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“Oiliness Hazard”: A Threat to Economies with State-Owned Monopolies

ECONOMY"Oiliness Hazard": A Threat to Economies with State-Owned Monopolies

Despite appearances, monopoly and state ownership is not a beneficial solution for any enterprise, let alone for state bodies and politicians who shape or allow it to be shaped.

In the 70s of the 20th century, a group of Polish economists – including L. Balcerowicz, W. Balicki, J. Beksiak, U. Grzelonska, J. Lipinski, A. Lipowski, S. Nowacki, and K. Porwit – described a phenomenon known in world literature as moral hazard, or the temptation of abuse. This was apparent, for example, in the socialist or so-called planned economy, where large state enterprises could not be effectively regulated due to an informational advantage over the government bodies (known as information asymmetry) and could essentially carry out their wasteful “developmental strategies” with impunity. The description of this phenomenon has earned many awards in the field of economics in the name of Nobel. Unfortunately, no Polish economist managed to win these awards (except Leonid Hurwicz, a law graduate from the University of Warsaw, who however, contributed to the US statistics). It’s a pity because we had an excess of “research material” on the phenomenon of moral hazard in Poland before 1989, well-developed theoretically giving these previously mentioned economists a great chance to win the Nobel prize, though it wasn’t a dreamed-of one.

Looking at the contemporary practices of Polish “public monopolies”, the more and more drastically they are being uncovered and publicized, one might believe that there appears to be an (un)dreamed-of opportunity for Polish economics to describe a phenomenon that could make a big splash in world literature. It seems begging to be named (allusively or not) oiliness hazard or the temptation of sycophancy. This lies in large Polish enterprises – controlled by the state and often holding monopoly or dominant positions in the market – taking actions that do not serve the interests of the company or the economy well but are aimed at currying favor with politicians.

The fact that the actions of state monopolies may be liked by some politicians more and others less is of secondary importance. What’s more important is that the most important politicians do not have to worry about the phenomenon of information asymmetry, as it was with moral hazard, as their satisfaction, or – as economists say – their utility functions, are maximized.

This turns upside down the hitherto searches for the theory of economics and management studies, who for decades have been trying to solve the big dilemma of interest conflict and information asymmetry between the “top” and the “bottom” (known as the principal agent problem). A variety of ways have been figured out within these searches to reduce information asymmetry and several ways to motivate the “bottom” by the “top” so as to get the desired win-win, the best benefits for both sides, as a result also for the entire economy and society.

Consequently, the phenomenon of oiliness hazard – the temptation of sycophancy, has become a big “innovation” for economic theory and management studies. It sheds new light on the dispute about the ownership and dominant positions or monopolies of large enterprises and goes beyond that dispute: it can also concern the operation of the Central Bank, prosecutors, courts, and even prime ministers and the president.

Private enterprises, which gain dominant positions or monopolies on the market, are often regarded as very dangerous to the defensive interests of the country’s emotions, and social structures. In politics, and unfortunately sometimes in theory too, it is believed that if entitled to a double nelson, that is, nationalized and protected from competition, they will effectively implement this long list of the country’s interests.

All signs suggest that in-depth research will reveal a strong impact of the oiliness hazard phenomenon on the long-standing and too high inflation in Poland, destroying long-term savings, on significant delays in the technological and market restructuring of the fuel and energy sector, on the lack of foreign and private investment in this sector (because why risk!?), on high energy prices for households, and even the paralysis of the legal system, and even farmers’ protests against the Green Deal.

Prof. Adam Noga works at the Department of Economics of the Leon Kozminski Academy. He is the author of works such as “Theory of Companies” or “Theory of competition. Economy theory of everything”. He is a member of the Polish Economists’ Society.

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