Governments Should Not Run Businesses - Essay Example

GOVERNMENTS SHOULD NOT RUN BUSINESSES BUT ONLY PROVIDE REGULATORY FRAMEWORK FOR THE BUSINESS TO RUN 0 INTRODUCTION: It is said that "In a world of instrumental rationality institutions are unnecessary; ideas and ideologies don't matter; and efficient markets--both economic and political--characterize economies."- (Douglass C. North pp 1) The Economic History of the World has traversed through various policies and schools of thought in different periods. These policies have also laid down different principles to be adopted by nations depending on the circumstances prevailed at those points of time. Similarly several political theories like Liberalism, Conservatism and Socialism/Marxism have also been advocated through different periods of the past with the new advent of modern day political ideologies of Feminism and Ecologism or Environmentalism. These ideologies positioned themselves towards left, right or center way of political thinking. Several combinations of the political and economic ideologies have taken shape with a proper mixture of what was believed to be ideal at that particular point of time. These combinations took the form of Elitism, Pluralism and Corporatism, the purpose of these theories being to define and describe the relationship between Government, Business and Society. These theories, concepts and ideologies had also given rise to certain economic terms explaining the relationship between government and business, which are important and need an understanding to pursue our further discussions on this paper. They are: Classical Economics - implying a minimal role for the government with greater independence for the business to act and interact on its own with the forces of demand and supply to bring in equilibrium of the economy. Keynesian Theory of Economics - advocating a higher rate of interaction by the government on the market forces at a macroeconomic level, so that the advantages of such interaction can be possessed by the business. According to this theory no equilibrium of the economy will be brought by, without the interaction of an external force like that of the government. Neo Classical Economics - identified the inefficiency the Keynesian theory to recognize the importance of economic infrastructural inputs like transport, ports, education, competitive market etc., which are vital micro economic factors to be considered for the wellbeing of the society. Any inefficiency creeping into these sectors because of the intervention of the government would result in the weakness of the total economy of the nation concerned. "The framework of neoclassical economics is easily summarized. Buyers attempt to maximize their gains from getting goods, and they do this by increasing their purchases of a good until what they gain from an extra unit is just balanced by what they have to give up to obtain it. In this way they maximize "utility"-the satisfaction associated with the consumption of goods and services" - (Roy Weintraub 1985 pp1) Although these principles provide different degrees of governmental interference in the businesses, to determine exactly the role of the government in bringing about the discipline into the business would be rather difficult and would depend upon the infrastructural and natural resources in reserve for the country. This paper attempts to bring about a comprehensive answer to the question, whether the government should extend its presence more into the various businesses or limit its role to a mere regulatory body so that it oversees that the business run smoothly and achieve the goals for which they had been established. The analysis of the answer to this question is being carried out by a review of arguments against the government owning businesses and also a review of the regulations by the government on the conduct of the businesses. 2.0 WHAT ARE THE GOVERNMENT BUSINESS ENTERPRISES AND THEIR ROLE IN BUSINESS PROMOTION: The Government Business Enterprises can be defined as" agencies and organisations which are established by government- usually by statue- to carry out specific commercial and business type undertakings" - Source: Slide No 5 of 25 Module 6 The contribution to economic and social well being by the government business enterprises is governed by the twin principles of Commercialisation and Corporatisation. Government business enterprises "have features of both public sector and private sector organisations. Like private companies, they engage in commercial activities the goal of profit making, often in competition with other private sector companies. Like public sector agencies they are required to execute government policies often in the form of delivering non-commercial services (or' community service obligations') - (Stephen Bottomley 2000, Research Paper 18). The essential characteristics of a government business enterprise can be classified as: Engaged in the com metrical activities in the private sector Controlled by the government Have an independent legal existence from government and the executive. The Australian Government Business Enterprises pose a good example of efficient government run businesses. For examples, "Australia Post has in place a comprehensive system of corporate governance practices designedto provide appropriate levels of disclosure and accountability."- Corporate Governance pp1. There is no single valid phenomenon that explains the creation of government business enterprises. May be it is that the private sector was seen as incapable of delivering required products or services and the community considered it appropriate that government should own a firm that operated as a natural monopoly. " In their Study of Canadian Experience, Trebil Cock and Pritchard point out that policy makers face a three step choice: (1) Should goods or services be produced publicly or should the government rely on regulation or subsidisation of, or contractual arrangement with, private sector firms; (2) If goods or services are to be publicly produced should production be undertaken through the departmental or corporate form; (3) If goods or services are to be produced through corporate form, what should be the extent of the government's ownership interest, the method of creation, the management and accountability regimes, etc." - (Stephen Bottomley 2000 Research Paper 18) For the study in our paper the first question is of more relevance as to the basic ideology of whether there should be any business activity in which the government should engage itself. With this question in view we shall proceed to analyse the arguments against the government ownership of business. 3.0 ARGUMENTS AGAINST GOVERNMENT OWNERSHIP OF BUSINESS: In general the following are the reasons for the government to get involved in business: It is a way by which the government can steer the economy in the direction of societal wellbeing. It can be adopted as a tool for exercising control over and restrict the activities of the private sector. It can be treated as a way by which the government can earn money to fund governmental activities like social obligations, defense etc. Source: Slide No 7 of 25 Module 6 While the above factors strongly recommend the creation of government business organizations the following arguments go against government entering business: "Private ownership" leads to excessive revenue hiding, and "state ownership" (i.e., national government ownership) fails to provide incentives for managers and local governments in a credible way."- (Jiahua Che 1998 pp 465-467) "Conflicts and bitterness are inherent in government operation. Imagine what would happen if all the newspapers were published by the government. First because a government operation gets its revenues from coercive taxation instead of voluntary payment for services rendered, it is not obliged to be efficient in serving the consumer and second conflicts among groups of tax payers would rage over editorial policy news content and even tabloid versus regular size." - (Murray N. Rothbard 1956 pp2) It is the culture of the private firms to welcome the customer and expand their operation when the demand for their products is increasing. Whereas, the government would instead of reacting positively to the customers' demand will push the customer to do with less of a commodity or to go without it. Preferences of the customer are given a free rein in private enterprises while the government may not recognize this principle. Private firms who successfully run their business find it easy to obtain additional finance for expansion and thereby can serve their customers more efficiently. "In government there are no profits for investors and no penalty for inefficient operator. No one invests, therefore and no one can insure that successful plans expand and unsuccessful ones disappear." (Murray N. Rothbard 1956 pp2 ) Private firm largely tend to be more efficient because of the 'calculations' of the prices of the products to make gains from the business and to avoid making losses, while the government business distorts the pricing calculation and end up in making losses with an inefficient system of pricing. 4.0 REASONS FOR GOVERNMENTAL REGULAIONS IN BUSINESS: The precise definition of a 'regulation' goes like this; "A regulation is a legally sanctioned government intervention in the operation of a society and/or economy, so as to produce a result different from that which would have occurred in the absence of regulation." Source: slide 3 of 36 Module 8. The term "regulation" refers to the various instruments by which Governments impose requirements on enterprises and citizens. It thus embraces laws, formal and informal orders, administrative guidance and subordinate rules issued by all levels of government, as well as rules issued by non-governmental or professional self-regulatory bodies to which Governments have delegated regulatory powers"- (United Nations Conference on Trade and Development 2001 pp3) Regulation can help support business activities and also sets standards for corporate governance, helps ensure the safety and security of the public, guards their freedom and choices and protect the environment. Regulations also impose costs on business, consumers, government and the wider community. The government needs to regulate the business for the following reasons: Every business activity need to be regulated to bring out the best interests it serves for the public. May be it is a commodity or service, it is important that the business contributes the most advantageous things to the nation. Another reason for which the regulations are made is to ensure that the stability in the political and social environment is maintained. In the absence of any regulation the business firms will tend to operate in a manner detrimental to the whole society. To control such activities and bring about the political and social stability the government needs to adopt to various regulations concerning the conduct of the business in any country. The economic development of a country largely depends on the performance of the business. This in turn depends up on the orderly conduct of the business to achieve which it becomes important to resort to various regulations. Protection of the culture of a country is of paramount importance. Unless regulated the people may behave in ways which totally destroy the culture of the country to which they belong. Retaining control over the institutions and the economy as a whole is being greatly facilitated by framing appropriate regulations governing the business and other commercial activities. Actually regulations were the tools used by the 'elites' to gain control over the economy. According to Liberalism whenever there occur any problems in the business environment it is for the government only to sort out the problems and bring back the business harmony. This, the government sought to achieve through proper regulations. Source: Slide 4 and 5 of 36 Module 8 Another major reason for bringing about regulations in business is to protect the interests of the consumer. Regulations in the areas of fair trade practices, provision of warranties, provision of safety standards, health and contamination regulations and detection and prevention of fraud in the businesses are being made to protect the interest of the consumer. 5.0 ARGUMENTS FOR MINIMISING REGULATIONS IN BUSINESS: "In his classic 1859 essay On Liberty, John Stuart Mill warned against the dangers of government becoming too interventionist in peoples' daily lives: 'Every function superadded to those already exercised by the government causes its influence over hopes and fears to be more widely diffused, and converts, more and more, the active and ambitious part of the public into hangers-on of the government, or of some party which aims at becoming the government. Regulatory intervention inevitably makes people dependent on government."- (Tim Ambler and Keith Boyfield 2005 pp6) The arguments for minimizing the regulations in the business take their root in the following premises: Fewer new regulations will make less dependence on the government and will make the economy stronger. Cutting back the number of regulations should result in the improved performance of the private sector in business. The business may be controlled by more sensible compliance and inspection provisions instead of regulatory measures. One another argument that claims for less regulatory measures believes that the stiff competition in business would be able to offer better quality at lower prices. "Calls by large industries for utility deregulation found a ready chorus in academics, analysts, and politicians who believed that competition could produce lower prices, better service, and more innovation than government regulation."- (Charley Higley 2000 pp1) 6.0 CONCLUSION: From the foregoing discussions, it appears that most of our economic problems are created and prolonged by the interference of the government in the business. Government ownership undoubtedly breeds insoluble conflicts, inevitable inefficiency, and break down of living standards. Private ownership brings peace, mutual harmony, healthy competition leading to greater efficiency and notable improvements in standard of living. "Proponents of privatization advance three broad types of arguments in one form or another: Privatization promotes efficiency and enhances social welfare by creating incentives to allocate resources to their highest and best use and by encouraging individual owners to invest in longer-term initiatives in the expectation that they will reap the resultant gains over time. Transferring property from the public domain to the private sector and reducing regulatory restrictions increases personal freedom, avoids the effects of rigid bureaucracies, and reduces corruption and cronyism in public places. A combination of private property and appropriate incentives and rules produces equitable results in the sense of rewarding those who work hard, take risks and exercise ingenuity. As such, it also leads to creativity and innovation."- (Ernst Urich von Weizsacker, oran r. young, Matthias finger 2004 pp 11) It is also argued that "free market capitalism will automatically bring about the changes needed. As the prices of scarce environmental resources rise, and as industries and consumers have more money to spend, new technologies will be introduced to reduce the impact on the environment."- (Panos Media Breifing No 38, 2000 pp1) Similar arguments are also being offered against businesses to be carried out in the private sector. They are: Privatisation of business results in the weakening of the capacity of the government to care for social equity and greater economic well being. Private businesses tend to forget the long-term ecological and cultural values in the pursuit of profit maximization. The cost of providing public services is tremendously increased as a result of increased business activities in the private sector. The private business do not really take the risk of public service provisions and whenever the costs exceed revenues, there comes the demand for subsidies and enhanced service charges by the private players. It has been proved that the commercially optimal decisions are often suboptimal for public goals. "The real issue is not so much public vs. private--it is monopoly vs. competition. A key issue in the current trend towards what is commonly referred to as "privatization" is the introduction of competition (e.g., public-public competition, public-private competition, competition between public-private ventures, public-nonprofit competition) to increase efficiency, reduce costs, and improve quality and customer satisfaction."-(Demetra Smith Nightingale, Nancy M. Pindus 1997 pp 1) Hence, on the basis of the above arguments it may be summarized that the business should be left to the private corporations with stringent regulations by the government concerning the socio-economic and environmental factors to be followed in letter and spirit by the business community. It should also be the aim of the government that the private business enterprises are kept under strict vigil and control in the matter of providing public services that they do not become monopoly suppliers and take advantage of their position. Reference List: 1. Douglass C. North The New Institutional Economics and Development [online] Available from: http://www.econ.iastate.edu/tesfatsi/NewInstE.North.pdf Accessed on: 17th January 2007 2. E.Ray Weintraub (1985) Neo Classical Economics the Concise Encyclopedia of Economics pp1 [online] Available from: http://www.econlib.org/library/enc/NeoclassicalEconomics.html#top Accessed on: 17th January 2007 3.Stephen Bottomley (2000) Government Business Enterprises and Public Accountability through Parliament Research Paper 18 1999-2000 [online] Available from: http://www.aph.gov.au/library/Pubs/RP/1999-2000/2000rp18.htm Accessed on: 17th January 2007 4. Corporate governance pp1 [online] Available from: http://www.auspost.com.au/BCP/0,1080,CH3904%257EMO19,00.html Accessed on: 17th January 2007 5. Jiahua Che (1998) Insecure Property Rights and Government Ownership of Firms The Quarterly Journal Of Economics May 1998 Vol 113, No 2 Pages 467-496 6. Murray N. Rothbard (1956) Ideas on liberty The freeman: vol 6 No 9 [online] Available from: http://www.fee.org/publications/the-freeman/article/aspaid=252 Accessed on: 17th January 2007 7. United Nations Conference on Trade and Development (2001) Model Law: The relationship between a competition Authority and regulatory bodies, including sect oral regulators pp3 [online] Available from: http://www.unctad.org/en/docs/c2clp23&c1.en.pdf Accessed on: 17th January 2007 8. Tim Ambler and Keith Boyfield (2005) Route Map to Reform: Deregulation pp6 Adam Smith Institute [online] Available from: http://www.adamsmith.org/pdf/deregulation.pdf Accessed on: 17th January 2007 9. Charley Higley (2000) Disastrous Deregulation, Public citizen pp1 [online] Available from: http://www.citizen.org/documents/disastrousdereg.PDF Accessed on: 17th January 2007 10. Ernst Urich von Weizsacker, oran r. young, Matthias finger (2004) Limits of privatization: How to avoid too much of a good thing. ES_L2p_16-12 pp 11 [online] Available from: http://www.atasp.de/downloads/limits-to-privatization-introduction.pdf Accessed on: 17th January 2007 11. Panos Media Breifing No 38, (2000) Building sustainability into economic policy Economics for Ever. Pp1 [online] Available from: http://www.panos.org.uk/PDF/reports/EconomicsForEver.pdf Accessed on: 17th January 2007 12. Demetra Smith Nightingale, Nancy M. Pindus (1997) Privatisaion of Public Services Urban Institute A Background Paper pp1 [online] Available from: http://www.urban.org/publications/407023.html Accessed on: 17th January 2007 Read More