Friday, 9 March 2012

New Zealanders do not own them

Liberty Scott makes the point that New Zealanders do not own SOEs.
New Zealanders do not own SOEs by any standard definition of what ownership of property means.
And he is right. His argument is that an owner has two basic rights: 1) the right of alienation and 2) the right to dividends from profits. Liberty Scott writes:
First and foremost is the right of alienation. You can sell, gift or surrender that stake to whoever is willing to buy or receive it. You are not forced to own it. After all, if you were, you'd be forced to bear liabilities as well as receive proceeds from profits.

Secondly, ownership bears the ability to gain dividends from profits and capital gains from appreciation of the assets. Conversely, it also means you bear liabilities (in the form of your assets being devalued and shareholding able to be surrendered to creditors, or rendered worthless through the market).
Liberty Scott goes on the note that New Zealanders have neither of these rights in relation to SOEs and thus are not owners of the SOEs. I agree with the conclusion but I get to it via a different argument. In particular I don't use the right to be a residual claimant as part of the definition of ownership.

Awhile back Madsen Pirie at the Adam Smith Institute blog had a nice posting on the topic of public ownership being a misnomer. As Pirie puts it
The state sector may have the name of the public filled in on the dotted line, but the public do not own it in any meaningful sense of the word. All of the attributes of ownership, such as control, the right to determine what use is made of it and under what conditions, is determined by the bureaucracy in command of it.
This is an important point, without control you don't have ownership. As Oliver Wendell Holmes Jr. put it,
But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))
Clearly the "public" does not have the rights Holmes refers to. The government (or its bureaucracy) has these rights. Following Grossman and Hart ("The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", 'Journal of Political Economy', 94:691-719) economist's tend to define the owner of an asset as the one who has residual rights of control over the asset; that is whoever can determine what is done with the asset, how it is used, by whom it is used, when they can use it etc - note that ownership is not defined in terms of income rights. Under "public" ownership it isn't the "public" who has the control rights, its the government. The "public" can not determine what use is made of a "public" asset, rather its use is determined by the politicians and managers in command of it.
Because the public has no choice over whether to pay for state services, or to choose what quality of service is appropriate for them, they have no power over them. In their absence it is the managers and workforce who increasingly direct the services to meet their needs and convenience instead of those of the public.
Just think of the "public" universities in New Zealand, there are no private ones, what control does the "public" have over them? Control rests with either the government or a complex system of academic and non-academic staff, executives, outside trustees and current and past students of the university. The university's "owners", the "public", have the least say of anyone in their running.

In fact as Pirie points out, paradoxically,
The public actually has more influence, via its choices and purchasing decisions, on private sector businesses than it can ever have over state industries and services.
So private is more public.

Why then do we not include the right to be a residual claimant as part of ownership as Liberty Scott does. Well it is not always true that control rights and income rights go together and when they don't the question has to be asked who is the owner? It is not clear in Liberty Scott's definition who the owner would be. In the Grossman/Hart definition it is whoever has the control rights. Note that income rights can be contracted away in a way control rights can not. If for example you are the manager of a firm with a performance based pay package, say you receive a percentage of your firm's profits. Now assume that all the firm's workers are on such deals and the deals take up 100% of the profits of the firm. Who owns the firm? Not the workers, despite the fact that they get all the profits. The owner will be whoever has the control rights, that is, whoever signed the performance contracts with the workers. Note the owners get zero income.

This does raise the question of why do we normally see control and income rights being held together. In short this is because income rights give you the incentive to use assets wisely while control rights give you the ability to do so. Having only one of the rights means assets will not be used efficiently.

1 comment:

ZenTiger said...

Apply that logic to democracy in general. Do we have a say in policy making (steering the country; setting the principles by which our collective assets will be managed - safety standards, legislated compliance, etc)

We don't really own or control political parties as individuals. We can vote for one, but then it seems we have little control over legislation enacted etc, yet the fiction is promoted in all seriousness.

If we are to believe in democracy, we supposedly must believe that state owned assets are also capable of paying dividends indirectly to us.

Best not to dwell on it for too long. The answers reveal too much.