Even with the best of intentions and the most rigorous methodology, there is almost no way that anyone will truly be able to measure the effect on employment.

The only sure way to "create" jobs would be to take the old Soviet approach: make work. Pay workers to dig holes and then pay other workers to fill up the holes (or use slave labor to build a vast canal which has no practical purpose.) How is that different from paying people to stay home, watch television, write reviews of the programming, and then call that "work"? In fact, paying people to watch television would reduce job injuries, cut down on carbon emissions, and reduce work absenteeism.

What is missing, of course, is work than means something. Anyone can ponder what work is meaningful. The only way to know what work is productive, what work is efficient, and what work raises the standard of living for everyone is the unfettered flow of tens of millions of economic transactions every day. The brain without our senses can do little. The best plan, without a constant feedback in countless nuanced responses, is almost doomed to fail.

General Motors and the other companies which fall increasingly into the benignly intentioned American version of neo-Fascist planning (the Left, for a long time, loved Mussolini) may not lack incentives to do well; they may not lack the bright minds to analyze data; they will not lack a defined goal. But they will find that their sensory organs become dim as markets stop being free. Wishful thinking will replace real information. To paraphrase Churchill, freedom is the worst form of economic system - except for all the rest.

Copyright ©2009 Bruce Walker

Bruce Walker is a long-time conservative writer whose work is published regularly at popular conservative sites such as American Thinker.