August 08, 2004
The City Water Company - Why?

During this whole discussion I have been making an assumption. I have been presuming that ability of a competitive market economy (Classical Liberalism) to provide goods and services is superior to the ability of a centrally planned, government run economy (Classical Socialism).

It sounds so obvious and reasonable that if people would only think for a bit they could plan out where to put the stores (and jobs) so as to prevent all the waste and economic dislocation that occurs without planning.

What is wrong with that (very reasonable sounding) Classical Sociallist theory?

The City Water Company - II

“I can’t have 7 different pipes coming into my house. The only sensible way to get water is to have a government monopoly.” Well, you can disprove that “only government monopoly” statement by providing a counter example. Me. In my city the water company isn’t a government monopoly. It is company publicly traded on the New York Stock Exchange.

There are areas of economic activity where “natural monopolies” exist. I.e. there are areas where one supplier or one consumer tends to take over more and more of that particular economic activity until it is the only player left.

In general these are areas where there is either a high barrier to entry (it is really expensive to get into the business) or where each consumer choosing that provider makes the provider more attractive to the next consumer (i.e. it tends to snowball because everyone wants to have uniformity). The thing about all those different pipes coming into the house is an example of high barrier to entry. Computer operating systems may be an example of consumers wanting to have uniformity so they can all share files and programs (at least 95% of people keep voting with their dollars to all have Windows).

But the fact that an industry promotes Natural Monopolies doesn’t mean it promotes a Government monopoly.

What is the difference? Either is a monopoly isn’t it? A city 20 miles north of me has a cable TV company with a monopoly to provide cable service within the city. They got a five year contract, and laid all those cables. But they did a lousy job (poor servicing of the cables, didn’t provide the programming variety they had promised). So the city fired them!. Now a different company has the next five year contract (and has the Fear of God in them because they know the last provider sank money into this city and then was shown to the door).

A non-government monopoly can a) be fired and b) go bankrupt. Those are two highly desirable qualities in any company I deal with. I don’t have to fire them and they don’t have to actually go bankrupt. But the knowledge that either can happen encourages them to behave. Can you imagine what would have happened in that city with the lousy cable TV servicing and the minimal programming if that had been the city run cable company?

The City Water Company - I

Someone said in an email discussion “In general I agree in free market economics, but there are places where it just doesn’t make sense. The City Water Company, for example. I can’t have 7 different pipes coming into my house. I can’t choose every day, based on price and quality, whose water I will by. The only sensible way to get water is to have a government monopoly (The City Water Company) provide it.

This view neatly slides several concepts together in sort of an intellectual bait-and-switch, leading one to a very different conclusion than the one I reach. I am going to break this down into three short discussions.

I - The government does, indeed have an important role in economic activity, but that role is properly regulatory not participatory. Take the grocery business. The government has a role insuring the food in the store meets health and safety standards. It has a role inspecting the scales to insure the weights and measures are accurate. It has a role defining what a “Grade A Egg” and a “Grade AA Egg”. Those standards should be known to all and the government should inspect to make sure the standards are being followed. That is a regulatory role.

The government is not supposed to be running its own Government Grocery Stores (stores where the building, the employee wages and the cost of wholesale food come from government funds and where government employees decide whether Lamb or Beef will be for sale this week).

Big difference. “But wait,” you say. The divide between regulating a company and running a company is not that clear.”

(Lady Thatcher noticed that too, you’re in good company).

If the government sets the conditions for opening and closing factories, the hours and wages of employees, the cost that can be charged for finished goods and the amount and quality of various products produced, that isn’t “Private Industry” even if private individuals own shares of the company. That is a hybrid, but a lot closer to centrally planned industry (Classical Socialism).

There has to be some commons sense in here (there usually has to be some common sense in life). The government needs to regulate, but needs to regulate “only as much as is necessary to prevent harm to the public” (and yes, that requires common sense to interpret too). The government can forbid a store from selling peaches that have toxic residue on them (that would hurt people and they have no real way to tell if the toxic residue is there or not). The government should not direct a store to sell peaches this week (rather than apples) in order to help the Peach Farmers. The government has no obligation (nor interest) in keeping the Peach Farmers (nor this grocery store) from going out of business.

It is like a lot of other freedoms. I should be free to do things in my own yard that I want (sit and read or play touch football) but I shouldn’t be free to start an enormous bonfire because that endangers other people. Government regulation in economic activity is similar. “You can sell peaches or not, but you can’t sell poisoned peaches.”