The Problem with Privatization
It's about competition.
Classical liberals commonly favor “privatization” of many government activities. Their case, of course, is that the private sector would provide goods and services at lower cost and of higher quality than government can. Since classical liberals are right about this, why do I think there’s a problem with privatization?
The answer is that the call for privatization does not get at the real reason the private sector works better than the political sector. The great advantage of the private sector is not private ownership per se but that private owners compete with one another. Classical liberals would do better to contrast not the “private” and “public” sectors, but the “competitive” and “monopolistic” sectors. If the goal is efficiency in delivering the goods, private ownership is a necessary but not a sufficient condition. Instead of calling for the “privatization” of government services, classical liberals should be calling for “de-monopolization.”
Private Monopoly
Suppose a local government decides to privatize trash collection. This often means that rather than running the trash collection organization itself, the local government offers the monopoly right to collect trash to the highest bidding private firm. Although the interested firms compete in bidding for the contract, they nonetheless end up with a monopoly privilege in the locality. From the consumer’s perspective, a political-sector monopoly has been replaced with a private-sector one.
Private monopolies might be marginally more efficient than political ones, if only because they have a bottom line and presumably have to do the job well enough to get the contract renewed. Those incentives may be stronger than those that flow from the public’s ability to complain or vote out local officials in the case of government provision. However, notice that the private monopoly ultimately has to please the politicians who dispense the monopoly privilege, not the consumers. How much the public really gains from swapping a government monopoly for a private one is not at all clear.
Imagine instead that the local government simply opened up trash collection to any firm that wished to sell the service to consumers. This “de-monopolization” would lead to actual competition among (potential) providers, forcing trash collectors to serve consumers well, instead of just local politicians who hand out monopoly privileges. Competition drives firms to provide better quality, lower cost goods to consumers rather than political benefits to government agents. Yes, you can’t have competition without private ownership, but private ownership alone is not enough. You need de-monopolization to generate the competition that is at the core of the private sector’s effectiveness.
Several Property
In some of his later writing, F. A. Hayek recognized a similar point when he suggested that it was problematic to talk of “private property” and that we should talk instead of “several property.” The distinction is not merely semantic. His point is that the important thing about “private” property is not that it is private, but that it is divided among “several” owners who then compete to make the best use of it.
The rhetoric of “privatization” may turn people off who might otherwise be more sympathetic to classical-liberal ideas if we were to frame them as opposition to monopoly rather than as support for shifting resources from “public” to private hands. It’s also worth mentioning that the “public” sector is far more “private” than the private sector. Compare how little we know about what “public sector” organizations like the CIA or the Fed do versus how much we know about Apple, Google, or other public corporations, which regularly open their books and provide annual reports to the public. If we believe that the benefits of de-monopolization will go to “the public” as consumers, then let’s drop the talk of “privatization.”
Private ownership is not a goal but a means to an end. What really matters is what best serves the public in its role as consumers. Private ownership only does that if it’s within an institutional context that promotes competition. We classical liberals need to shift our rhetoric from promoting privatization to promoting competition by ending government monopolies wherever possible. That is the path to lower prices, higher quality, and more freedom.
Comment by Sterling on 26 January 2012:
I want to extend this a little. Even when a government calls for bids on the service, the (I will correct) lowest bidder gets the job. However, often the ones bidding and the ones that ultimately get the contract have to be unionized by state law. With such a law in place, the bidders and the ultimate providers of the service, rather than being granted a monopoly in competitive fashion are granted a monopoly in an oligopolistic system. This isnt truly competitive either.
Comment by David Michael Myers on 26 January 2012:
This is a good PR (public relations) point. However, I think one should carry it a slight bit further by using the terms “private competitive” sector and “government monopolistic” sector in order to clarify and drive the point home.
Comment by norman on 26 January 2012:
You say: F. A. Hayek recognized a similar point when he suggested that it was problematic to talk of “private property” in 1945. Obviously in the last 60 years or so, we haven’t made much progress. Government growth is cancerous. If taxes become too burdensome for the next generation, then the problem will self correct. The baby boomers are a dying generation clinging to their government benefits with no hope for change.
Comment by Anthony V. Ardizzone on 26 January 2012:
Interesting article, Prof. Horwitz. It’s good to see that you still take a free market approach to this issue even though the title sounds anything but.
Comment by JT on 26 January 2012:
I like your idea here Steve, it’s amazing how much difference
re-framing a concept into a slightly different perspective (often via semantics) makes! Thanks for adding a nice tool to my box for discussing these issues with my community college students. Much appreciated!
Comment by bionic mosquito on 26 January 2012:
It would be helpful if the author clarified that the issue is government-enforced monopolies.
Only in the second to last sentence is this concept introduced. It seems too late, given the intent of the commentary.
Comment by John on 26 January 2012:
Epic troll!
Comment by David Hillary on 26 January 2012:
Competitition is not just about the ‘who’ but also the ‘what’ and the ‘how’. Most people consider the concept of competition in the narrow sense of price competition between multiple sellers of a given product. However the more important aspect of competition is between business models, technologies, products and institutions — freedom in these dimensions drive the whole market structure to efficient forms. All too often governments regulate to create visible price and market share competition in an artificial and inefficient market structure contrived by government regulators. (For example, telephone number portability regulations and retail electricity supply competitition regulations that involve ‘regulated’ monopolies in some elements of the service who are provided to provide regulated access to competitors). Here in New Zealand we have the absurdity of having a dominant dairy farmer owned milk processor with a 90% market share that is required to supply raw milk at regulated prices to its competitors. Is it really that hard to sign up some farmers and send a tanker to collect milk to process?
Comment by Heath Nestor on 26 January 2012:
I have long recognized the point of this article. I rarely encounter anyone else who makes the point that competition is the only thing that makes privatization work.
I am not enthusiastic about privatization of roads. It will help some. It can’t provide vigorous competition. In many cases we aren’t going to have multiple roads to choose from. Those we do get are usually going to have government protection. I fear that mass “privatization” of roads would work out so poorly that it would give privatization a bad name.
Incidentally, where I live we have private, competing trash haulers. The adjoining county requires all haulers to pay to dump trash at the county incinerator. One hauler was prosecuted for “smuggling” a load of trash out of the county.
Comment by Mark on 26 January 2012:
David Michael Myers, I like your branding ideas.
bionic mosquito, the author talks about government monopoly in the 2nd paragraph.
I’m a pretty strong advocate of replacing government monopolies with competition, but one industry that shouldn’t be privatized is prison management. Prisons are controversial. Some may consider it cruel/ unusual to violate a person’s liberty, but in this case many of us agree that is one of the more humane measures we can take for those who have been convicted of violating others’ rights.
I have no problem with prisons being built by competing contractors, but the personnel overseeing the prisoners, and therefore becoming likely to testify in parole hearings, shouldn’t be motivated by profit. If they’re getting paid by the government per prisoner, then they’ll want to have as many prisoners as possible. So they might paint a bad picture to the parole board to keep a prisoner inside longer. Or they take their profits to lobby politicians to keep more laws on the books. Non-violent drug “offenders” are a cash cow for prison corporations because these types of prisoners don’t really belong there. They’re easier to oversee than sociopaths who kill, rape, & rob.
There shouldn’t be a profit motive surrounding an individual’s liberty.
Comment by Robert on 26 January 2012:
These are some excellent points. I think this is some very good thinking and excellent deconstruction that will truly help to clarify the issue of privatization v. govt. services..
The author is right on point re: monopolies..
THANK YOU STEVE
Comment by Joe Esty on 26 January 2012:
Hayek’s “several property” rings of the Chicago School’s Holy Grail “perfect competition,” in which competition is atomized to ridiculous, untenable levels. What does it mean to have private property divided among several owners? I own a share of Ford stock and you own a share of Ford stock. Does that mean we should start competing in the auto business with each other?
Comment by Bob Robertson on 27 January 2012:
In a local newspaper forum, I suggested dropping city trash pickup and letting people buy the service from anyone who wanted to offer it.
As should be no surprise, people came out of the woodwork to decry how there would be people who wouldn’t pay for trash pickup if it weren’t provided by the city, that trash would pile up everywhere.
Thing is, that’s exactly what happens now. I’ve never lived in a place with more litter in the streets, paper and plastic blocking storm drains, broken glass on sidewalks, etc.
Comment by James Wilson on 27 January 2012:
Something is missing here. The purpose of privatizing, say, the Postal Service is NOT because private competitors would do the job better, it is because postal services is not in any sense a “proper role” for government.
You see how easily the issue gets confused. Commenter Mark above said that prisons shouldn’t be privatized. I doubt that Horwitz would disagree. The argument for government/private has to do with the assigned roles we give to government.
Comment by Mark on 27 January 2012:
To Bob Robertson, it seems the issue in your story is poor enforcement of littering laws.
To James Wilson, yes, the scope of the article focuses more on practicality than morality. I agree that courier service should not be within the role of the government, which I define as protecting negative rights & administering a system of fair interaction with natural resources. The reason for my distinction is simple: blanket coverage vs individual consumption.
The police station around the block serves as a deterrant to crime. Because one of its key roles is the prevention of violation, we don’t know who those would’ve-been-victims are. So it’s a benefit to the whole community and is justifiable to be paid for by public funds. Same thing with defense (not to be confused w/ military adventurism) and the court system. And nature is something that necessarily affects us all while none of us created it, so it’s proper to be managed by the govt [via taxing access to natural resources in order to pay for law&order, defense (really a type of law&order), & admin].
Courier service, like education, health care, transportation, food, etc, are individually consumed, so the individual should provide these for himself (& for others if he so volunteers) as he sees fit by choosing from competing vendors. When the government immorally takes these activities upon itself, it uses the idea of govt charity as an excuse to expand it’s own authority. And when the competing vendors of these services are replaced by a government monopoly, efficiency certain suffers (in the long run, morality & practicality go hand in hand). And the expanded powers, which the govt euphemises as responsibilities, are also used as an excuse for expanded taxation, including immoral forms like income, payroll, corporate, and capital gains taxes.
Comment by Joe Schmoe on 28 January 2012:
Re: Mark
The issue is that people argue that “in practice” privatizing litter collection wouldn’t work, when the reality is that “in practice” the public sector can’t do it either.
Comment by Nicholas Ventimiglia on 29 January 2012:
What about the economy of scale ?
The minimum margins for several small firms will be higher then a single large firm. Even with competition, this will require that the mandatory minimum price is higher.
Lets not toss out Smith / Marx 101.
Comment by Nicholas Ventimiglia on 29 January 2012:
This argument starts great, but, forgets economics 101. Namely the “Economy of Scale” where you get a better price for a larger quantity.
The minimum margins for several small (competing) firms will be higher then a single large firm. Even with competition, this will require that the mandatory minimum price is higher.
Explicitly, If I provider service to 1000 I will need to collect $1 to make $1000. If i provider service to 100,000 I will only need to collect 1 cent per customer.
Comment by Ralph on 31 January 2012:
Thanks for the article. Another factor is that coercive government programs are typically not legally liable. Privatization introduces accountability.
For info on people using voluntary Libertarian tools on similar and other issues, please see http://www.Libertarian-International.org , the non-partisan Libertarian International Organization
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Comment by Kelly on 8 February 2012:
To truly privatize, the end user would determine his service provider with minimal government regulation. In the example of garbage disposal, the citizen would be required to properly dispose of refuse and would hire or be responsible to maintain their domain with the freedom to accept or decline service providers. Most have been lured by the fallacy of “economy of scale” into assuming that governments are trustworthy to provide or determine services at the lowest cost for the benefit of all.
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