The following appeared in the Portland Business Journal on November 29, 1999. It is reprinted with permission from the author.

Is this Poland, cir. 1966, or Portland approaching 2000?

November 9, 1999 marks the tenth anniversary of the fall of the Berlin Wall and the first undeniable signal of the impending collapse of the Soviet Empire. Over the past decade nations such as the Czech Republic, Hungary, and Poland made remarkable progress in jettisoning Soviet-style communism and establishing democratically elected governments and competitive markets.

These nations learned a common lesson: centralized control of the economy by government, however well intentioned, results in widespread shortages of goods, poor quality, lack of innovation, and environmental degradation - in sum, an almost complete lack of responsiveness to the wants of consumers and citizens.

Given their experience with central planning, it is unsurprising that emerging market economies like Poland now reject most government ownership of industry and instead embrace widespread private ownership. This trend of less government interference in the economy is not unique to East Central Europe, it is present in countries in Europe and Latin America as well. Policymakers around the world are increasingly convinced that a nation is more likely to become prosperous when government rejects attempts to run businesses and instead confines its efforts to activities like crime prevention and the operation of courts of law.

Given these widespread changes in the relationship of government to business, it is difficult to fathom why the Portland City government is considering ownership of the local power companies, PacificCorp and PGE (see The Oregonian, September 1, 1999).

Utilities such as PGE represent a unique form of enterprise, a so-called "natural" monopoly in which a good or service can be provided more cheaply by one business rather then by several firms. In the past, government regulation of natural monopolies was justified as a means to keep the enterprise from taking advantage of customers who had no other supplier to whom they could turn. However, natural monopolies and extensive government regulation of them, may be a thing of the past. The break-up of AT&T and accompanying deregulation of the telecommunications industry has resulted in extensive competition, price reductions, and increased consumer choice.

The same deregulatory process is now occurring in the energy industry. Greater competition and an increased use of the marketplace in determining the provision of electricity and natural gas services is expected to produce positive benefits for consumers of power.

Not only is the city's proposal counter to national and international trends, if it is implemented it will result in the same sorts of problems that plagued the Soviet Union and other nations in which government ownership of industry was prominent.

These problems have to do with incentives. Private enterprises operate to earn profits. Greater profits are earned when a business is providing the kinds of goods and services that customers want. Economic profits thus serve as a signal and reward. Conversely, economic losses indicate the business is doing something wrong and needs to adapt or cease production. Businesses that are more responsive to their customers are more likely to earn economic profits, and remain in operation, than those who are not.

The absence of the powerful signals of profit and loss diminishes the performance of government-owned enterprises. Because they neither earn nor retain profits, government-owned enterprises have less incentive to provide the best possible service to customers. Why should a government agency improve service, or innovate, or reduce operating costs, when the resulting additional earnings cannot be retained? Moreover, in government there exists a strong disincentive to reduce costs - if an agency does so its budget is cut. And finally, what incentive is there to control costs if a government enterprise can resort to alternative, and coercive, sources of revenues such as taxes?

It is ironic that while economies are increasingly liberalized globally, and consumer choice is expanded, government ownership is embraced locally. Perhaps we should use the anniversary of the destruction of the Berlin Wall to remind ourselves that government ownership of business, and the resultant stifling of consumer choice, is a mistake.