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Nationalisation by regulators

01 October 2013 Robert W Vivian, University of the Witwatersrand

This article is a continuation of my earlier article “New Socialism”, FAnews October 2012. In that article I argued that the world is not witnessing the end of socialism, but socialism is evolving into a new form.

Socialism is about handouts. In the old form of socialism the state took responsibility of collecting funds for providing the host of handouts and then itself made the handouts. This bankrupted most countries. The process involved two stages. First bureaucrats collected funds and administered the handout system. Then recipients received the handouts.

That a two-stage process is involved is important because ending the second, the state making the handouts, does not necessarily end the system. The bankrupting did not only come from the handouts themselves, but also from the growth of a government where bureaucrats now earned well above private market salaries. Bureaucrats reinvented themselves with the consequence that neither government size nor expenditure decreased.

Illustration

The e-tolling system can illustrate this point. Citizens have been paying for roads for a long time. Introducing e-tolling will impose hundreds of additional rands per month on individual motorists without reducing existing road payments.

Taken to its logical conclusion, one day the government will levy a "service” charge on all compulsory monopolised state services in addition to all the ever increasing taxes which are collected. The collected taxes will then serve no purpose other than to pay for various layers of bureaucrats who are making no contributions whatsoever.

This has happened before. Monasteries were originally set up to care for the poor. By the time Henry VIII nationalised them, all their efforts were being expended upon themselves with virtually nothing going to the poor.

New socialism

In the new form of socialism, the state does not collect funds for the handouts or make the handouts. The state bears no responsibility for the handouts but simply imposes the cost of these handouts directly onto other customers.

For example, municipalities provide services, but in many cases do not collect the fees for these services. It then writes off billions of rands. This gets repeated over and over again. The write-offs are paid for by those who do pay for services. They pay an additional amount to cover the write-offs. I call this additional amount the Masakhane tax.

This practice is widespread in South Africa. For example, there is the constitutional right to an education, which means that once admitted to a school, a pupil cannot be denied an education. The state does not pay for the pupils whose parents cannot afford to pay the ever increasing school fees. That cost must be borne by the parents who do pay. They pay an additional amount to cover the cost of those who cannot afford to pay; the Masakhane tax.

The modus operandi of this new socialism is clear. The state imposes the handouts but takes no direct responsibility for the cost of the handouts. These are passed onto paying consumers who get less and less for what they are paying for.

In this way individuals are press-ganged into the new socialist order. The other related development is that through institutions like the competition regime, the state is increasingly grabbing handouts for itself. Since it has found a method of giving handouts to others why should it not be the beneficiary of handouts itself.

Nationalisation

A topic closely related to socialism is nationalisation. Historically they go hand in hand. In this article I will point out that the state, or more correctly, state departments and institutions are busy nationalising the private sector through regulators. The private sector is being press-ganged into this new nationalisation. Interestingly, this development touches upon many of the most recent developments in economic theory.

When one thinks of nationalisation, one thinks of a government nationalising companies or industries. Recent examples were the forced nationalisation of many of the UK banks such as the Northern Rock, Royal Bank of Scotland, and the then-newly merged HBOS-Lloyds TSB in 2008, where the UK government acquired ownership of these banks as part of the £500 billion (R7.7 trillion) bank rescue package.

When one thinks of the private sector, most would conceptually think almost exclusively in terms of private ownership. Indeed, this is the central distinguishing feature between Capitalism (a Marxist concept) and Marxism itself. When one thinks of owning private property, one thinks of owning real property, such as a house, a car, a factory, a bank, and so on.

Who owns the property?

However, as far back as 1932 two authors Berle and Means pointed out in a very influential publication that in fact corporations own by far the vast bulk of private property. The authors said that a separation exists between ownership of real private property and the control of that property.

Before 1932 the perception was that private persons somehow owned private property. The vast bulk of real private property is owned by companies and controlled by corporate managers, while the owners, who are typically shareholders, do not control that property.

The very essence of modern society is thus not who owns private property, but who makes the managerial decisions at the private corporations. Managerial control is the very essence of the modern private sector. Regulators are taking over this control.

Nationalisation: by regulation or regulators?

National Treasury justified the latest raft of legislation to the National Assembly Standing Committee on Finance on the basis that draconian and intrusive legislation was needed. Indeed, an examination of the latest proposed legislation clearly shows that it is that: draconian and intrusive.

Clearly, by its very nature intrusive legislation intrudes on the management decisions of corporations. Putting it differently, it is telling corporate managers how to manage the firm.

The more intrusive legislation is, the less say managers have in managing their companies. Thus it becomes clear that nationalisation by regulation is taking place.

Managers of insurance companies can no longer manage. Bureaucrats are making the management decisions. The regulators are through their regulations becoming the true managers. Since the essence of the private company is who manages it, companies have become nationalised by regulation since management discretion has passed over to regulators.

This article is not arguing that nationalisation by regulation is taking place. That happened some time ago. Rather, I argue that nationalisation by regulators is taking place. Regulators are fast becoming the managers of the industry. Regulators are now moving to the position where they simply regulate. To put it more correctly, regulators are simply managing all companies directly.

Outside of rule of law

Let me illustrate this by an example. Recently a spokesman for National Treasury decided that motor premiums must decrease as motor vehicles age. He approached the institute body, which agreed to issue a directive in support of this idea.

Things that should be noted about this incident include: National Treasury is not the regulator; no regulation was quoted or relied upon; the issue has to do with price fixing; the tariff was outlawed in the late 1970s to prevent any industry body having any say over premiums.

Nothing about this decision can be justified through any regulation. Yet an attempt was made to impose a fundamental management decision on the industry outside of any regulation. This is not regulation, but the direct imposition of a fundamental management decision by a regulator.

Nationalisation by a regulator, not regulation, is now taking place. This is nationalisation outside of the law and thus outside of the rule of law.

Taking control

The matters over which regulators now claim managerial control are immense. In a recent debate which took place at the Oxford Union, Daniel Hannan MEP pointed out that the now defunct FSB’s handbook consisted of an enormous 10 500 pages. This was merely the guide of how to comply with the FSB’s regulations. The regulations themselves were over and above that.

TCF is a further example of a micro-managed management system, pretending to be regulation. The private sector managers will have virtually no say over how to manage companies. This has been taken over by regulators. Nationalisation by regulators is fast becoming complete.

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