Functional capitalism By Scott Sumner

Singapore Airlines is majority owned by the Singapore government. Alitalia is privately owned. So which country’s airline industry is better described as “capitalist”, Singapore or Italy?

Free market economists like myself tend to be opposed to government ownership. That’s not because there’s anything inherently wrong with government ownership per se, but rather because governments that own companies tend to also do other bad things, like erect barriers to entry or subsidize production. (First class US postal service is an example of both mistakes.)

On the other hand, if a government does not protect its state-owned firm from competition, and does not subsidize the firm, then there’s really no problem with government ownership. You still have a free market. Indeed there may even be cases where public firms can provide a service cheaper than private firms. Some claim that to be true of title insurance in Iowa, which is provided by a state-owned firm. (I don’t know enough to comment.)

The Singapore government does not protect Singapore Airlines from competition, and they do not subsidize the airline. They instruct it to operate like a normal firm, earning a profit and competing with other airlines. It’s technically state-owned but functionally private. In contrast, Alitalia is technically private, but occasionally receives bailouts from the Italian government.

Tyler Cowen recently linked to a Matt Bruenig article entitled:

How Capitalist Is Singapore Really?

Here’s an excerpt:

Then there are the state-owned enterprises, which they euphemistically call Government-linked Companies (GLCs). Through its sovereign wealth fund Temasek, the Singaporean government owns a large share (20% or more) of 20 companies (2012 figure). Together these companies make up 37% of the market capitalization of the Singaporean stock market. The state also owns a large share of 8 real estate investment trust (REIT) companies (2012 figure), which they call GLREITs. The value of the GLREITs make up 54% of the country’s total REIT market. The sovereign wealth fund Temasek doesn’t just own domestic assets. It also is invested broadly throughout the world, especially in other Asian countries. In March of last year, Temasek had a net portfolio value of S$275 billion, which is equal to around 62% of the country’s annual GDP. To put this figure in more familiar terms, Temasek’s total holdings are equivalent to if the US government built a $12.4 trillion wealth fund. Call me old-fashioned, but I don’t generally associate state ownership of the means of production with capitalism.

There are two issues here. One is the nature of Singapore’s state-owned firms, which I’d argue are usually pretty capitalist. The second is the question of sovereign wealth funds. I’d argue that if the alternative is a fiscal regime like we see in America, Europe or Japan, then sovereign wealth funds are the lesser of evils. I’d much rather my government be a high saver that was prepared to meet the fiscal challenges of the 21st century, than one that ran chronic budget deficits and had a Social Security system that was basically a vast unfunded Ponzi scheme.

Singapore is certainly not a libertarian ideal. The citizens are forced to save for their retirement and future health needs. But I see that as a lesser of evils compared to a regime where people are forced to pay taxes for the current needs of older citizens, and are given the (false) impression that these taxes are some sort of pension contribution that the government is setting aside for their future needs.

The article also mentions the fact that the Singapore government owns most of the country’s land. Again, that’s not ideal. But it’s worth noting that the Singapore government has in some ways behaved like a hyper-capitalist landowner. They’ve recently created more new land (proportionately) than any other country in the world. Land in Singapore is very valuable, and like any good profit-maximizer they take advantage of that fact. I don’t see that being done in other areas where land is valuable (like New York and LA.) Correct me if I am wrong, but I’d guess that’s because government regulations prevent new land formation in much of the coastal US. So again, in terms of land production you could argue that Singapore is one of the most functionally capitalist countries in the world. That’s not to say things are perfect, I’d like to see both the US and Singapore governments privatize a large share of their vast landholdings.

The article ends as follows:

Singapore (and Norway, among others) shows that it is quite possible to collectively own the means of production while also using price systems to assist in the allocation of productive factors. This is what market socialists have been saying for a hundred years.

If I’m right that Singapore is functionally capitalist, then this sort of “market socialism” is not likely to lead to any of the other goals that socialists may have in mind. Thus, for instance, Singapore has a rather unequal distribution of income. Companies are run for the benefit of shareholders, not workers. Singapore may not be a libertarian ideal, but it even further from being a socialist ideal.

PS. The red areas show that Singapore has recently expanded by about 25%: