In the comments on my post containing the open-letter to the Labour
Party’s two Davids a couple of weeks ago, John Small and I got into a
discussion about the morality of a government policy that would wipe value from
a private company (in this case, suggested changes to the electricity market
that would reduce the profits of privately owned electricity companies). John
wasn’t sure why I raised the issue of morality; this is worth post on its own.
winners and losers, just as changes in the non-governmental actions will. One
of the starting points I argue in my Honours class in welfare economics is
that, in terms of practical policy (as distinct from the conceptual benchmark
of a mythical social planner) the world is, always has been, and always will be
Pareto efficient, and so a rule that policy changes cannot impose costs on
anyone is tantamount to a rule that policy changes can never occur. But I think
we can suggest some guidelines for when government-imposed costs are justified.
The key issues are whether the policy is imposing costs on individuals or
corporate bodies, whether the policy is a direct appropriation of property or one
the imposed costs are indirect, and whether the policy is designed to improve
efficiency or serve some social objective. Let’s take each in turn.
- Is the cost imposed directly on individuals or on
corporations? Takings from individuals require a higher threshold of benefit than
takings from corporations. I don’t here mean to that corporations are somehow
separate from the individuals who own them, or that their owners have lesser
rights than other citizens; this is simply recognising the fact that company
owners have the opportunity to diversify risk in their shareholdings, and hence
to diversify the implications of government policy changes. A policy that
forced lower electricity prices might wipe value from electricity companies,
but add value to electricity buying companies as well as final consumers. If such a policy were efficiency
increasing, there is no reason for it to impose significant costs on any
- Is the policy one that appropriates resources directly or one that changes the value of current assets? A direct takings, such as when the government uses compulsory purchase to acquire land for a highway, is a more serious use of government power than one that imposes costs indirectly through revaluations of assets, simply because a direct takings has the potential to impose far greater costs to an individual if their personal valuation of the asset is greatly in excess of its market value.
Based on these two criteria, I have no problem on morality grounds with, say, the government’s forcing Telecom to give other companies access to its copper wire network, with the anti-trust actions against Microsoft, or with changes to patent law that would stop Apple from suing Samsung. In each case, the question for me would be simply whether such policies would promote long-run efficiency or not. (In the case of these three examples, I suspect the answer would be No, No, and Yes, but that is an empirical question.) The issue becomes more when the policy is put in place to achieve social objectives.
- Is the policy one that is designed to improve efficiency or to bring about social redistribution? In my view, the hurdle has to set very high before one can justify a direct or indirect takings to fund redistribution. This is not to say that social redistribution is not warranted, but rather the moral case for redistribution should be grounded in a transparent and honest policy that seeks to share the burden broadly rather than hiding the costs. Financing redistribution through indirect takings smacks too much of offering the other kid’s bat for my taste.
This is the key question in the case of Labour’s proposed electricity
reforms. If their proposal were based on a view that market power was keeping
price above marginal cost so that reducing price would be efficiency enhancing,
then the issue would be the technical one of whether there is market power and
whether eliminating that market power through a single payer would cause more
problems than it would solve. But the proposed policy is explicitly to set
price below marginal cost in order to
equate price to average cost. John argued from a utilitarian perspective that the
redistributive benefit would likely exceed the efficiency cost. We can debate
about how large the efficiency cost would be, and whether, if you had revenue
available for redistribution, subsidising electricity prices would be the best
way of using it. But if we want to have more redistribution, either with an electricity subsidy or with direct transfers, then we should finance that directly with broad-based tax increases. Let’s not get into the game of arguing for a policy to
transfer resources from corporate owners to electricity consumers on the basis
of “they must have known that regulation is very very common in this industry”
and hence that the costs are ethically inconsequential.