A critical analysis
On the 7th of September Rodney called the submission by Bronwyn Howell on the Telecommunications Amendment Bill as the finest submission he has ever seen presented to a select committee, and said those arguing for the confiscation of property rights need to respond to Howell’s work if they are to have any intellectual credibility.
Well the challenge has been taken up, and TUANZ and InternetNZ commissioned reviews of the submission by two expert economists. Dr John Small, of Covec is the former head of economics at Auckland University and is an expert in competition and regulatory economics. Dr Tommaso Valletti, is a professor of economics at Rome University and Imperial College, London, and until recently teaching at the London School of Economics. He is an expert in the economics of telecommunications and an advisor to Ofcom, the UK telecomms regulator, the OECD, the EU and the World Bank.
One can read the reports of Dr Small and Dr Valletti online. Here are some extracts starting with Dr Small:
Howell is clearly energetic and passionate about the subject. It may be that these admirable qualities are the root cause of the serious weaknesses in the paper. It is otherwise difficult to understand how she came to blatantly misrepresent the work of others, make statements that would not pass muster in a first year economics course, suggest that her own exceptionally weak empirical work is evidence of anything meaningful, and appear ignorant of her logical errors.
Dr Small concludes: “If I was reviewing it for an academic journal, I would recommend it be rejected.”
Dr Valletti summarises his report with:
It is shown that the literature reviewed in the Submission is very selective and far from being accepted within academia. Some of the results quoted are very controversial.
He also makes the point that many of the studies Howell relies on have not been published
in leading academic journals. This means they have not been vetted by the academic community and by referees.
It is important to note that both reviewers are only commenting on the quality of the Howell submission. They are not saying that there are not grounds on which you could criticise or critique the Government’s stocktake research, and are not necessarily advocating in favour of the Govt’s package – that was outside their remit. What they are saying is that the Howell paper is not something great reliance can be placed on,
September 26th, 2006 at 8:59 am
Well, this should come as no surprise. According to Dr. Small, the Howell report makes the following main arguments against nationalisation:
What Sowell is saying, in effect, is that theft is alright if there are economic benefits and everyone else is doing it, but that in this case there aren’t any benefits, and no-one else is doing it.
Why not focus on the real issues – property rights, & the abrogation thereof by Government?
September 26th, 2006 at 8:59 am
Well, this should come as no surprise. According to Dr. Small, the Howell report makes the following main arguments against nationalisation:
What Howell is saying, in effect, is that theft is alright if there are economic benefits and everyone else is doing it, but that in this case there aren’t any benefits, and no-one else is doing it.
Why not focus on the real issues – property rights, & the abrogation thereof by Government?
September 26th, 2006 at 9:13 am
I didn’t realise the principle of property rights could be defeated by showing the submission had holes in it.
Either you believe there is something inherently wrong with taking someones property against their will, or you don’t.
September 26th, 2006 at 9:22 am
Two walled off from reality academics with no apparent personal track record in business risk taking and profit making, and apparently (remarkably) bereft of any knowledge of the principle of private property rights. I’ll take Rod Hide’s judgement any day.
September 26th, 2006 at 9:39 am
Redbaiter – “I’ll take Rod Hide’s judgement any day.”
From Rodney today -”…That’s why governments shouldn’t be in business. The concen should be with the customers, not propping up businesses.”
Consumers have already benefited from the LLU reforms in cheaper prices – what is your problem?
September 26th, 2006 at 9:47 am
Pacman,
Do you not see that the issue here isn’t whether consumers get cheaper prices – it’s whether the Government has the right to nationalise private property?
September 26th, 2006 at 9:49 am
If a private business is refusing to provide a decent service, a service that is vital to the nation’s economic health, then the Government is obliged to do something about it. If not nationalisation then what?
September 26th, 2006 at 9:56 am
sonic
For a supposedly intelligent person you are either being incredibly dense or deliberately obstruse.
Econ 101
let the market ultimately determine the outcome
and before you go there with red herrings, this was the effect of a totally mismanaged creation of a monopoly when Telecom was privatised. However, once the property was vested in the shareholders, Government had no right (even tho it had the power)to remove the value arbitrarily from that property.
Ham fisted, clumsy, socialistic, statist, all of the above? certainly
September 26th, 2006 at 9:58 am
Sonic,
So you don’t think that property rights apply if the Government can make a case that consumers will benefit if those rights are violated?
Nice.
What other rights would you limit in this way?
September 26th, 2006 at 9:59 am
So what you’re saying is that government has the right to create artificial monopolies from previously state-owned assets but no right to do anything about the results of this? They can’t work to resolve problems, only to create them?
That doesn’t strike me as a very useful form of government.
September 26th, 2006 at 10:00 am
I think there is times when these rights can be overturned (after many years of trying to encourage change) if they are abused without it being a slipery slope into the govt coming into my house to take everything I own. It has been done everywhere else in the OECD and many times in the past in western countries for good reasons without the collapse of capitalism (Bell/AT&T in the US for example)
September 26th, 2006 at 10:03 am
Pacman,
So, rights are only to be upheld as long as the Government approves of what you’re doing with them beyond actually violating the rights of others?
Again, what other rights would you abrogate for this reason?
Should the Government be able to nationalise a nationally important factory if it thinks it’s being mismanagaed?
How about censoring newspapers if the Government thinks that their coverage doesn’t serve the national interest?
I’m struggling to understand the principles, if any, underlying your position.
September 26th, 2006 at 10:06 am
DavidW
If you stopped at Economics 101 you would have missed the better stuff such as monopolies or the lack of a perfect market
September 26th, 2006 at 10:08 am
Pacman,
Obviously you finished prematurely too
Have a read of Platonic Competition, by George Reisman, before you start advocating nationalisation on those grounds.
September 26th, 2006 at 10:32 am
That was so long and hard to read so I skimmed with effort… I prefer Krugman.
I am not sure what the exact defense you think it brings? That there is no such thing as a perfect market so the rules don’t apply?
September 26th, 2006 at 10:39 am
“Econ 101
let the market ultimately determine the outcome”
Perhaps you should have studied economics for a little longer, viz natural monopolies, general economic good etc etc etc.
I asked a simple question, what’s the solution if not govt intervention. So far, from the Econ 101 fans, we have had nothing but discredited Friedmanite dogma.
September 26th, 2006 at 10:44 am
Duncan
Lets keep in the ballpark of the argument – what is an example of this nationally important factory – I would imagine that if it was that important then the govt. could replicate the factory (not that I advocate this). Censoring newspapers is a red herring I cannot even conceive how to fit into the thread.
Pretty hard to replicate the phone network which is one of the reasons why it is so different from other markets.
September 26th, 2006 at 11:09 am
Howell’s paper was not to do with property rights – that is a different debate. I suggest people read the paper and the analysis of the paper.
September 26th, 2006 at 11:13 am
Pacman,
I am attempting to get at the underlying principles here – it doesn’t really matter whether we’re talking about phone lines, a factory, or a newspaper.
My question is: does the Government have the right to abgrogate the rights of others, simply because it deems that course of action to be in the public interest?
I argue that it doesn’t – as far as I can tell though you are arguing that it does, & I was hoping for clarification & perhaps justification of that position too.
September 26th, 2006 at 11:16 am
David,
I am well aware that Howell’s paper isn’t about property rights – hence my criticism of it. She is attempting to mount a pragmatic, economics-based defense against a violation of rights.
Perigo once criticised the Business Round Table, saying that they’d have opposed the gassing of the Jews because of the cost of the gas.
Howell’s paper is in the same category; fighting for a good cause, with little understanding of the real issues, & in consequence providing little in the way of strong argument.
September 26th, 2006 at 11:27 am
“does the Government have the right to abgrogate the rights of others, simply because it deems that course of action to be in the public interest”
All governments do so all of the time. Not sure what your point is.
You have the right to free speech, however if that is hate speech and therefore contrary to the public interest you lose the right.
You have the right to free assembly, but not if this is sure to cause a riot.
I could go on, but you get the idea.
September 26th, 2006 at 11:27 am
Err.., it is not that governments can’t or shouldn’t intervene at any time, but that they should do so within the framework of laws and rights in a country. I am sure you would be upset if a government decided to nationalise your personal property without compensation.
It may well be (and I would agree) that the original privatisation was badly thought through, a common problem with government action, but having distributed a property right I suggest governments should not arbitarily deprive a person or entity of the same. There is a framework to change the management of the resource, negotiate with the owner(s). The option to compulsorily require the separation of, for example, Telecom’s line business and the retail selling of services is another reasonable mechanism and one that would open up the area to competition. Where there are existing laws against monopolies, these too are valid channels to use.
In this case, a combination of these factors has been cited. The process would be, in my opinion, on a firmer basis if Telecom had been subjected to a prosecution under such monopolies legislation as exists, as for example Microsoft was in the USA. There are certainly grounds for potentially taking action, Telecom’s behaviour (in my experience) in many areas is rife with monopoly rent seeking actions.
September 26th, 2006 at 11:31 am
Sonic,
I have never argued that one ought to be able to exercise one’s rights to violate those of another – the old saying “my freedom to extend my fist stops at your nose” pretty much sums that up.
What I am talking about is the Government abrogating rights because they think that the country would be better served by doing so, regardless of whether the individuals effected are actually violating the rights of others.
September 26th, 2006 at 11:34 am
Ed,
Again, get down to the principle of the matter.
It isn’t really relevant to this discussion whether the Government acted with the letter of the law in their dealings with Telecom. What is relevant is whether their actions, whether legally sanctioned or not, were moral.
September 26th, 2006 at 11:45 am
Sonic,
See Hate Speech Is Free Speech for a thorough treatment of hate speech – “… we must recognize that the attempt to criminalize hate is not only immoral, it is also impractical. For freedom will always include hate; progress thrives in a crucible of intellectual pluralism; and democracy is not for shrinking violets.”
September 26th, 2006 at 12:55 pm
“Err.., it is not that governments can’t or shouldn’t intervene at any time, but that they should do so within the framework of laws and rights in a country. I am sure you would be upset if a government decided to nationalise your personal property without compensation.”
I’d be rather surprised if they did. I’d wager that a more common day-to-day occurance in terms of the loss of private property is having it consumed in liquidations of limited liability companies, a circumstance where your normal market exchanges of value become rather moot – if you don’t get your dosh back from the liquidators you’re fucked, and any goods or services you delivered to said company have effectively been seized without payment.
It’s quite possible as a director of a company to run up enormous debts in your day-to-day transactions with other people, come out of it with a big pile of assets and a bigger pile of debts and then get the company liquidated. Some of the dodgy buggers even set other companies they control up as secured creditors and transfer all the valuable assets out, leaving the shell of the company and the debts remaining for the real creditors.
The individuals who owned these assets then get back little to nothing of the fair and free exchange they had agreed to.
This happens every day, and I’m sure has historically resulted in a considerably larger loss to individuals and businesses than this rather unique Telecom decision has done.
How many of you would be willing to argue that limited liability companies are an attack on a free and fair marketplace? They certainly have their role and they help promote risk-taking which in turn assists economic growth in New Zealand. But they certainly do regularly result in individuals effectively having their property or works taken away from them without payment, or any ability to pursue said payment in future. It strikes me as a rather similar situation – we sacrafice some of our rights to control our property in return for having a more prosperous and successful country and economy.
September 26th, 2006 at 12:55 pm
Sonic is the type of uncivilized leftist thug who will never understand such concepts as private property rights, free speech and individual freedom and responsibility. Such concepts are just too far outside their mental frame of reference. Whenever assaults on these basic tenets of a civilized society occur, the ones wearing the jack boots and carrying the bayonets are recruited from the ranks of those who think like Sonic.
September 26th, 2006 at 12:57 pm
RB, I think Mrs Jones in Reception is having trouble logging into her email.
Better get up there quick, chop chop!
September 26th, 2006 at 1:01 pm
Thanks for the link Duncan. I can agree with most fo it however there are still some examples which can be defined as hate speech.
One that an old lecturer of mine used to use was SCUM (society for cutting up men) which existed in the 70’s or an hypothetical Pro-rape movement.
September 26th, 2006 at 1:52 pm
If nationalisation of one company’s property to benefit society is beneficial why not just nationalise all the large ones?
E.G
(1) Get a list of the top n New Zealand companies required to make up a total value of ~ 50 billion dollars.
(2) Dissolve the current ownership and turn those companies into SOEs. Appoint skilled public sector managers to competantly manage the new SOEs (they do exist).
(2) Take that capital in the form of shares, and redistribute it to each person in NZ over the age of 18 (or another age). 20 billion / 3 million people =~ $17,000 each.
Outcome:
(a) The capital is still managed well (by the competant public sector managers) and hence the performance of those companies is at or around what it is with private ownership.
(b) You only really hurt a few of the richest people in and outside of the country. Who cares? Besides, it’s not really “hurting” them anyway because they’ve all got so much money.
(b) We all get $17,000 each. Hell yeah.
How is $17,000 each not beneficial for society?
The financial benefits of LLU are ridiculously small in comparison. That’s why I’m against LLU – not because it doesn’t make sense, but because we could do so much better!
September 26th, 2006 at 1:54 pm
Err,
There is a fundamental difference between nationalisation of property, and loss of property through the failure of a LLC.
Interaction with an LLC (and especially investment in an LLC) is voluntary.
September 26th, 2006 at 2:00 pm
Duncan, buying a monopoly from a government is also voluntary.
September 26th, 2006 at 2:44 pm
Err,
Yes. And once they bought it, it became their property. Nationalisation, however, is involuntary – it was forced upon Telecom by the Government.
September 26th, 2006 at 4:01 pm
Now we’re going in circles again.
In both circumstances you have a voluntary choice whether or not to do business in that particular area of the market – whether by trading with a particular LLC in the role of a creditor or by trading as a monopoly telecommunications provider. Some LLCs fall over with very little warning to their creditors. Telecommunications regulation is an existing fact of the market and has been for decades.
Both situations are a gamble. When you extend credit to an LLC you risk losing your property should that LLC go into receivership. When you play chicken with government regulation over a dominant position in the marketplace you similarly take a significant risk should you turn out to have miscalculated.
Property rights are not, as you seem to be suggesting, legally inviolable in other circumstances – the everyday process of LLC liquidation quite specifically strips people of their rights to particular property, and has been used considerably more maliciously in the past than the regulation there is so much squealing about here today.
Now, as it stands, Telecom has *not* had its property nationalised in any way. The local loop remains the property of Telecom, but regulation is being imposed that controls the access other companies have to that property. Telecom will still be receiving fair compensation for this access, but they’ve just put themselves in a position where they no longer get to choose what that compensation is.
As for the damage to their share price, Telecom gambled by operating on the assumption that they could continue rorting New Zealand and clearly owning shares in the company conducting this rort is a favourable position to be in. Once it became clear that competition was going to return to the market naturally some investors took the opportunity to assess the actual competitive ability of Telecom to serve its customers and put their money elsewhere. That’s just the free market for you, the previous inflated price was merely a function of an existing monopoly position, not a demonstration of confidence in Telecom.
September 26th, 2006 at 4:48 pm
Err,
Telecom owned the local loop – the LL was its property.
In buying the LL it was no more choosing to gamble with the possibility of future nationalisation than I, in buying a car, am risking the former owner coming back & siezing the car by force. Sure, it’s a possibility, but one that is a violation of my rights.
Telecom *has* had its property nationalised – in the same fashion that private property is nationalised through legislation like the RMA. Simply put: if you don’t have the right to dispose of your property in the way you see fit, then it isn’t (solely) your property any more.
Finally, losing money due to nationalisation has nothing do to with the free market; it is a consequence of Government interference, specifically, of Government theft. If a storekeeper lost money through shoplifting, would you blame the market for that?
September 26th, 2006 at 5:47 pm
Duncan, as I said, we’re going in circles. I provided you with another circumstance in which your property and the right to set the value you recieve from it can be forcibly removed, but all you’ve done is duck the issue by claiming it’s somehow “different” with a bit of handwaving. Telecom bought into a monopoly position long after the Bell break-up, anybody in the industry should therefore have been aware that regulatory action against monopoly telcos was a real and pressing risk to any business in that field that needed to be carefully and effectively managed.
Telecom tried to game the system. They lost. Now we have you and the Libs rabbiting on about property rights while ignoring the fact that the exact same result occurs on a daily basis in LLC liquidations – individuals and companies lose their right to set the rate at which they dispose of their property. You either need to stand up and say that property rights are inviolable by any act of government or not, but you can’t have it both ways. This is a very reasonable and necessary piece of regulatory action well in line with what has been done overseas in the telecommunications sector.
I think the reason you’re hand-waving over this one is that the LLC is clearly necessary in modern business and that a goodly portion of our business activity would not happen without the protection it affords. You’re therefore standing in line to look like quite the wingnut if you actually take a consistent position on this point.
September 26th, 2006 at 8:03 pm
As I understand it, a limited liability company is a legal entity (equivalent to a person in many respects).
Debts are owed by the LLC, *not* by the owners, so in the case of liquidation only assets owned by the LLC can be used to repay creditors.
Those interacting with an LLC do so voluntarily, knowing that they cannot attempt to recoup any losses from the assets of the owners of the LLC.
I don’t see how this is in any way equivalent to the nationalisation of property? Or have I totally misunderstood your argument?
September 26th, 2006 at 8:41 pm
“Those interacting with an LLC do so voluntarily, knowing that they cannot attempt to recoup any losses from the assets of the owners of the LLC.”
Right, and there’s the rub. You extend credit to an LLC you should do it knowing that you run the risk of losing money should the company be liquidated. You buy a telecoms monopoly at a knock-down price and with the offer of “good faith” in dealings with potential competitors and you take a risk that you are going to be judged a monopolist that is not acting in good faith unless you’re very careful. It’s not like the Bell breakup hadn’t already happened when Telecom was sold off, any buyer should have been well aware of the potential consequences of abusing a vital monopoly – particularly a telecoms one – in the long term.
Essentially what we’re discussing here is risk. Telecom took a clear and visible risk throughout the 90s and 00s with its strategy towards its monopoly position and the spectre of regulation. Even as telecoms monopolies overseas were having their local loops opened up to competitors, Telecom took the gamble that this would not happen to it. This has not been the case everywhere – other telcos have opened up voluntarily, or decided to split their separate functions into separate organisations with no tightly-knit relationsips.
If they were overly concerned about the impact on their asset then they could have sold it at the time, monopoly intact, to somebody willing to take that risk. They didn’t, because they were making a shitload of money by rorting the country.
In both circumstances we’re talking about a sustained, voluntary policy of taking risks – you extend credit to an LLC you do it on the assumption that you’re going to get something that makes the risk worthwhile. Telecom took their risks in a similar manner – they believed that they were going to get away with it, and that they could continue charging prices well in excess of those seen in truly competitive markets.
Essentially what I’m saying here is this:
* There are certain legal circumstances (trading with an LLC is one of them, operating in a monopoly position is another) where you run the potential risk of having your assets taken from you without the ability to choose the level of remuneration.
* In these situations the individuals in question have the ability to choose whether or not they wish to operate in this position. Their investors have the choice as to whether they want to invest in a business with this risk profile – if you invest in a business that has extremely larged debts to a single unstable LLC then you should probably be worried. Likewise if you invest in a telecoms monopoly that is one of the last in the OECD to escape LLU then you should factor this into your investment decision.
* If they get burned by betting on the wrong horse then that’s neither a world-shaking event nor the collapse of civilisation. It’s just one of the many ways in which property rights get toned down slightly to ensure we can enjoy a more favourable marketplace to trade in.
Here’s the thing – property rights start to become somewhat meaningless once you start allowing nebulous concepts to own property, and for those rights to be destroyed in an ad-hoc manner rather than transferred. By treating an LLC like a person in terms of its asset ownership you start to undermine property rights, because you create an environment where property rights can be destroyed without a person dying – it therefore becomes a considerably more everyday and deliberate option. The problem is that the LLC is like a person who can re-incarnate at will – essentially it’s possible to “commit suicide”, shed your negative asset position and walk back into society clean while other people are forced to pick up your debt. If that’s not a violation of your concept of universal property rights then I don’t know what is.
September 27th, 2006 at 7:56 am
Err,
Saying that Telecom should have been prepared for the possibility of nationalisation, knowing it was buying an ex-State monopoly is a little like saying that I should be prepared for the possibility of being mugged when I leave the bank with cash.
Sure, I am aware of & prepare for that possibility – but that doesn’t excuse immoral behaviour on the part of the mugger.
This is an entirely different state of affairs to dealing with an LLC company: the rules are laid out clearly beforehand, and both parties agree to the transaction.
September 27th, 2006 at 12:32 pm
“This is an entirely different state of affairs to dealing with an LLC company: the rules are laid out clearly beforehand, and both parties agree to the transaction.”
Again, I don’t see the point of difference.
Essentially what you’re saying here is “LLCs are different because you should know you’re taking a risk by trading with one”. The fact that monopolies attract regulation is hardly an arcane or mysterious fact to anybody in business, Duncan, and anybody in the telecoms business doubly so. Again, we’re going in circles. There are two possible positions here:
* Loss of assets on terms you didn’t agree is acceptable if you took a calculated and easily forseen risk by trading in a certain area of the market which attracts that particular risk.
* Loss of assets on terms you didn’t agree to is not acceptable in any circumstance.
We’re either in agreement on the first position or you’re going to have to shift your position on LLCs.
September 27th, 2006 at 12:40 pm
Err,
“Loss of assets on terms you didn’t agree” is theft. Theft is immoral. Telecom lost assets on terms to which it did *not* agree when the Government nationalised the LL. The Government *stole* the LL from Telecom.
We are most certainly *not* in agreement on point one.
September 27th, 2006 at 1:37 pm
“Loss of assets on terms you didn’t agree is theft. Theft is immoral.”
Bingo. So therefore the ability that directors have to liquidate a company (resulting in the loss of assets to creditors on terms they didn’t specifically agree to) is theft and therefore immoral in your book.
Neither that situation or the Telecom situation sees the injured party actually sitting down and signing or agreeing verbally to any such terms. They just happen to be a reality of the market if you get into a particular situation. If you don’t rely too heavily on that situation not occuring for your income it probably won’t hurt you much, if at all. If you do then that’s essentially poor risk-management on your own part, considering such risks are clearly there if you care to look.
Either way, you’ve essentially stood up and said that both anti-trust laws and and limited liability companies are amoral in their current form and should be got rid of in the search for Marketopia. I think that leaves our positions sufficiently distinct and people can choose between them as they see fit.
September 27th, 2006 at 6:22 pm
I hate to break up the Duncan/err lovefest here, but…
“Loss of assets on terms you didn’t agree” is theft.
…just isn’t true. Duncan tries to argue from a first principle that in reality isn’t a first principle at all. Property regimes are a social relation that reflect the culture of the society in question, the historical contingencies that led to particular regulatory outcomes, and the political interests of the present population.
September 29th, 2006 at 8:23 am
Err,
Even if you assume that it’s moral to pass anti-trust legislation (which it isn’t), the LL nationalisation took place after the privatisation. You can’t argue that is equivalent to LLC legislation, which is in place at the time the transactions take place between the LLC and the creditors.
MCMC,
“A ‘right’ is a moral principle defining and sanctioning a man’s freedom of action in a social context” according to Rand – and the only way your argument is valid is if you concede that morality is subjective, & determined by social convention.