Monday 6 May 2013

The morality of corporate takings

In the comments on my post containing the open-letter to the Labour Party’s two Davids a couple of weeks ago, John Small and I got into a discussion about the morality of a government policy that would wipe value from a private company (in this case, suggested changes to the electricity market that would reduce the profits of privately owned electricity companies). John wasn’t sure why I raised the issue of morality; this is worth post on its own.

It is inevitable that changes in government policy will result in both winners and losers, just as changes in the non-governmental actions will. One of the starting points I argue in my Honours class in welfare economics is that, in terms of practical policy (as distinct from the conceptual benchmark of a mythical social planner) the world is, always has been, and always will be Pareto efficient, and so a rule that policy changes cannot impose costs on anyone is tantamount to a rule that policy changes can never occur. But I think we can suggest some guidelines for when government-imposed costs are justified. The key issues are whether the policy is imposing costs on individuals or corporate bodies, whether the policy is a direct appropriation of property or one the imposed costs are indirect, and whether the policy is designed to improve efficiency or serve some social objective. Let’s take each in turn.  

  • Is the cost imposed directly on individuals or on corporations? Takings from individuals require a higher threshold of benefit than takings from corporations. I don’t here mean to that corporations are somehow separate from the individuals who own them, or that their owners have lesser rights than other citizens; this is simply recognising the fact that company owners have the opportunity to diversify risk in their shareholdings, and hence to diversify the implications of government policy changes. A policy that forced lower electricity prices might wipe value from electricity companies, but add value to electricity buying companies as well as final consumers. If such a policy were efficiency increasing, there is no reason for it to impose significant costs on any diversified shareholder.
  • Is the policy one that appropriates resources directly or one that changes the value of current assets? A direct takings, such as when the government uses compulsory purchase to acquire land for a highway, is a more serious use of government power than one that imposes costs indirectly through revaluations of assets, simply because a direct takings has the potential to impose far greater costs to an individual if their personal valuation of the asset is greatly in excess of its market value.
Based on these two criteria, I have no problem on morality grounds with, say, the government’s forcing Telecom to give other companies access to its copper wire network, with the anti-trust actions against Microsoft, or with changes to patent law that would stop Apple from suing Samsung. In each case, the question for me would be simply whether such policies would promote long-run efficiency or not. (In the case of these three examples, I suspect the answer would be No, No, and Yes, but that is an empirical question.)  The issue becomes more when the policy is put in place to achieve social objectives.
  • Is the policy one that is designed to improve efficiency or to bring about social redistribution? In my view, the hurdle has to set very high before one can justify a direct or indirect takings to fund redistribution. This is not to say that social redistribution is not warranted, but rather the moral case for redistribution should be grounded in a transparent and honest policy that seeks to share the burden broadly rather than hiding the costs. Financing redistribution through indirect takings smacks too much of offering the other kid’s bat for my taste.
This is the key question in the case of Labour’s proposed electricity reforms. If their proposal were based on a view that market power was keeping price above marginal cost so that reducing price would be efficiency enhancing, then the issue would be the technical one of whether there is market power and whether eliminating that market power through a single payer would cause more problems than it would solve. But the proposed policy is explicitly to set price below marginal cost in order to equate price to average cost. John argued from a utilitarian perspective that the redistributive benefit would likely exceed the efficiency cost. We can debate about how large the efficiency cost would be, and whether, if you had revenue available for redistribution, subsidising electricity prices would be the best way of using it. But if we want to have more redistribution, either with an electricity subsidy or with direct transfers, then we should finance that directly with broad-based tax increases. Let’s not get into the game of arguing for a policy to transfer resources from corporate owners to electricity consumers on the basis of “they must have known that regulation is very very common in this industry” and hence that the costs are ethically inconsequential.


  1. The proposed Labour policy does NOT set the the price below marginal cost.

    As I understand it, the Labour plan would pay the generators the marginal cost of generation (of that generation plant, not that of the whole market), plus a 'fair' rate of return on capital. So hydro power gets paid at the marginal cost of hydro, and thermal at the marginal cost of thermal, rather than hydro getting priced at the marginal cost of the most expensive generation (usually thermal) as present.

  2. What about the the morality of a government policy that wipes value from a private company if that company was a slave owner? Should the owner be compensated for a change in law that make slavery illegal?

    John Stuart Mill, of all people, said yes. Mill wrote this on the topic in his text "Principles of Political Economy":

    Iniquitous as ... [“property in human beings”] is, yet when the state has expressly legalized it, and human beings, for generations, have been bought, sold, and inherited under sanction of law, it is another wrong, in abolishing the property, not to make full compensation.

    If slave owners are to be compensated then all other cases look easy.

  3. Peter, you are describing what the Labour plan would pay generators (but not quite). But look at the implication for consumers. The single-buyer agency cannot charge consumers different prices depending on where there power was generated, since electrons on the national grid don't know where their energy came from. And Labour have been quite clear that their plan is to pass on savings to consumers from not having hydro stations making profits based on their low operating costs. So it must be the case that they are proposing that consumers pay a price less than the marginal cost of the last unit produced. And also note that even within a hydro or thermal plant, there are increasing marginal costs to production and hence "super profits" as defined by the Labour document even if each station is paid its marginal cost. They are proposing eliminating super profits, so defined, and so they must be proposing average cost pricing.

  4. Just noticed this post Seamus and I think this last comment is too strong. Did you look at the Greens policy? It envisages a form of progressive pricing whereby marginal usage would face the marginal cost. Think of it as a lump-sum transfer of x units of power at a cheap price.

  5. Yes, I saw this. Which is why my comment referred specifically to the "Labour Plan". To my mind, the Green plan is potentially a whole lot better than Labour's because I regard sub-MC pricing as the worst aspect of Labour's proposal. But it leaves me with two concerns:
    1. If they are truly proposing MC pricing, then the lower price is not a price, just a lump-sum transfer of income. Wouldn't it be easier to do that directly?
    2. Nothing that I have seen in the discussion about "what is wrong in the electricity market" gives me any confidence that they would truly set marginal price equal to marginal cost, taking into account the opportunity cost of water and the capital cost of peaking plant amortised over peak periods only.