Nationalisation

Most of the UK’s major strategic heavy industries and public utilities were nationalised between 1946 and the early 1950s, only to be returned to the private sector between 1979 and 1990.

Examples of nationalisation

1946 – The Bank of England was the first organisation to be nationalised by the new Labour government of Clement Atlee.

1947 – The Coal industry was nationalised in 1947 when over 800 coalmines were taken under public ownership and a National Coal Board (NCB) was established to manage the industry on commercial lines. The NCB became the British Coal Corporation in 1987, and this was wound up in 1997 as the industry was privatised. (Source: National Archives).

1948 – Railways were nationalised to help rebuild the network infrastructure and re-equip the rolling stock after the destructive effects of the Second World War.

1949 – Steel was first nationalised in 1949, and privatised a year later by the new Conservative government. It was re-nationalised in 1967 when over 90 of steel capacity was put under the control of the British Steel Corporation (BSC). Steel was returned to the private sector once more in 1988.

2008/9 – A number of key UK banks became subject to full or part-nationalisation from early 2008 as a response to the financial crisis and banking collapse. The first bank to become nationalised was the Northern Rock in February 2008, and by March 2009 the UK Treasury had taken a 65% stake in the Lloyds Banking Group and a 68% stake in the Royal Bank of Scotland (RBS).

The advantages of nationalisation

The main motive for nationalisation during the post-war period was to ensure a co-ordinated approach to production and supply to ensure economic survival and efficiency in the face of war, and post-war reconstruction. For example, the advantage of a nationalised rail network, as with other natural monopolies, was that central planning could help create a more organised and co-ordinated service. This argument was applied widely to the so-called commanding heights of the economy.
It can also be argued that much infrastructure provides a considerable external benefit to individuals and firms. For example, a nationally and centrally funded and efficient rail network helps keep road traffic down and hence reduces pollution and congestion. It may also help reduce business costs, which may be passed on to other businesses.
Another advantage of national ownership is that economies of large scale can be gained that would not be available to smaller, privately owned enterprises. For example, a nationalised rail service could purchase materials, rail track, and rolling stock on a large scale, thereby reducing average costs and supplying more efficiently than smaller operators.
In more recent times, the failure of major banks has highlighted the fact that, under national ownership and control, failing banks can be funded more quickly and for larger amounts than under private ownership. This enables the banking infrastructure to be rebuilt, as well as ensure the closer regulation of banks in the future.

The disadvantages

By the late 1970s it became increasingly apparent that many of the industries nationalised between 1945 and 1951 were running into difficulties. The major problems that the industries faced were:

They were being managed ineffectively and inefficiently. The principal-agent problem is highly relevant to public sector activities given that the managers of the utilities were generally not required to meet any efficiency objectives set by the state. There was growing criticism that, because these industries were protected from competition, they had become increasingly ‘X’ inefficient.
Nationalised industries were also prone to suffer from moral hazard, which occurs whenever individuals or organisations are insured against the negative consequences of their own inefficient behaviour. For example, if a particular nationalised industry made operating losses, the government would simply cover those loses with subsidies. Knowing that the taxpayer would come to the rescue meant that the inefficient behaviour could continue. This is, perhaps, the most significant criticism of the recent ‘bail out’ of failing banks. Given that they know the taxpayer will bail them out this may be an encouragement to continue with their inefficient and highly risky lending activities.
In addition, the nationalised industries had limited scope to raise capital for long term investment and modernisation because they would have to compete with other government spending departments, like education, health and defence. The result was a prolonged period of under-investment in these industries.

By the late 1970s, and throughout the 1980s, most UK’s major State owned industries were sold off to the private sector through privatisation. The intention was that, back in the free market, these industries would become more efficient and would be able to modernise by having greater access to the capital markets, and by employing more modern and dynamic management. Privatisation also generated huge revenues for the UK Treasury as well as allowing tax cuts and creating an environment where other supply-side reforms could be implemented.

Following the banking collapse of 2009, nationalisation was put firmly back on the agenda, if only in terms of the financial system.

See: Banking regulation