Mixed economy

There are several ways in which the state can be involved in the economic life of the country:

1. For many years in some countries the state has intervened to provide certain commodities which cannot be provided by the market forces of supply and demand. It is a fact that there have been private armies, private police and fire services and even courts of law but the undesirability of such services privately owned and controlled is so obvious as not to merit further discussion. Consequently even in the hey-day of laissez-faire such services were provided and administered by the State.

2. The State can be involved in a regulatory capacity or in a legislative manner to cover the deficiencies in the system. In Britain the medieval Assizes of Bread and Ale were rudimentary beginnings in the field of quality control as were the standards established in the woolen industry. The Elizabethan Poor Laws were the real beginnings of the state intervening in the provision of services for those not able to provide adequately for themselves. In more recent times the state has tried to bring about a more equitable distribution of wealth through the systems of taxation, subsidies and state pensions and allowances. Similarly it has by legislation attempted to curb the excess of monopoly power.

3. Through the measures outlined in (1) and (2) the state helps to produce a mixed economy by providing public services alongside private ownership and by introducing regulations to ensure that scarce resources are used in the best manner without going to the extent of having a central planning authority. However when we use the term we are really thinking of countries like present-day Britain or France where in addition to the above intervention there is also some state ownership of the means of production in addition to private enter­prise. It is this aspect which must be examined more carefully.

The Case for State Enterprise

1. The provision of goods and services which could not or would not be provided adequately by private enterprise must be regarded as the prime reason. To a large degree these are services of a social nature, the provision of medical services is a case in point. There was a time in Britain when such services were provided simply by market forces, i.e. people were prepared to pay for the care of their health just as they were prepared to pay for the education of their children. This preparedness to pay presupposes the ability to pay which is of course the weakness of the argument. In neither of the instances above was everyone in a position to buy the services of the doctor or the schoolmaster, there was therefore unequal opportunity. It has already been said that the health of the work force is one of the items to be considered when reviewing the factor labour, consequently the provision of medical services by the State is not only desirable in that it removes yet another social injustice but it is as essential to the well-being of an industrial nation as is the education of the entire population.

2. One of the arguments advanced against free enterprise was that an industry might not be as efficient as it could be or there might be waste as a result of competition. Thus it is argued that there are aspects of our economic life that are more efficient when the state owns and administers the industry. This is obviously one of the main arguments in favour of nationalisation of industry. The case for state intervention in the form of public ownership can be summarised thus:

a) It gives the State control over monopoly power and profits in those areas where monopoly was inevitable. This applied particularly to the public utilities where because of the stupidity of having competing organisations providing gas, electricity, water, etc., in one locality, monopoly rights were granted by the Slate whether the organisation was a private company or the trading department of a local authority. These industries all call for heavy capital outlay and clearly any wasteful duplication of services should be avoided.

2. It enables the State to play a greater role in regulating the economy if it controls the key industries, e.g. during periods of economic depression.

3. It permits greater rationalisation of the structure of the industry, e.g. gas, electricity and transport.

4. It is essential in the interests of national security, e.g. the Atomic Energy Authority.

5. It may be that improvements in the technology of the industry require capitalisation the scale of which can be met only by the State, e.g. the railways.

6. Certain industries might disappear if the only yardstick by which to judge them was commercial benefit. However the state can and must regard them also from the angle of social benefit, e.g. what would be the multiplier effect on a region if a large employer of labour had to close down? (Note that it would not simply be the employees of that firm who would be unemployed. Reduced level of purchasing power in the region would ultimately work through the system to affect other firms and thus the job-security of other workers.)

3. There are a large number of service industries which are essential to the community as a whole and must be available to all, e.g. waste disposal, sewerage schemes, etc. The only efficient way to provide these is publicly and to pay for them through rates and taxes. Briefly there are services which we can provide collectively, which we could not do individually or even in groups.

The Case Against State Enterprise

1. The motivating force in private enterprise is the possibility of making a profit and it is this which spurs businessmen to greater efficiency. Since nationalised industries are not required to make a net profit for the State but simply enough to cover costs and to provide for future growth, does it not follow that they will be less efficient? It is impossible to arrive at a definite conclusion on this but certain points are worthy of examination. Firstly, if we look at the units of control, does it follow that because large salaries can be paid out of profits to the directors of limited companies that they are efficient or that the nationalised industries would be more efficient if their executives received greater remuneration? It is true that the director with a financial stake in his company is also motivated by self interest (dividend on shares) but could it not be argued that his nationalised industry counter-part could be equally motivated by non-monetary considerations, such as the satisfaction of doing his job well or the enjoyment of the status conferred by a nationally recognised position.

For the production and clerical workers a similar situation prevails. Their profit arises from selling their labour, they are remunerated either on a time or a piece basis supplemented by various forms of productivity bonus. The only difference is that whereas workers in the nationalised industries have no financial stake (except as taxpayers) their opposite numbers may be involved in some profit sharing or participation in ownership scheme.

The two types of organisation must be seen from different angles; whereas it is essential for the private firm to make a profit in order to survive, the survival of the state enterprise has to be judged on how vital it is to the well-being of the community as a whole.

2. The nationalised industry by its very nature must be very large. Even when the administration is divided into Regions and Areas each with its own Board each unit is still big by any standards. To ensure uniformity of service, a great deal of effort has to be diverted into administration, consequently the structure of the nationalised industry tends to be top-heavy and so open to criticism. However this is not a problem peculiar to nationalised industries - any large organisation is prone to the same malady. It is not the principle of public ownership that we should be criticising here but the fact that an organisation can suffer from the diseconomies of large scale just as it can enjoy economies of scale up to a point.

3. State enterprise, certainly in the case of a nationalised industry, confers monopoly powers and therein lie certain dangers. Since it is generally held that monopoly is against the public interest does it follow that this applies only to private monopoly and never to state monopoly? Again the argument is familiar; because of the profit motive the private organisation will pay more attention to the quality of its service to the consumer. However in the light of the many complaints made against such service and the new emphasis given to consumer protection it would seem that such criticism cannot be leveled only against the public sector.

4. Lastly, there is the argument associated with (1) that because of the possibility of making a profit the private entrepreneur is prepared to take risks. He anticipates the market will respond and he will be successful, if he is not it is his fault and his capital will be forfeited, but the State may be inhibited by the fact that it is public money which is being put to risk.

There are obviously degrees of "mix" in a mixed economy which will reflect not only the economic but also the political climate of the country. Some economists would like to see a greater contribution by State enterprise and others less. The ultimate decision is a political one but since all political parties have their economic advisers the reasoning for more or for less participation has an economics basis. The case against has been stated and clearly a lessening of State enterprise could be brought about by selling-off parts of the nationalised industries or by de-nationalising them completely. Although the case for has been similarly outlined it leaves us with the questions - why there should be more State enterprise and what forms it would take?

At present in Britain some 20% of the Gross National Product is within the public sector - the industries concerned are, with the exception of coal and steel, service industries which were nationalised shortly after the Second World War because they were essential to the national economy. It is interesting that since then most of the countries of Western Europe, no matter which way they lean politically, have deemed it necessary to bring their service industries into public ownership.

The Case for Further State Enterprise

Advocates of more state ownership base their case on:

1. At present the public sector undertakes the unprofitable part of the economy which would seem somewhat unfair and the time is now ripe for the State to move into profitable manufacturing also.

2. If the state is to have any real influence over the level of employment, regional development and the balance of payments, i.e. if it is to be really effective in managing the economy, it must have greater control over investment policy.

The method by which it is brought about in the UK is by some organisation on the lines of the National Enterprise Board. This board would hold all the shares in wholly-owned firms such as Rolls-Royce, all the Government shares in such joint ventures as British Petroleum and it would then acquire shares in other firms right across the board. These holdings would ultimately represent a controlling interest in each concern so that it could have a real voice in investment, pricing and employment besides acting as a watch-dog on the public money invested. Its long-term objective would be to make profits for ploughing back and so gradually make the industry more aware of the needs of the community rather than making private profit.