roles of government – the _

The state — or in common parlance, the government — is the guardian of public resource. These resources are ones that we own collectively, like petroleum, or of interest in the past few weeks in Malaysia, telecommunication spectrum. It is the responsibility of the government to manage and use the resources efficiently. If it cannot, then there is a case to privatize those resources to those who can.

In privatizing these resources, one would expect the government to raise some money it can use to improve the general welfare of the public. One of the best ways to raise money from such privatization is by auctioning the public resource.

Economists typically love auctions because it is efficient. In everyday English, it means an auction can extract the most benefit out of a transaction for the seller. In an auction that focuses purely on maximizing sale prices, the government will benefit enormously from the outcomes of the auctions.

In the Netherlands recently, the government raised nearly EUR4 billion by auctioning the 4G spectrum to the private sector. Initially, the government had expected to raise half a billion euro only. The large difference came as a pleasant surprise to the government. In time when the Dutch government is tightening their belt as a reaction to the economic crisis that Europe as a whole is facing, the EUR4 billion will help in maintaining the quality of public service in the Netherlands.

If one is concerned whether such privatization and auctioning would create a monopoly, there are types of auction that can address exactly that. Restrictions can be imposed so that nobody can buy everything, or buys too much. While total receipts out of those auctions may suffer, the government will still enjoy considerable revenue out of it that can put to good use.

One example will bring us to the United States in 2008 when the Federal Communications Commission (FCC) conducted a controversial spectrum auction. Restrictions were imposed to prevent telecommunication firms from gaining too much market power. Google, worried that these telecommunication firms would restrict access to various content and applications on the internet, even decided to participate in the auction despite not being a telecommunication firm per se. After all had been said and done, the FCC still raised nearly USD20 billion from that particular auction while addressing the issue of market power.

In contrast in Malaysia, 4G spectrum was transferred from the public domain to private firms for free. There was no sale at all, and much less an auction.

For the public, the privatization is an outright welfare loss. An asset that could have been worth billions of ringgit of public money ended up as being nothing. There is no new revenue for the government and so, the public cannot benefit from the privatization exercise as much as it should. And this comes at a time when the government recognizes that it needs to broaden its taxpayer base, which is narrow at the moment. So, the privatization will not be popular to discerning taxpayers.

Even libertarians, who would typically support privatization exercise, will find this particular Malaysian privatization as very disappointing.

Despite the fact that the privatization came at the expense of potential revenue for the public, some would no doubt defend the flawed privatization. Several defenses have been presented so far.

One argument suggests that with the free award, the recipients would be able to provide cheaper services with the same level of quality than they otherwise could. This is not a given unfortunately and right now, it is a mere speculation.

The reason is that these recipients can effectively form a cartel. This has happened in the past, even with the new Competition Act is in place. In fact, Maxis and Redtone International, two of the 4G spectrum recipients, are already collaborating in rolling out their 4G network. How far this particular collaboration will go is for all of us to see.

Worse, some could even essentially resell the spectrum to other more serious telecommunication companies instead of utilizing the spectrum for themselves. In doing so, they would realize the economic rent that should belong to the public in the first place. If there was an auction or even just a sale instead earlier, there would have been less opportunity for such rent-seeking activities. An auction especially would have squeezed the incentive for rent-seeking out into public pocket and force firms to try to create new wealth rather than engage in unproductive rent-seeking.

Unfortunately, now that everything is done, we are left with the possibility of collusion in the market and a whole lot of room for rent-seeking activities by private firms at the expense of the public. This is not an ideal market scenario.

Mohd Hafiz Noor Shams. Some rights reserved

First published in The Sun on December 25 2012.

Friend Ho Yi Jian^[1] currently at the National University of Singapore asks several questions pertaining libertarianism. One question asks what many have asked: how small is a small government? The second question is about wealth inequality. Third, is there a way to overcome speculation associated with the operations of free market?

Let us explore the three questions one at a time.

The hardest question is the first. How small — or big — should a small government be?

There is no objective way of measuring the size of government but there are principles. In no way however these principles are universally adopted throughout the schools of libertarianism.

In the famed Monty Python’s The Life of Brian, Judeans were against Roman rule and there were multiple resistance groups. They however just could not agree with each other. In the classic comedy, the Judean People’s Front and the People’s Front of Judea seemed to hate each other more than the Romans though both groups shared a common goal of ridding Judea of Roman presence. The same is applicable for libertarianism.

Different strains of libertarianism have their own idiosyncrasies which one libertarian may disagree with each other. I therefore cannot provide an answer to represent all libertarianisms. But I can present my version of libertarianism and that is green libertarianism. This is the green-blue alliance that is probably currently seen in form of the Conservative Party in the United Kingdom under the exciting David Cameron.

In this kind of libertarianism, the purpose of the state defines the boundary and hence size of the state. The purpose in my libertarianism — with regards to this particular purpose — is uncontroversial in common libertarian circle because it is the universal truth in libertarianism. The first and foremost purpose of the state is the protection of individual negative liberty. This is further enhanced with rights egalitarianism: all are granted the same negative rights as long as the person respects others’ same rights.

As first formally rationalized by Isaiah Berlin, negative liberty is the freedom from interference. This definitely includes protection from coercion and fraud. This freedom is mostly bounded by the non-aggression axiom.

Sidetracking, the non-aggression axiom does not eliminate force as an option. It merely prevents libertarian from initiating force. If coercion was initiated by the other, then by all means pick up your arms and fight. The state motto of New Hampshire describes it all: live free or die.

I would like to think I am a Friedman libertarian to a certain extent. This is mostly because while preferring for a small government which at the very least defined by protection of individual negative rights and non-aggression axiom, the government has a crucial role in education. A liberal society as in libertarian society requires an educated society and education is the sculpture of society. Without education, individuals would not be empowered to take destiny into their hands and that would bring the downfall of a liberal society. Its importance can never be overemphasized in sustaining a liberal society.

While we are at it, allow me to answer Jed Yoong’s question posed much earlier^[2] and answer Yi Jian’s second question too.

Before we begin, it is crucial to point out of problematic label liberalism as utilized by Jed. It is problematic because of the inconsistency of her usage of the word, which is probably due to her unfamiliarity with US politics. The title of her entry betrays that fact. She carelessly uses liberalism to describe the free market sort by including me and John Lee^[3] as adherents of liberalism in the same line as the US liberals — more accurately the Democrats. This is a misuse of label because in US tradition, the liberals are the social democrats and I am definitely not a social democrat. Admittedly, libertarians in the classical liberalism sense may support the Democrats but that is due to employment of pragmatism and nothing more.

Under the flawed definition, she asked, how egalitarian will your (here, I take it as me. Others can answer that question for themselves; the two other names mentioned were John Lee and Nik Nazmi) NEP-free Malaysia truly be?

A loaded question with flawed assumption is hard to answer. She fails to understand the libertarians are not quite concerned with wealth egalitarianism. Instead, libertarians are firm believers of rights egalitarianism. Libertarians are not supportive of and oppose to any effort at achieving equality of outcome.

This is why libertarians or classical liberals are the great philosophical enemies of communists and socialists.

The question of endowment does disturb me however. Here, my concern is poverty and not wealth inequality.

In my opinion, poverty has greater propensity to create instability than wealth inequality. Proof: supposedly equal communist state always without fail, fail. Less communistic and socialist state and more capitalist countries have proven to outlast communist state, so far. But of course, there is no absolute capitalist state in the world at the moment. What are there are states on a spectrum sitting close to capitalistic end, vis-Ã -vis the other end in a simple two dimensional spectrum.

Take note of my concern for poverty. I hold that poverty is the problem, not wealth inequality. I also hold that a lot of people accidentally mixed the two concepts together without realizing it because the two concepts are similar on the surface. Below the skin, the difference cannot be missed.

It is that endowment question, or if your will, the question of poverty, that led me to rationalize the need for government’s active role in education. It is education that is capable of breaking the cycle of poverty, the great machine which provides equality of opportunities. Education may also create a more wealth egalitarian society, but only as a side effect, not as an expressed goal.

But if — and that is a damn big if — affirmative action is a must, I prefer it to be inclusive, not exclusive, need-conscious affirmative action.

Coming back to the first question, one final factor in defining the size of government is market failure. While market is the superior form of social technology in its class — and definitely far more superior than socialism — it does suffer weakness and that is market failure. Many libertarians, especially the minarchists of minarchist somehow choose to ignore this but market failure presents both theoretical and practical problems.

It is important to define market failure, lest others misconstrue losses caused by corrections made by the market for bad decisions made by actors as market failure. Bad decisions made by actors are actors’ failure, not market’s. This is applicable to bubble bursting, from tulips, to dot com, to housing. In those cases, the market is merely turning around and saying, hey, you made a mistake and you have to pay for it.

Market failure here is in the line of tragedy of the commons. The problems associated with pollution and harvesting of public goods in situations where there is consistent and systemic divergence of social and private costs called externality, especially negative externality are market failure. In this, the government has a role to narrow wide gap between social and private cost. This can happen through introduction of Pigovian taxes — of special interest is the informal Pigovian Club founded by economist Greg Mankiw — or issuance of permits.

Finally, the third question: speculation is a problem, what can we do about it? Here, he qualifies speculation as over-speculation.

In answering the question, I would like to begin from the top. Is speculation a problem?

The question, much like Jed’s question of egalitarianism, is loaded. I do not accept that speculation is a problem. What I consider as a problem is incomplete information or more accurately, asymmetric information. It is especially so when it is associated with fraud. Does the government have a role to play in that?

Yes. Refer back to the first purpose of government: protection of individual negative rights.

Mohd Hafiz Noor Shams. Some rights reserved

^[1] — [Labour Politics, Libertarianism and Business Cycles. Thoughtstreak II.V. March 6 2009]

^[2] — [Liberalism In America + Malaysia, 1968 vs 2008 Jed Yoong. January 3 2009]

^[3] — John Lee blogs at Infernal Ramblings of a Thoughtless Mind.