I’m a free market sort of guy. But I don’t mind a bit of nationalisation and I’m not in favour of privatisation. The reason is simple. It doesn’t really matter.
What matters is competition. And not in the sense of that boring concept an economist uses. What I mean is whether people are allowed to compete with the government and whether they can opt out of the government’s services.
Think of it as “potential competition” instead of actual competition.
Here’s the distinction explained.
While a business, nationalised or not, is doing a good job, potential competition may or may not become actual competition. It’s the possibility – the threat – that matters. Not the amount of actual competition.
But if the government bans competition, the business can continue to be as inefficient as it likes. That’s when you get problems. Whether it’s nationalised or not isn’t really relevant. Who cares if you can just choose the non-nationalised alternative? The better one gets customers.
Whether there are actually firms competing isn’t important either. A group of them can be inefficient too. If they’re protected from potential competition – new firms entering with different models and ways of doing things – that’s what matters.
Licensing laws do this, for example. Lemonade sellers are protected from potential competition from children who want to set up lemonade stalls by licences and food standards.
Here’s another way to think about it. Despite being a fan of free markets, I’m a fan of monopolies, as you understand the word. They can be quite efficient. As long as there is the potential for competition to emerge, monopolies needn’t be a problem. In fact, they’re practically proof that the company is doing a good job.
But the word “monopoly” was originally used to describe a government grant. A legal licence to be the only one operating in an industry, or the only group allowed to. This bans potential competition. The Boston Tea Party was about ending such a monopoly – the government grant to trade tea (exclusively) to the US. And we know how that ended…
These days, monopoly means “a lack of active competition”. But that’s just misguided because it ignores the difference between potential competition and actual. If a monopoly is doing a very good job, preventing competition from emerging as a result of doing a good job, then there’s no problem with a monopoly. A cartel that the government creates is a problem, no matter the competition.
If a government grants a monopoly, preventing competition from emerging, then you get the problems associated with monopolies. Inefficiency, high costs and people dressing up as American Indians before throwing their tea into the harbour.
My point is that it’s the threat of something new which matters. And whether that threat is impeded or taken off the table altogether by the government. Under those conditions, there’s not much difference between a nationalised and a private business. Both want to do well, or they’ll decline and competition will rise.
Trains are the textbook example of all this. Economists call them natural monopolies because of the single route between two points. Cure a lot of PhDs and government interference in public transport because of “monopoly theory”.
But trains only seem like monopolies. Other travel methods and other routes keep trains honest. Unless the government stops the alternatives from emerging. That’s what matters, not whether the train system is nationalised or not.
But the train example does show why nationalisation can become an issue. Not because of nationalisation itself, but because governments like to ban competition with their nationalised industries. Again, it’s potential competition that matters, not actual.
To explain this, I need to explain a sequence of events, which makes things too complicated for most voters to think through. But it goes a little something like this…
The government nationalises or monopolises (licenses) an industry. Those nationalised or licensed companies become so inefficient that competition emerges from the private sector. Uber competes with licensed taxis, bottled water competes with dirty tap water, and so on.
Politicians see this competition with their nationalised industry as unfair and harming the nationalised or protected industry. And so they ban the competition. The latter being the key problem, not the nationalisation or licensing itself.
Another case in point is the US healthcare system. You can participate in the heavily controlled healthcare system via mandated insurance and government contracts, which is a complete debacle.
Or you can opt out and run your own healthcare business. The opportunity to opt out is the key, not the nature of the US healthcare system.
Now you’ll hear plenty about the soaring costs of healthcare in the US. But one firm opted out of the government-controlled and insurance-funded system a long time ago. It operates on a simple cash system. Pay to play. No insurance and no government financing.
Here’s what happened according to an interview on Econtalk.org:
In 1997, Steve Lantier and I, both anesthesiologists, walked away. And we walked away from very successful anesthesia practices and opened the Surgery Center of Oklahoma with the idea that we would always tell patients how much their procedure was going to cost, and that we would provide only the best care. That’s really how we started.
Within a week of opening, our dream came true. The phone rang and a patient said she needed a breast mass removed and wanted to know how much it was going to cost. I was so happy to get this phone call, but then I realized I did not know the answer to her question. I asked if she’d mind if I put her hold; and I called the surgeon and I asked him, ‘How much is your fee?’ He had no idea. So, I said, ‘Will you suggest a fee or I’ll have to answer for you.’
By then, many doctors were already tiring of someone else telling them what they were worth and declaring their worth. So, this particular surgeon, he’s a really nice guy, and he said, ‘$500.’ And I thought that was cheap, but I said, “Okay.” And, I knew this procedure, a breast biopsy, was going to take about 20 or 30 minutes. Anesthesiologists basically bill for our time, so I added in what I thought that amount of time mine was worth and what I knew the minimal operating room supplies required would cost.
And then I was about to take her off hold, when I realized that she would want to know–she was going to want to know: Is this cancer? So, I called a pathologist friend and asked him, ‘How much do you want to examine this specimen?’ and, of course, he didn’t know. He thought about it for a little bit, and he wanted $28. So, I added all this up and took her off hold. The whole thing took five minutes. I told her $1900 is our all-in price. She said ‘That’s interesting. The so-called not-for-profit hospital down the street wants $19,000 and that’s just for the facility.’
The price in the non-government and non-insurance part of the healthcare market was a tenth of the government and insurance part.
There are now a lot of practices like the one in Oklahoma. They’ve opted out of the government system because they still can. They’re allowed to. And the results are spectacular compared to the government and insurance based healthcare system.
But here’s the cracker:
To this day, that’s still our price. The prices on our website are the same prices we quoted over the phone in 1997 with a handful of exceptions, all of which are lower than the prices that we quoted in 1997.
As the founder of the practice put it, “So much for the spiraling cost of healthcare.”
A lot of their early clients were from Canada. People who wanted to escape vast waiting periods for free nationalised universal healthcare. People who came from a system where it was hard to opt out, compete or go elsewhere…
But these days, a lot of the Oklahoma clinic’s clients are people who see health insurance as too expensive. That’s the part of the market which Obamacare caused trouble for by punishing competition with the government and healthcare system. It made health insurance compulsory, putting everyone into the system.
Here in the UK, the debate about these things usually descends into a choice about selling the NHS or nationalising Royal Mail. But I don’t think that is what matters. What matters is whether people can opt out and compete. If they can, then we can all gravitate toward the better option.
If the NHS is better, great. Nothing much changes.
But if the NHS is not better, then people will have the chance to go elsewhere. To find what is better.
And they already are according to the Telegraph:
The number of patients paying for operations privately is soaring amid rising waiting lists and deepening rationing across the NHS, new figures show.
Private companies have seen a 53 per cent rise in the “self-pay” market in four years, the data reveals.
Why is obvious:
It comes amid deepening rationing across the NHS. In Sussex, proposals say patients should endure “uncontrolled, intense and persistent” pain for six months before being referred for hip surgery. Doctors say the restrictions proposed by seven clinical commissioning groups (CCGs) are so severe that patients could be left at risk of painkiller addiction. And hernia patients are being forced to prove they are in so much pain they cannot go to work before they are given an operation.
Most CCGs are now refusing to fund the surgery until patients are so debilitated their everyday life is affected, research has found, with just one in four following clinical guidelines. Meanwhile, two-thirds of areas are limiting cataract surgery to those with the worst vision.
And waiting times for cancer treatment are the worst they have been since data began being collected almost a decade ago, with more than one in five patients waiting more than two months for potentially life-saving procedures.
Creating alternatives is great news for patients because it gives them a choice. But everyone sees it in a different light:
The report by market analysts LaingBuisson says patients are increasingly ending up paying for operations they might have expected to receive on the NHS.
The figures show that between 2012 and 2016, spending on the “self-pay” market for acute medical care rose from £454m to £701m – a rise of 53 per cent, including a 13 per cent rise in 2016.
The statistics exclude those paid via health insurance, and any cosmetic treatments.
The report says: “A consistent rise in waiting on the NHS is identified as a leading driver of increased interest in self-pay private healthcare.
“In particular, very high waiting times in many regions are likely to have encouraged more people to pay for care ‘out-of-pocket’.”
“Out of pocket” also means careful decisions. The sort of consumer awareness that holds companies to account, improving services over time.
Of course, all this happens in the postal market. Companies are allowed to compete with Royal Mail. So nationalisation makes no big difference. And then there’s email…
The real message for you today is about technology’s role in all this.
What if the doctor who’s doing your surgery were on the other side of the world? That’s about to become possible, radically shaking up the cost and nature of healthcare. It could also light a fire under this firm’s share price.
The secret to technology’s success is its connection to potential competition. It practically is potential competition.
Governments and nationalised industries simply cannot keep up with tech. Tech is always a step ahead of monopolisation and nationalisation. Uber showed that nicely, before being absorbed into a licensed government-controlled business. The consequences of that are in the news at the moment.
Tech investors are the ones most immune from government attempts to restrict potential competition because the government cannot anticipate that change.
Until next time,
Editor, Southbank Investment Research