Why state monopolies are bad (and I'm annoyed)

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While standing in a queue at the railway station recently I pondered a little on the contradiction of monopoly (the useless station operator had just three tills open at the busiest time of the year for buying tickets). Not the game but the control of a given industry, commercial operation of service by a single organisation. Why is it that private monopolies are bad whereas public monopolies are good?

The economics books say that the monopoly firm will always set their quantity at the level where marginal cost is equal to marginal revenue. This allows for “monopoly profits” so long as entry to the market is constrained.

So why should state monopolies – like health or education, for example – be better? Is there some special magic that makes them different? Well let’s be kind and assume that the state monopoly is stopped by a benign government from price gouging. That would be alright wouldn’t it?

Well not really – not only do monopolies (however cuddly) tend to set higher prices but they do not pass on economies of scale. So while our cuddly government might control the price a little, it does not stop the build up of inefficiencies produced by a lack of market pressure.

So where does all the money go, you ask?

When we look at most privatisation of monopoly industries – telecoms, gas, electricity, postal services and so on – one of the key initial gains lay in reducing the size of the workforce. This should not surprise us since the state monopoly is at its heart a producer owned and controlled organisation. The gains from economies of scale and the excess profits implicit in monopoly do not go to shareholders – as would be the case in a private monopoly – but to those who are employed in the industry.

Ah, I hear you say, that’s good then? After all the money that in a private arrangement goes into to pockets of fat cat owners is going to the workers!

Again, not really. Firstly the distribution is uneven – pay for administrative and supervisory employees is far higher than is merited by the skills needed to perform the task (or by comparison with similar private sector jobs) whereas the reverse is true for manual jobs within the state monopoly. This imbalance comes about because administrative functions control the distribution of cash within the monopoly organisation.

Secondly, the organisation becomes overmanned. Not only are new bureaucratic processes and systems developed but senior administrators create a culture where self-administration is a sin. PAs, clerical assistants, clerks and policy advisors proliferate – all on good money, all “contributing”, all there because the monopoly provides the cash to allow such indulgence.

Maybe (just maybe) there is a case for so-called “natural monopolies” to be in public ownership. But there is no economic case at all for health and education to be de facto state monopolies. In fact we get expensive, inefficient, overmanned services run for the benefit of bureaucracy rather than for the consumers of those services.

So I’m right to be irritated by “protecting the NHS” – from what? Efficiency? Competition? Its consumers? Marauding killer zombies? If monopolies are a bad thing – and they are – then the NHS needs breaking up. We can’t go on with the current ineffective and inefficient arrangement - it can be owned by government, charity, social enterprise - whatever - but there must be a properly competitive market.

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