Mises’s diagnosis is that SAA suffers from perverse incentives

The mess that is South African Airways (SAA) is widely known today. What many do not realise is that in 1944, Yale University published a book that laid out the reasons for the mess.

While it is true that Ludwig von Mises’s Bureaucracy does not mention SAA by name, it does dissect the differences between “profit management” and “bureaucratic (or political) management”.

Mises argues that under each system of management, there exist incentives. Managers and/or owners respond to those incentives.

Transfer the bureaucrat to a system of “profit management” and his actions will change. Put a businessman in charge of a bureaucratic system of governance and he will act like all the bureaucrats before him. Change the incentives and you change the response.

It is not that Mises says there is no place for bureaucratic management, but government-owned business is not one of them. Selling police protection to the highest bidder is a problem, but selling airline tickets at a profit is not remotely similar.

Gordon Tullock, in his book The Politics of Bureaucracy, shows bureaucratic systems do not meet consumer needs.

First, the structure is centralised, with superiors having control over their subordinates and, second, most subordinates are selfinterested and unwilling to challenge their superiors.

Profits play no part in this system, so there is no counterforce encouraging individuals to promote new ideas. Thus the same force — self-interest — encourages efficiency under the profit management economy but discourages it under political management. Under profit management, self-interested individuals want to profit and can do so only by meeting the needs of consumers more than by satisfying politicians.

In the delightful antiracism film Zootopia, animals run the world. The lead character, July Hopps, goes to the Zootopia version of the motor vehicle licensing authority, which in the film is run by sloths incapable of doing anything quickly. It is a scene that invokes knowing laughter around the world.

With perhaps one exception. New Zealand privatised the issuing of driving licences to the local Automobile Association.

I spent time there and wanted a local licence. First, I found I could go into the local office on a Sunday — the privately run department was open seven days a week. I walked in and was handed the written test. Once done, the test was immediately graded and after about a twominute wait, I was told I had passed. The same clerk then took my photo and said I would receive the licence in the mail. It was delivered the next afternoon.

I have dealt with bureaucratically managed licensing departments in SA and the US and seen more Zootopian-type service there than what I saw in New Zealand. It is not that the people working in SA or the US are bad. It’s just that the incentives are very different.

Some people make disparaging remarks about SAA that imply the problem is “Africa” or that inept “ANC” types are to blame. But the facts do not support that theory. The non-African British Airways, a state carrier for decades, was inept, badly run, losing money and displaying the same faults as SAA — until it was privatised.

There are other examples: Swissair, Air India, Kenya Airways, Lufthansa. After privatisation, things improve. Not all countries are willing to privatise their state-owned airlines. Ghana refused and in 2005 was forced to close down Ghana Airways due to “staggering debts”, according to the World Bank’s David Lawrence.

SELF-INTEREST ENCOURAGES EFFICIENCY UNDER PROFIT MANAGEMENT BUT DISCOURAGES IT UNDER POLITICAL MANAGEMENT

Putting off the privatisation of SAA is now threatening the entire nation. As University of Cape Town finance lecturer Misheck Mutize warns in a recent article: “The increasing inefficiency in state-owned enterprises continues to put pressure on the country’s fiscus. This is not something it can afford. Ratings agencies have made it clear that they’re monitoring continuous bailouts and government guarantees. This is because they pose a serious threat to government’s fiscal balances and policy priorities.”

Things are so bad that SAA is not just bankrupt, it is threatening to bankrupt the government as well.

Mutize’s solution: “Some state-owned enterprises will need to be privatised. This is because they operate as monopolies in key sectors, which is perpetuating gross inefficiencies. Only privatisation will end these distortions.”

The country must root out the ingrained predatory state, he says. Only then can investor confidence begin to be restored, recovery restarted and rating downgrades reversed.

Or, as Mises might have put it, it is time to change the incentives to ones that encourage managers to do the right thing.