Wednesday, 26 August 2015

Rent extraction

This was the theme of an article by Ben Chu in Monday's Independent. He explains:

Ferrying goods along the Rhine in medieval times was an expensive business. Feudal lords who controlled land along the banks of the river (which was also the main European commercial thoroughfare in the period) had a habit of hanging iron chains across the width of the waterway and extorting a fee from anyone who wanted passage. The nobles grew very rich from their tolling activities, building fancy castles overlooking the Rhine with their ill-gotten proceeds.
This was a classic example of what is now known by economists as “rent extraction”. The operators of these tolls weren’t creating any wealth through their activities. They weren’t facilitating trade by maintaining the waterway, or making it any safer for the merchants. They were merely using their privileged geographical location to extract wealth from others – to shift money around.
Ben Chu relates this business to the nice earners that the financial services industry has carved out for itself, thanks to the power of its lobbying - paid for by money which the banks and consultancies have not themselves created. But it also applies to other services for which the ordinary citizen cannot avoid payment.

Personally, I always had doubts about the Thatcher-Major privatisation of natural monopolies (water, power distribution and railway infrastructure) and was sorry that my party accepted totally the Tory thesis at the time, though to be fair to our spokesman Malcolm Bruce, he did call for tighter regulation and customer protection than was actually put in place.

In Ayes to the Left from which I extracted quotes to illustrate my blog post on the day, Peter Hain proposes schemes for the privatised monopolies which are worthy of consideration, incorporating the discipline of the market and avoiding micro-management by politicians while harnessing the public spirit of their employees. Certainly, anything would be better than Network Rail which is de facto a nationalised corporation again, but is still loaded with debt, like an Enron or CityLink, from its days in the private sector.

No comments: