The brilliant late economist Ludwig von Mises, using economic theory, explained why a socialist economic system cannot work. If you want to understand the economic theory, read his book, Socialism. (It is freely available online.)
Von Mises showed that the public ownership of factors of production (socialism) will mean that market prices cannot form. If everyone owned a bit of everything, and weren’t able to trade their equity stake in these entities, they would not be valued and therefore would not have a market price. Without market prices, there are no economic signals to help people match supply and demand, nor ways to economise economic activity. Chaos results.
Comparing the companies Telkom (majority state owned) and MTN (majority privately owned) offers great insights to the non-economist, to show how this process works in the real world.
Telkom was listed on the JSE stock exchange in 2003 at a price of R23 per share. Government sold half of the state-owned entity, semi-privatising it. Government still owns 39.8% and the Public Investment Corporation 10.9% of Telkom, making government the largest shareholder of Telkom.
The Telkom share price climbed from R23 in 2003 to a peak of just above R60 in the peak of the business cycle boom in 2007.
“The price is brilliant from an investor point of view. It is as low as it can get,” a telecommunications analyst told Fin24.com at the time of the listing in 2003.
Since then, the Telkom stock price has collapsed nearly 80% and fallen below the IPO level of 2003. This figure is unadjusted for currency debasement or price inflation.
Because the government makes political decisions in its allocation of resources, rather than business decisions that would maximise shareholder and employee wealth, it has over the past decade destroyed the equity value of Telkom. The government is mismanaging the resources of Telkom, and not able to arrange them in such a way to create wealth and grow the value of the business. In fact, the government is destroying wealth.
Contrast this with MTN. The MTN share price is up from levels below R20 in 2003, to R155 today. That is an increase in the equity value of the company of 1,000%. In other words, the management of MTN have created tremendous wealth for shareholders and employees.
While government is making arguments for why Telkom is a ‘key’ and ‘strategic’ national resource, they are at the same time destroying the value of this ‘key’ ‘strategic’ resource.
Already, talk among the ruling elite in the ANC is that Telkom should be delisted. “There are discussions about delisting inside the party,” ANC Treasurer General Mathews Phosa said in an Aug. 3 phone interview to Bloomberg. Phosa declined to comment further other than to say that the discussions were “private.”
So discussions of an enterprise owned by taxpayers, are private. Right.
But I digress.
I have written before about why government hates market prices. Government hates market prices because they reflect reality. Government would prefer if no market prices existed, or if they did, for government to control and set them (think LIBOR ‘scandal’).
The government’s motivation to de-list Telkom is simple. The government hates the fact that the destruction of more taxpayer resources are being reflected in the value of Telkom, through its share price. The government wants to de-list Telkom, because it wants to keep its wealth destroying ways a secret.
Telkom would then be run like the other parastatals Eskom, Transnet, Portnet, SAA, to mention a few, where the taxpayer must cough up equity capital year in and year out so these enterprises can keep going.
The larger the portion of the South African economy that is socialised, the poorer South Africa will become as a nation. In other words, the more resources the government manages through taxation and government spending, the more the equity value of South Africa as a nation will be destroyed.
So, do you want to live in a nation of Telkoms or MTNs?
