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.

In 2006 officials in Indiana leased 157 miles of the Indiana Toll Road to a private Spanish/Australian consortium. While this was called a “privatization,” Block would clearly dismiss it as nothing of the kind. The Indiana Toll Road remains owned by the state. Real privatization would mean completely private ownership of all streets, roadways, paths, and freeways. Only private roadway owners would determine regulations and prices.

In the current political climate it may seem Block has the cart before the horse. Arguing for free-market roads these days is a little like a starving person worrying about his dessert. Shouldn’t we first try to halt the current growth in the size and scope of government and deal with the almost Utopian idea of private streets and highways later? But anyone who has read Block’s provocative book, Defending the Undefendable, or has heard him discuss free-market ideas one on one, knows he does not blink in his support for freedom. Besides, if “we can establish that private property and the profit motive can function even in ‘hard cases’ such as roads, the better we can make the overall case on behalf of free enterprise,” he writes.

A big roadblock, so to speak, in arguing for private roads and highways is that practically everyone takes government ownership for granted. Even many economists, using “market failure” arguments such as the one about “externalities,” often cite roads as something only government can provide. Block carefully takes apart these arguments. For example, the “externalities” argument contends that private investors would underinvest in roads and highways. But who is to say, given a complete lack of market signals, a government agency would invest the correct amount? Indeed, this part is among the book’s best contributions.

In addition to giving readers a seminar in logical economic reasoning, Block’s book also reflects his passion for freedom. He believes firmly that government management of roads and highways is not only inefficient but also deadly. “Road socialism” causes the deaths of more than 40,000 people in the United States each year. And although many people blame highway deaths on alcohol, unsafe vehicles, or speeding, Block lays the blame on the government officials who manage the highway system. He explains his conclusion: “It may well be that speed and alcohol are deleterious to safe driving; but it is the road manager’s task to ascertain that the proper standards are maintained with regard to these aspects of safety. If unsafe conditions prevail in a private, multistory parking lot, or in a shopping mall, or in the aisles of a department store, the entrepreneur in question is held accountable.” The problem is that government officials are not accountable.

Much of the book, a collection of essays, involves answering practical questions, such as how private road owners might deal with intersections. Block answers this and other questions fully—maybe a little too fully for the casual reader. Still, Block is serious about this complex subject, and his book is not intended to be light reading. Fortunately, his writing style is clear and easy to follow.

An important assumption underlying the book is that a competitive free-market road system would necessarily be superior to one operated by government. In supporting that assumption Block presents a series of arguments familiar to students of the Austrian school of economics. For example, he notes the importance of market signals in directing entrepreneurial decisions. Block also addresses the neoclassical notion of “perfect competition.” This highly unrealistic model suggests roads require government management. Yet, as Block notes, “perfect competition” exists practically nowhere and, if that were truly our standard, nearly all markets would call for nationalization.

After making a strong case for road privatization, Block addresses the thorny matter of getting from here to there. After wrestling with several possible approaches, he admits that privatizing today’s system of public roads would be like trying to unscramble an egg. Yet even an “imperfect privatization will be far preferable to none at all. Government streets are an administrative and safety nightmare. It is inconceivable that private initiatives could do worse.”

The fall of the Soviet Union and other collectivized systems clearly showed the gigantic problems inherent in government ownership and management of any enterprise. This lesson has not yet been applied to our roads and highways. Thanks to Block’s comprehensive work, that may not always be the case.

One example of media complicity is a Thanksgiving Day column in which Debra Saunders called the enhanced pat-downs “freedom fondles.” Reason editor Matt Welch assembled two sets of links for the Hit & Run blog cataloguing favorable media statements about the new techniques. We have been advised by the Los Angeles Times to “shut up and be scanned.” The Santa Fe New Mexican tells us we should “stand, or bend over, on principle and suffer attendant indignities,” while the Rochester Post-Bulletin tells us to “grin and bear it.” The Louisville Courier-Journal asks, “At what point did Americans turn into a nation of crybabies?”

What’s particularly stunning is how often these defenses of TSA procedures came from the (so-called) liberal press, such as the New York Times or the Nation. Actress Whoopi Goldberg and her left-leaning colleagues on ABC’s The View agreed that those protesting the invasive techniques by slowing down the process at airports are equivalent to terrorists. It is striking how quickly the left adopts “America: love it or leave it” and forgets that dissent is the highest form of patriotism when their guys are in power. Would these people be bending over backward to excuse the TSA if a Republican were in the White House? We don’t think so.

Beyond the media treatments, the idea that we should trade off a little liberty to get more security presents a false choice. The TSA does not provide security. It provides what security experts like Bruce Schneier call “security theater.” As one of us (Carden) wrote recently, the TSA agent with his hand in your pants is not there for your safety. He is there to give you the illusion of safety. The TSA dog-and-pony show is just the government’s very expensive way of saying, “We’re doing something about this.”

If we were serious about security, we would do three things. First, we would eliminate the TSA. It makes flying less convenient and gives people an incentive to drive. Per passenger mile, driving is far more dangerous than flying. The evidence suggests that more people will die on the roads than would have died in terrorist attacks on planes because they are discouraged from flying by the TSA and its new, more invasive procedures.

Second, we should give the airlines responsibility for security. The discovery process of genuine market competition among airlines would determine the degree of security passengers are comfortable with, while also avoiding techniques they find invasive. What profit-seeking firm would want to alienate its customers by taking nearly nude photos or touching “their junk”?

It’s the airlines that stand to lose physical capital and reputation, so they have every reason to get it right. They will certainly be more responsive to fliers’ needs than a monopoly would.

This second point is the response to the claim that we are corporate shills looking to advance a privatization agenda. While there might be some cost savings from privatization, this might also do more harm than good since a “privatized” TSA would do a lot of the same invasive things, only the State would be able to shift blame to the private sector. As a monopoly, a “privatized” TSA would still lack the ability to respond to customers’ desired tradeoffs. What we need is not “privatization” but “de-monopolization.”

Finally, we would get serious about using decision markets for terrorism detection. This idea met with fierce resistance when first introduced—politicians and pundits said no one should “profit from terrorism.” These critics missed the point, though. As economist Robin Hanson has written, decision markets are a very high-efficiency way to obtain information, even when the payouts are small.

Hanson points out that a crucial failing of international intelligence gathering is that information is incomplete and/or flawed. Ironically (and tragically), the political outcry over the Policy Analysis Market (PAM; summarized on Hanson’s website) demonstrated precisely why such a market is necessary. In the face of incomplete and incorrect information and in the presence of important cognitive biases, sources of reliable and unbiased information are indispensable—especially when so many lives are on the line.

The PAM started as a Defense Advanced Research Projects Agency (DARPA) project to allow people to purchase very small contracts that would pay out in the event of a given combination of outcomes. The project drew fundamentally on the insights of F. A. Hayek and James Buchanan, who argued that the process of exchange itself reveals crucial information and generates order. In the early trials of the project, traders were asked to predict different combinations of events that might result from adopting a particular policy.

The Need for Information

As an aside, the furor over the Policy Analysis Market and the ratcheted-up procedures by the TSA are especially interesting in light of the controversy over WikiLeaks. Some have denounced WikiLeaks and its founder, Julian Assange, for endangering American lives, and we remain agnostic on this until the fury has settled. Even if WikiLeaks is morally culpable for endangering innocent people through its leaked documents, we would be willing to bet that those who were instrumental in canceling the PAM in 2003, thereby thwarting the open flow of information, are responsible for more casualties by several orders of magnitude. As a rule, more information is better than less.

Bruce Schneier and others argue that the best way to fight terrorism is to identify terrorists rather than scanning grandmothers or treating someone’s urostomy bag as if it were a possible explosive device. One of the best ways to do this would be to develop a terrorism prediction market like the one proposed by Hanson.

The TSA should be abolished and serious, competitive alternatives should be explored. As Carden argued on Forbes.com, “Full Frontal Nudity Will Not Make Us Safer: Abolish the TSA” (emphasis added). The problem with government-run airport security is that it eliminates the market’s search process that would otherwise allow people to discover the most effective and customer-friendly security methods.

For the first time in 16 years the U.S. economy was reclassified from “totally free” to “mostly free.” But wait: The United States was totally free economically until 2010? That’s enough to suggest that the Index focuses on quite a narrow range of “economic freedom” criteria, rather than looking critically at the forms of State intervention most structurally important to the survival of big business and corporate power.

For example, by any valid measure of economic freedom, the passage of the WIPO Copyright Treaty, the Uruguay Round TRIPS (Trade-Related Aspects of Intellectual Property Rights) Accord, and the Digital Millennium Copyright Act would have been considered an upward surge in statism and protectionism unequaled since (at least) the Smoot-Hawley Tariff. “Intellectual property” is every bit as much a form of protectionism as are tariffs. Patents and copyrights serve exactly the same protectionist function for transnational corporations that tariffs did for the old national industrial corporations; in both cases they restrict who is permitted to compete in offering a given good to a given population.

But among the inside-the-Beltway “free market community,” Heritage is one of the staunchest advocates of global “intellectual property” enforcement expansion. Indeed, two lines out of six in its summary concerning its metric for “Property Rights” in the United States are taken up by this: “A well-developed licensing system protects patents, trademarks, and copyrights, and laws protecting intellectual property rights are strictly enforced.”

One-Sided Index

There are other suggestions of the one-sided nature of the Index, as well. For example, under “Labor Freedom” it simply states that “dismissing an employee is not burdensome.” Never mind for the moment that, from the standpoint of an employee, a bit of contractual security might be a good thing. (I doubt if the people at Heritage would generalize this disdain for contracts to all their other commercial dealings.) What’s important is what the article doesn’t say: “Quitting without notice is not burdensome.” In fact it is not burdensome; workers in most states are at-will employees unless a union contract specifies otherwise. But Heritage doesn’t consider the contractual burden on the worker or lack thereof a sufficiently important issue even to bear commenting on—and this in a section titled, mind you, Labor Freedom, not Employer Freedom.

The problem is that an index, ostensibly put forward as a general survey of economic freedom as such, is really a survey of economic freedom primarily as it affects the minority of the population that owns considerable amounts of capital and employs others. The idea that being employed is an economic activity, and that those who are employed have economic interests as much as those who do the employing, doesn’t even appear on the radar.

Yet another example of the Index’s bias is its “concerns” regarding bailouts of automakers over “expropriation and violation of the contractual rights of shareholders and bondholders.” Bill Beach, director of the Heritage Foundation’s Center for Data Analysis, laments that “the rule of law declined when the Obama administration declared some contracts to be null and void. For example, bondholders in the auto industry were forced to the back of the creditor line during bankruptcy.”

But note the glaring lack of concern for contractual rights guaranteed under GM’s contracts with the UAW. This one-sided concern with impairment of the obligation of contracts is fairly widespread on the “free market” right. The same people who protested the loudest about bailout “blackmail” in interfering with CEO salaries and benefits, oddly enough, were by and large also the source of the most strenuous calls for using Washington bailout money as a hammer to “impose discipline” on auto workers. So apparently, for a certain breed of “free market” advocate, the differential between a GM and Toyota assembly line worker is problematic—but the differential between a GM and Toyota CEO isn’t. What’s that thing I was saying before? Contractual security is a good thing—for everybody but workers.

This shortcoming is compounded by Heritage’s endorsement of Bush Treasury Secretary Henry Paulson’s original TARP program. Stuart Butler and Edwin Meese, in a 2008 article titled “The Bailout Package: Vital and Acceptable,” did express concerns lest the bailout take the form of a blank check—to the government, that is.

So they favored TARP, as such—a Hamiltonian program of using taxpayer money to prop up the bubble-inflated value of financial assets and preventing them from being marked down to market value. They just objected to any conditions on how the free money could be spent once the banksters got hold of it. I wonder how they feel about workfare. I understand that it was probably different people composing the different passages in question, but still it would be nice if the right hand knew what the further-right hand was doing.

Ignoring Primary Interventions

The Index fails to distinguish between the primary, structural forms of government intervention that prop up corporate power and the secondary, ameliorative forms of intervention that attempt to moderate its side effects. The State enforces a whole host of artificial property rights and artificial scarcities that serve as sources of economic rent to privileged firms, and maintains all sorts of regulatory cartels. The cumulative effect of these privileges, artificial scarcities, and cartels is to sustain corporate power on a global scale and create vast disparities in wealth.

These forms of intervention, these primary grants of privilege, don’t show up very prominently on the Index of Economic Freedom. What does show up is mainly the kinds of fiscal and welfare-state interventions that serve to limit the exercise of State-granted privileges and make corporate power less galling to average people. Is it only “statism” when it benefits someone besides the rich?

In fairness, while Heritage supports many of the legal privileges that serve as entry barriers at the national level, the Index does at least acknowledge barriers to small business formation at the state and local levels, comparing them favorably to other places: “The overall freedom to start, operate, and close a business, regulated primarily at the state level, is still strongly protected [in the United States]. Starting a business takes six days, compared to the world average of 35 days. Obtaining a business license takes less than the world average of 218 days. . . .”

The same critique applies to other indices of “economic freedom,” as well. For example, like Heritage, the Economic Freedom of the World Index (Fraser and Cato institutes) treats voting for anything called a “free trade agreement” as a proxy for supporting free trade. [Editor's note: See comments for correction.] Economist Dean Baker ridicules mainstream journalists for taking the “free trade” label at face value when the primary purpose of such agreements is to boost “intellectual property” protectionism rather than to reduce tariff protectionism. In the introduction to The Conservative Nanny State, Baker writes:

[N]ews reports routinely refer to bilateral trade agreements, such as NAFTA or CAFTA, as “free trade” agreements. This is in spite of the fact that one of the main purposes of these agreements is to increase patent protection in developing countries, effectively increasing the length and force of government-imposed monopolies. Whether or not increasing patent protection is desirable policy, it clearly is not “free trade.”

It is clever policy for proponents of these agreements to label them as “free trade” agreements (everyone likes freedom), but that is not an excuse for neutral commentators to accept this definition.

Nicholas Hildyard had a pretty good handle on what’s actually entailed in the neoliberal “free market” agenda promoted by these indices. The effect of the agenda “has not, in most cases, been to diminish either the state’s institutional power or its spending. Instead, it has redirected them elsewhere. It has also strengthened the power of many Northern nations to intervene in the economic affairs of other countries. . . .”

Of the kind of “privatization” that prevailed, for example, under Chile’s Pinochet and has since been promoted by assorted “structural adjustment” programs, Hildyard wrote:

While the privatisation of state industries and assets has certainly cut down the direct involvement of the state in the production and distribution of many goods and services, the process has been accompanied by new state regulations, subsidies and institutions aimed at introducing and entrenching a “favourable environment” for the newly-privatised industries. [“The Myth of the Minimalist State,” The Corner House, March 1998]

In practice, such “privatization” involves, first of all, spending taxpayer money on upgrades of State property to entice corporate buyers to take it off their hands—with the new outlays to make the property salable frequently exceeding the purchase price. The bidding process itself for State-owned industries and utilities has usually been governed by what Joseph Stromberg calls “funny auctions, that amounted to new expropriations by domestic and foreign investors” (“Experimental Economics, Indeed,” Mises.org, Jan. 7, 2004). The first order of business, subsequently, is massive asset stripping by the new corporate owners. And as Hildyard suggested, the newly “privatized” functions are carried out within a web of special regulations and protections to make sure the “private” firms are insulated from anything resembling genuine market competition.

A genuinely libertarian privatization policy, as recommended by Murray Rothbard in “Confiscation and the Homestead Principle” (Libertarian Forum, June 15, 1969), would treat State-owned utilities as the homesteads of those working them.

The same is true of so-called “deregulation,” which (as Hildyard pointed out) can more accurately be called reregulation. The nature of most so-called utility deregulation can be illustrated by the mid-1990s electrical “deregulation” in Texas, home of “free market” champions like Dick Armey and Tom DeLay. Writing at Mises.org, Tim Swanson stated:

[I]n the mid-90s, regulators, consumers and energy producers began to rearrange the market for “deregulation” in Texas. Incumbent providers such as TXU and Reliant were restructured in the name of free markets, but when the dust cleared, the only winners were members of the political class and corporations that had been State-sanctioned monopolies prior to the “deregulation.”

TXU was separated into two companies, Oncor and TXU Energy. Oncor was given the monopoly on all services including meter reading, energy delivery, etc. Additionally they own all of the poles and wires and are protected by law from competition. TXU Energy became a billing company (and owner of power plants), merely forwarding all of the customer service questions and problems to Oncor, and therefore providing no services themselves.

This is akin to the following: splitting AT&T into two separate companies, one (Nexis) that owns all of the cables, wires, PBXs, switching stations, call centers, etc. and provides all of the services, repairs, installations, etc., and the other company (Willy) whom [sic] simply sends you a bill at the end of the month, providing no value-added service.

Not only is it not deregulation (the same players exist with State protection) but more overhead is created through the creation of another billing company. [“Texas Sized Tomfoolery,” Sept. 9, 2003]

When the mainstream press and mainstream politics identify the narrow analysis associated with the indices as “economic freedom,” it’s no wonder that most people are wary of “free markets.” If I didn’t know better—if I didn’t know that real free markets were like kryptonite to corporate power—I’d hate them myself.

“If the parking meter deal put a bad taste in your mouth, try swallowing this: Chicago is considering leasing its water system to help fix the budget.” Privatization for efficiencies might be a good thing, but that’s not what this is about. Mayor Daley can’t stop paying off his cronies, so he’s selling off the city bit by bit rather than cut spending. Will we see similar deals at the Federal level soon?

There’s a dark side to privatization and Chicago has proof. Sometimes the private company buying up the utility is a political crony. And privatization hides operations of the utility where Freedom of Information Act requests do not apply. Governor Quinn uses his personal cell phone for state business. This is an example of micro-privatization that saves the state money (not much grant you) but it also makes his phone records a private matter that cannot be scrutinized by the public. In the case of the water department, which is know as the most political department, perhaps the city feels it can avoid patronage scandals if hiring decisions are no longer a public concern.I’m not saying all privatization is cynical … but when corrupt people privatize government services it tends to be for corrupt reasons. Keep in mind that the water department is one of the most corrupt of chicago’s many corrupt city agencies.  I won’t cross my fingers for an open and transparent bidding process.

The first and probably the most important subsidy of history is land theft, by which peasant majorities were deprived of their just property rights and turned into tenants forced to pay rent based on the artificial “property” titles of state-privileged elites.

Of course, all such artificial titles not founded on appropriation by individual labor are completely illegitimate.

As Ludwig von Mises pointed out in Socialism, the normal functioning of the market never results in a state of affairs in which most of the land of a country is “owned” by a tiny class of absentee landlords and the peasant majority pay rent for the land they work. Wherever it is found, it is the result of past coercion and robbery.

Murray Rothbard, in The Ethics of Liberty, explained the injustice of feudal landlordism:

But suppose that centuries ago, Smith was tilling the soil and therefore legitimately owning the land; and then that Jones came along and settled down near Smith, claiming by use of coercion the title to Smith’s land, and extracting payment or “rent” from Smith for the privilege of continuing to till the soil. Suppose that now, centuries later, Smith’s descendants (or, for that matter, other unrelated families) are now tilling the soil, while Jones’s descendants, or those who purchased their claims, still continue to exact tribute from the modern tillers.Where is the true property right in such a case? It should be clear that here . . . we have a case of continuing aggression against the true owners—the true possessors—of the land, the tillers, or peasants, by the illegitimate owner, the man whose original and continuing claim to the land and its fruits has come from coercion and violence. Just as the original Jones was a continuing aggressor against the original Smith, so the modern peasants are being aggressed against by the modern holder of the Jones-derived land title. In this case of what we might call “feudalism” or “land monopoly,” the feudal or monopolist landlords have no legitimate claim to the property. The current “tenants,” or peasants, should be the absolute owners of their property, and, as in the case of slavery, the land titles should be transferred to the peasants, without compensation to the monopoly landlords.

So rather than defending all existing land titles in the name of the “sanctity of property” and protesting when some left-wing government institutes a land reform that transfers feudal land titles to the peasantry, Rothbard favored 1) dividing up Southern plantations and giving freed American slaves “forty acres and a mule,” and 2) transferring the latifundia from Latin American landed oligarchies to the peasants.

In the Old World, especially Britain (where the Industrial Revolution began), the expropriation of the peasant majority by a politically dominant landed oligarchy took place over several centuries in the late medieval and early modern period. It began with the enclosure of the open fields in the late Middle Ages. Under the Tudors, Church fiefdoms (especially monastic lands) were expropriated by the state and distributed among the landed aristocracy. The new “owners” evicted or rack-rented the peasants.

Expropriating from the Peasantry

The Restoration Parliament of the seventeenth century carried out a series of land “reforms” that abolished feudal land tenure altogether—but only upward. There were two ways Parliament could have abolished feudalism and reformed property. It might have treated the customary possessive rights of the peasantry as genuine title to property in the modern sense, and then abolished their rents. But what it actually did, instead, was to treat the artificial “property rights” of the landed aristocracy, in feudal legal theory, as real property rights in the modern sense; the landed classes were given full legal title, and the peasants were transformed into tenants at will with no customary restriction on the rents that could be charged. The most important component of this “reform” was the Statute of Frauds of 1677, which nullified rights of copyhold by making them unenforceable in royal courts.

Finally, the Parliamentary Enclosures of the eighteenth and early nineteenth century robbed the peasantry of their rights of common. The propertied classes of England saw the economic independence provided by the commons as a threat, first to an adequate supply of agricultural wage labor on the landed oligarchy’s own land, and later to an adequate supply of factory labor willing to work the long hours and low pay demanded by the owners. The literature of the propertied classes of the time was quite explicit on their motivation: the laboring classes would not work hard enough or cheaply enough so long as they had independent access to the means of subsistence. They had to be made as poor and hungry as possible so that they would be willing to accept work on whatever terms it was offered.

A version of the same phenomenon took place in the Third World. In European colonies where a large native peasantry already lived, states sometimes granted quasi-feudal titles to landed elites to collect rent from those already living on and cultivating the land; a good example is latifundismo, which prevails in Latin America to the present day. Another example is British East Africa. The most fertile 20 percent of Kenya was stolen by the colonial authorities, and the native peasantry evicted, so the land could be used for cash-crop farming by white settlers (using the labor of the evicted peasantry, of course, to work their own former land). As for those who remained on their own land, they were “encouraged” to enter the wage-labor market by a stiff poll tax that had to be paid in cash. Multiply these examples by a hundred and you get a bare hint of the sheer scale of robbery over the past 500 years.

Contrary to Mises’s rosy version of the Industrial Revolution in Human Action, factory owners were not innocent in all of this. Mises claimed that the capital investments on which the factory system was built came largely from hard-working and thrifty workmen who saved their own earnings as investment capital. In fact, however, they were junior partners of the landed elites, with much of their investment capital coming either from the Whig landed oligarchy or from the overseas fruits of mercantilism, slavery, and colonialism.

In addition, factory employers depended on harsh authoritarian measures by the government to keep labor under control and reduce its bargaining power. In England the Laws of Settlement acted as a sort of internal passport system, preventing workers from traveling outside the parish of their birth without government permission. Thus workers were prevented from “voting with their feet” in search of better-paying jobs. You might think this would have worked to the disadvantage of employers in underpopulated areas, like Manchester and other areas of the industrial north. But never fear: the state came to the employers’ rescue. Because workers were forbidden to migrate on their own in search of better pay, employers were freed from the necessity of offering high enough wages to attract free agents; instead, they were able to “hire” workers auctioned off by the parish Poor Law authorities on terms set by collusion between the authorities and employers.

Legalized Discrimination Against Laborers

The Combination Laws, which prevented workers from freely associating to bargain with employers, were enforced entirely by administrative law without any protections of common-law due process. And they were only enforced against combination by workers, not against combination by employers (such as blacklisting “troublemakers” and collusive setting of wages). The Riot Act (1714) and other police-state legislation during the Napoleonic Wars were used to stem the threat of domestic revolution, essentially turning the English working class into an occupied enemy population. Such legislation criminalized most forms of association.

Even fraternal associations for mutual aid, burial and sick benefits, and the like operated in the face of hostility from the state, according to historians of the friendly-society movement such as Bob James and Peter Gray. Under the terms of the Combination Act, friendly societies were subjected to close judicial supervision lest direct craft production be organized for barter among the unemployed, or the societies’ benefits cross the line and function as de facto unemployment insurance for striking workers. The Corresponding Societies Act, passed around the same time, prohibited all societies that administered secret oaths or were federated on a national scale.

So the Industrial Revolution was, in fact, built on a system of legal peonage in which employers were directly implicated. The form taken by the factory system surely reflects this history. In a Britain composed of peasant smallholders, with no restraints on free association, workers would have been free to mobilize their own properties as capital through mutual credit institutions. Absentee ownership and hierarchy would likely have been far, far less prevalent, and the factory system where it existed far less oppressive and authoritarian.

A similar process occurred in the colonization of settler societies like America and Australia, by which the colonial powers and their landed elites attempted to replicate feudal patterns of property ownership. In such colonies, the state preempted ownership of vacant land and restricted working people’s access to it. Sometimes they gave title to vacant land to privileged land speculators, who were able to charge rent to those who homesteaded it (the legitimate owners).

E. G. Wakefield, an early nineteenth-century British theorist of colonialism, advocated just such preemption on the same grounds that the propertied and employing classes of Britain had supported Enclosure: it was easier to hire labor on favorable terms to the employer. In England and America, he wrote:

In colonies, labourers for hire are scarce. The scarcity of labourers for hire is the universal complaint of colonies. It is the one cause, both of the high wages which put the colonial labourer at his ease, and of the exorbitant wages which sometimes harass the capitalist. . . .

Where land is cheap and all men are free, where every one who so pleases can obtain a piece of land for himself, not only is labour very dear, as respects the labourers’ share of the product, but the difficulty is to obtain combined labour at any price.

Consequently, “[f]ew, even of those whose lives are unusually long, can accumulate great masses of wealth.”

Wakefield’s disciple, Thomas Merivale, wrote of the “urgent desire for cheaper and more subservient labourers—for a class to whom the capitalist might dictate terms, instead of being dictated to by them.”

Land preemption was a major element of colonial policy in early American history. Gary Nash, in Class and Society in Early America, described land grants in colonial America comparable to those of William I in England after the Conquest. In New York, for example, the largest estates granted by the British colonial administration (after the New Netherlands was acquired in the Dutch Wars) ranged from the hundreds of thousands to over a million acres. Governors continued to grant tracts of land in the hundreds of thousands of acres to their favorites, well into the eighteenth century. Under Governor Fletcher, some three-quarters of available land was granted to 30 persons.

Albert Jay Nock, in Our Enemy, the State, argued that “from the time of the first colonial settlement to the present day, America has been regarded as a practically limitless field for speculation in rental values.” Many leading figures in the late colonial and early republican period were prominent investors in the great land companies, including George Washington in the Ohio, Mississippi, and Potomac Companies; Patrick Henry in the Yazoo Company; Benjamin Franklin in the Vandalia Company, and so forth.

In The Ethics of Liberty, Rothbard condemned such preemption (“land-engrossing, where arbitrary claims to virgin land are used to keep first-transformers out of that land”) on the same grounds that he criticized feudal landlordism. He called for voiding all current titles to vacant and unimproved land, and opening it up to free homesteading. In addition, in cases where current mortgage holders and landlords trace their title to state grants of land, the proper claim lies with those who first homesteaded the land, or their heirs and assigns.

The Homestead Act of 1862, an apparent exception to this general trend, was really just another illustration of it. The majority of land, rather than being claimed under the terms of the Homestead Act, was auctioned to the highest bidder. Even for land covered by the Act, according to Howard Zinn, the $200 fee was beyond the reach of many. As a result, much of the land was not homesteaded on Lockean principles at all, but initially went to speculators before being partitioned and resold to homesteaders. And compared to the 50 million acres covered by homestead legislation, 100 million acres were given away as railroad land grants during the Civil War—free of charge! In other words, the privileged classes got the gravy, and ordinary homesteaders got the bone.

Keeping the System Going

What I have described here are only the initial acts of coercion and robbery on which our existing form of industrial capitalism was founded. Of course it didn’t stop there. Once the system was up and running, it depended on the state’s ongoing efforts to maintain a legal structure of privilege, based on artificial property rights and artificial scarcity: enforcement of absentee titles to vacant and unimproved land; entry barriers for the banking industry to make credit artificially expensive and scarce; the artificial property rights of patent and copyright; and more. And starting in the late nineteenth century the modern form of corporate capitalism depended on even more massive state intervention: subsidies to long-distance shipping to make market areas and firm size artificially large; the cartelizing effects of patents and tariffs; regulatory cartelization; and entire industries and sectors of the economy either brought into existence or guaranteed a taxpayer-funded market by the post-1941 perpetual war economy.

Contrary to popular mythology, the New Deal was not a departure from some preexisting idyllic state of “laissez faire.” There never was anything remotely approaching laissez faire. Capitalism—that is, the existing historical system as it actually developed—has had very little to do with free markets and a great deal to do with robbery and coercion.

This is not to say that all avenues to economic advancement through independent entrepreneurship have been closed off. But it’s much more of an uphill struggle than it would be in a free market, and the field is unfairly tilted in favor of the big players.

In seeking to institute a genuine free market, libertarians shouldn’t lose sight of these facts. What lessons are libertarians to learn from the previous historical account?

First, there is nothing “libertarian” about the instinctive tendency to rally to the defense of existing property titles without regard to justice. As Karl Hess said in The Libertarian Forum, back in 1969,

[L]ibertarianism wants to advance principles of property but . . . it in no way wishes to defend. . . all property which now is called private. Much of that property is stolen. Much is of dubious title. All of it is deeply intertwined with an immoral, coercive state system which has condoned, built on, and profited from slavery; has expanded through and exploited a brutal and aggressive imperial and colonial foreign policy, and continues to hold the people in a roughly serf-master relationship to political-economic power concentrations.

Second, in advocating free-market reform, we must consider the role of this historical legacy of injustice (the subsidy of history) in determining the winners under the present system. A “free-market reform” that simply locks in the beneficiaries of past robbery and privilege, and ratifies the past theft from which they benefit, will merely reward injustice and secure its ill-gotten gains.

From a libertarian ethical standpoint, the standard model of “privatization” (selling off state property to a large, politically connected private corporation, on terms most advantageous to the corporation) is therefore highly dubious. That’s especially true considering that much of the property was created in the first place—at taxpayer expense—for the primary purpose of subsidizing the operating costs of big business. Much of the state-owned utility and transportation infrastructure in the Third World was created, at the behest of transnational financial elites, as a precondition for profitable Western capital investment. And the odious debt thus incurred, often by corrupt dictatorships acting in collusion with global finance, is then used by the World Bank to blackmail those countries into selling off their infrastructure to the very same transnational corporations it was created to benefit—usually at pennies on the dollar.

An Appropriate Model for Privatization

Rothbard’s model of privatization is far superior: to void state titles to property and treat it as unowned, subject to immediate homesteading by those actually mixing their labor with it. That would mean that state universities would be transformed into the property of their students or faculty, as consumer or producer cooperatives. Government-owned utilities would become consumer cooperatives owned by ratepayers, and state-owned factories would be handed over to the work force and reorganized as worker cooperatives.

We must also be wary of pseudo-Coasean arguments that it “doesn’t matter” who the property was originally stolen from, because it will end up in the hands of the “most efficient” owner. That’s essentially the same argument used for eminent domain. Regardless of whose hands the property winds up in, the rightful owners and their descendants—who never received compensation—are out the value of what was stolen from them. And even the most inefficient ways of organizing production are pretty “efficient,” comparatively speaking, when you have the competitive advantage of working with stolen property.

Besides, there is no such thing as generic “efficiency”; efficiency depends on the owner’s purpose. The most efficient technique for subsistence farming on a small plot—economizing on land by building soil and adding intensive labor inputs—is entirely different from that for a feudal oligarch producing cash crops with access to more stolen land than he could possibly use, and often holding a majority of his stolen land out of use altogether. In any case, the rightful owner would no doubt find it far more “efficient” to be feeding himself on his own land, than starving in a shantytown because he can’t afford to buy even the cheapest food from those “efficient” plantations occupying his stolen land.

The actual system of political economy that so many corporate apologists refer to as “our free market system” has in fact been characterized from the beginning by robbery. We must beware of “free market reforms” carried out by the robbers. They amount in practice to allowing the robbers—hands still full of loot—to say: “All right, no more stealing, starting . . . now!”

Scandinavian countries have low corporate tax rates and transparent procedures to establish a business. Moreover, these countries have implemented numerous reforms over the past couple years. For instance, cutting income taxes has become one of Iceland ‘s crowning economic achievements. Denmark has been ranked by the Economist Intelligence Unit (EIU) as having the best business environment thanks to, among other things, its flexible labor market. 

Despite the good news about reform, other details remain grim. Sweden has extremely high taxes, which encourage workers to cut hours to avoid them. The Norwegian government continues to drag its feet on privatization, thus thwarting investment into the country. Additionally, the Scandinavian welfare state hinders productivity by enabling otherwise healthy workers to stay at home.

Economic Performance in Scandinavia 

Denmark       5.4 million          2%              6.4%  

                                           (2004)          (2004) 

Finland          5.2 million        1.8%            7.9% 

                                           (2005)          (2005) 

Iceland          296,737           6.5%            2.1% 

                                           (2005)          (2005) 

Norway         4.6 million          3%              4.5% 

                                           (2004)          (2004) 

Sweden        9 million           3.6%            5.5%

                                           (2004)          (2004) 

Source: Deloitte Touche Tohmatsu Country Guides in cooperation with the Economist Intelligence Unit (www.deloittecountryguides.com/index.asp.) 

Johnny Munkhammar, director of the Swedish free-market institute, Timbro, wrote in TCS Daily in March that Sweden is like two different countries. One is a country that has pursued reform, the other a country that has held on to the “Social Model of a big state.” 

This could be said for all the countries of the region as they balance free-market reforms with generous welfare systems. For instance, every day about one-fifth of the workforce stays home in Sweden. These “potential” workers are receiving disability benefits or are on sick leave. “Almost everyone who requests sick leave is granted it,” notes the OECD (Organization for Economic Cooperation and Development). 

The Swedish government’s aim is to help bridge the gap between sickness and work. But many take advantage of these benefits and use them as permanent income, as evidenced by the increase in disability and sick leave over the past decade. “The sickness rate of a Swede in his or her twenties, for example, is higher than the overall absence rate in all but four European countries,” the OECD said in a 2005 economic survey of Sweden. 

Scandinavia also has generous paternity leave. In Iceland, fathers can take up to three months off while receiving 80 percent of their salary. Swedish couples are entitled to take up to 480 days (240 per person). The first 390 days pay 80 percent of parents’ qualifying income, while the last 90 days pay a flat rate of 60 Swedish krona (about $8.40) per day. Not surprisingly, 95 percent of the high-rate benefit days are used. 

“A total of 2.2 million people in Denmark received income-substitute benefits in 2003,” according to the 2005 Danish Statistical Yearbook. The term “income-substitute benefits” includes sickness, unemployment, maternity, and social assistance. Many Scandinavians use these benefits as a means to earlier retirement.

In Finland “nearly 7 out of ten new retirees rely on some form of unemployment or disability payments,” the OECD reported this year. On the other end of the age spectrum, generous benefits encourage the young to take their time with school, delaying entry into the workforce. 

Whether they work or not, it’s unlikely that Scandinavians will have to worry about having a roof over their heads. Several countries have housing programs. Almost 75 percent of the Finnish population, even high income earners, are eligible for government-subsidized housing, according to the OECD. Denmark manipulates the housing market through direct subsidies and price regulation. Sweden offers a housing allowance based on housing costs and the number of children in the household. 

Paying for medical coverage isn’t a concern either. Scandinavia ‘s generous health-care system is well known, with the government continuing to pick up most of the tab. For instance, the EIU reports, the Norwegian system gives free treatment to all “with the exception of adult dental care and opticians.” The government pays 84 percent of health-care costs. 

Likewise, Iceland ‘s central government covers about 85 percent of the costs, with patients contributing toward outpatient care and pharmaceuticals. Iceland has more doctors per 1,000 inhabitants than the United States and United Kingdom do. Finland has reduced health-care spending, paying about 76 percent of total costs in 2003. Finnish cuts have resulted in fewer hospital beds, falling from 11 for every 1,000 inhabitants in the 1990s to fewer than seven in 2004, according to the EIU. 

Swedes Get Subsidized Health Care 

Subsidized health care is available to all Swedish residents. Adults may be charged up to 900 krona (about $126), whereas children (anyone under 20) receive free care. Dental care, while subsidized from the national dental insurance, has been deregulated, allowing providers to set their own fees. Health care is largely a public-sector effort, with only 8 percent of physicians in private practice. Private insurers pay for less than 1 percent of health care. 

Denmark ‘s system gives coverage to everyone, although immigrants must wait six weeks for coverage to start. Health care is free, with the exception of “dental care and physiotherapy.” Medication is subsidized. The majority of health-care costs, 86 percent, are covered by local municipalities, with the rest of the money coming from the central government (5 percent), private insurance (5 percent), and employers (4 percent), reports the EIU. 

While free or heavily subsidized health care for all may sound ideal, the quality of the care is often far from it. The biggest problem may simply be access. Sweden has “a low proportion of general practitioners relative to specialists,” notes the EIU. Swedes often have to wait a long time to be treated for nonthreatening conditions. A Swedish company, RelaxU, has turned this unfortunate reality into a profitable venture by working with Bangkok Phuket hospital to organize trips to Thailand for treatment. Leif Erre, RelaxU’s head, states that in Sweden “the waiting period for an operation or treatment can be anywhere from two to eighty weeks.” Such news isn’t shocking when the Swedish government freely admits that “the health services in Sweden rest largely in the hands of local politicians in 21 geographical areas.” 

All is not well in Denmark either, as Danes have one of the lowest life expectancies in Western Europe. As costs have risen, standards have declined and waiting times have increased, according to the EIU. Danes have responded by taking greater interest in private insurance. The number of people holding private policies rose from 1.1 million in 1991 to 1.75 million in 2004. 

Finland also has a low number of general practitioners, and until recently Finns had to wait a long time for care. The government introduced waiting-time targets in 2005, and things have improved, according to the OECD. Norway has also implemented reforms, thereby improving service, reducing waiting times, and increasing levels of treatment. But costs have risen steeply due to the volume of services and increasing salaries, says the OECD. Oil revenues give little incentive to impose cost-cutting measures. 

Paying the Piper 

Scandinavians may seem to have it all, with generous paternity leave, sick leave, education benefits, and cheap health care, but it all comes at a price. Scandinavians pay for these benefits with high taxes. The governments make no effort to hide this, as evidenced by this paragraph from a Danish government tax guide for new citizens: 

“The tax rate in Denmark is one of the highest in the world, as Denmark has a very large public sector. The public sector looks after many things that people in other countries often have to pay for themselves or that may not even be available to the public. Danish society is expensive to run and thus requires a lot of tax funds.” 

Danes are subject to numerous taxes, including state income taxes and municipal, county, and church taxes. Tax rates are progressive and reach 59 percent. Income taxes were cut in 2004, and a tax freeze was implemented in 2001. The Danish Ministry of Finance projects that the tax burden as a percentage of GDP will fall from 50.1 percent in 2005 to 47.5 by 2007. 

Taxes stifle business. A high tax on new cars makes innovation in the auto sector impossible, according to Ford’s managing director in Denmark , Kenneth Jorgensen. Taxes and duties account for around 50 percent of GDP. Currently, corporate taxes are levied at 28 percent. 

Sweden ‘s tax burden was 50.5 percent of GDP in 2004. The OECD notes that some Swedes avoid taxes by working fewer hours or “operating in the black economy.” 

Swedish taxes are so high that even the Swedish tax authority doesn’t want to pay them. A May 19 article in Forbes magazine noted that the Swedish tax authority produced television commercials in Estonia to escape the high taxes in Sweden. These commercials, which encouraged Swedes to pay their taxes on time, would have cost “50 to 100 percent more to make in high-tax Sweden.” Despite having high personal income taxes, Sweden has low corporate taxes with a flat 28 percent rate. The inheritance and gift tax was abolished in 2004. 

“Finns face a high personal tax burden, particularly when taken together with municipal tax, church tax and social insurance contributions,” reports Deloitte Touche. Finland ‘s corporate tax rate was lowered in 2005 from 29 percent to 26 percent. Finland ‘s VAT (value-added tax) rate for goods and services is 22 percent. 

Like the Finns, Norwegians face a heavy tax burden, with progressive income tax rates up to 51.3 percent in 2005. The wealth tax will be halved this year and cut again in 2007; the goal is to eliminate it eventually. Corporate taxes are 26 percent, and the VAT rate is at 22 percent. 

Iceland ‘s low corporate and personal income taxes are an exception to the rule, and they will go even lower thanks to reforms that started in 2004 and that will continue through next year. The general rate for personal income tax will be lowered to 21.75 percent by 2007. 

Reforms introduced in 2002 have lowered corporate taxes from 30 to 18 percent (26 percent for partnerships), Indsigt magazine reports. These taxes are lower than they were in the early ’90s, when the rate was 50 percent. “The largest single source of Treasury revenue is the value-added tax, which is levied at 24.5 percent on most goods and services,” the Central Bank of Iceland reported last year. The VAT has also been targeted for reform. 

Corporate rates in these countries are considerably lower than income tax rates, indicating that Scandinavian governments recognize the necessity of low rates to attract new investment. 

Open for Business 

These countries have a solid base for investment through their protection of property rights and strong rule of law. Moreover, they offer an educated workforce, a range of natural resources, and little or no corruption. In addition to low corporate tax rates, the Scandinavians have made other notable changes to open the door to investment. 

Privatization has come to these countries, thus increasing opportunities for investment, although some have been slower than others. The EIU notes that privatization has exposed “ Denmark to increased competitive pressures” and has provided a “useful source of income for reducing public-sector debt.” 

According to the Invest in Iceland Agency, public ownership there is being “phased down by privatization and the main role of the public sector is in health, education and social welfare.” Icelandic industrial policy has undergone changes over the past decade through implementation of “a more active competition policy replacing price supervision or even price controls that prevailed in many sectors,” says the Ministry of Foreign Affairs. 

Applications to establish a new business in Iceland are usually handled in one day. In business, time is money, thus Iceland ‘s quick turnover results in lower overhead costs. Likewise, Denmark offers “quick, informal and cost-efficient establishment procedures,” Invest in Denmark says. Denmark also offers an online registration system and boasts that a company can be incorporated “within a few hours.” 

Establishing a business in Sweden takes a little longer, about two to three weeks. Yet according to a report by the World Bank, it’s worth the wait. A 2005 World Bank comparison of 145 countries found that Sweden is one of the world’s top ten economies in “terms of ease of doing business.” 

Starting a business in Finland is easy. The Finnish government reports that 185 new foreign-owned companies opened their doors there last year. Finland ‘s location aids its success in attracting new companies. “ Finland is an attractive export base for the Baltic states and the regions of Russia bordering Finland ,” notes Deloitte Touche. 

These countries also have a history of trade and are known for exports such as bacon, oil, autos, fish, timber, machinery, and cell phones. Their free-trade policies have contributed to their growth. According to the Heritage Foundation, Denmark, Finland, Norway, and Sweden have a “low level of protectionism,” while Iceland has a “moderate level.” 

Denmark, Finland, and Sweden are members of the European Union (EU). Iceland and Norway belong to the European Free Trade Association (EFTA) and to the European Economic Area (EEA). The EEA covers the 25 member states of the EU plus Iceland, Liechtenstein, and Norway . 

Trade’s contribution to these economies is significant. It accounted for 46 percent of Swedish GDP in 2003. The Swedish government credits surging exports as one of the main drivers in economic growth. Norway describes trade as part of the foundation to advance its economy. 

Still Room for Improvement 

These countries still have much room for improvement despite the strides that they have made toward liberalization. Scandinavian countries have a good deal to offer, yet their reluctance to radically reform the welfare system makes them their own worst enemy. According to Stephen Brugger, executive director at the American Chamber of Commerce in Denmark , it is impossible to maintain things the way they are while expecting different results: 

In other words you can’t retain all of the safety mechanisms of the existing social welfare system and simultaneously grow a competitive, innovative and entrepreneurial economy. It is important that the government communicate to the population that we can’t both renew ourselves and keep things the way they are, otherwise we will be outpaced by the countries surrounding us. It is necessary that we change  some things fundamentally if we are to attract foreign investment. 

A simple focus on productivity would do these countries a world of good. Excessive regulations cost productivity (and money) and thus will deter, not attract investment. As the U.S. Commercial Service acknowledges, Swedish “labor laws create an expensive market for low cost labor, making operations like franchising a challenge.” 

Attracting investment is one issue, while convincing Scandinavians to decline generous sick leave and go to work is another. Sweden ‘s problem cannot be blamed on an uneducated workforce; on the contrary, it’s the less skilled, for the most part, who are working while the educated stay home. 

Sweden ‘s official unemployment rate, 5.5 percent in April according to Statistics Sweden, should be viewed with skepticism. A recent study by the McKinsey Global Institute indicates that Sweden ‘s real unemployment rate is around 15 percent. “McKinsey reached its conclusions by including those who want to work and those could do so, meaning people on government programmes as well as those on prolonged sick leave,” according to the Financial Times. 

These countries could learn a lot from Iceland. It has one of the highest labor-participation rates in the world, with older people staying in the workforce longer. Little Iceland has experienced larger growth and lower unemployment than the other countries. It seems that tax reform, privatization, and citizens who are willing to work befit growth. 

Greater privatization opens the door to more investment. Although state ownership is declining in Norway , it still has a long way to go. The government owns some of the largest companies in Norway, such as Statoil, which is partially privatized, and Norsk Hydro. The government also owns other enterprises ranging from electric plants to banks. Norway ‘s problems extend beyond its lack of privatization. Norwegian labor costs and taxes deter investment as well. 

Scandinavia has taken notable steps toward liberalization and has benefited greatly from it. If history is any indication, greater liberalization will bring greater investment. This transformation depends in large part on political will. Various factors, including the competitive forces of globalization and the fiscal pressure of large aging populations, may convince their leaders that there’s still work to be done.

An earlier version of this article appeared in Vital Speeches of the Day (November 15, 2005).

From a liberal perspective the goal of economic development is not simply to maximize output but, rather, to increase freedom of choice. As Peter (Lord) Bauer wrote in Economic Analysis and Policy in Underdeveloped Countries, “I regard the extension of the range of choice, that is, an increase in the range of effective alternatives open to people, as the principal objective and criterion of economic development.” Those countries that have liberalized trade—such as China and South Korea—have expanded individual choices and outperformed those that have clung to protectionism—such as Cuba and North Korea.

When considering how individuals and nations move from poverty to prosperity, one needs to emphasize that natural constraints (scarcity of resources) can be overcome if artificial constraints (such as trade restrictions) don’t impede development. This idea is consistent with Hong Kong Chief Executive Donald Tsang’s call for adherence to the principle of “small government, big market.”

There is a saying in China: “If no artificial constraints, then there is nothing you cannot do.” Nonintervention (wu wei) results in spontaneous order (zi fa) if government is limited to the protection of persons and property. In the fourth century B.C., long before Adam Smith, the great Chinese philosopher Lao Tzu held that when the ruler takes “no action,” “the people of themselves . . . become prosperous.”

Wu wei does not imply “the complete absence of all activity, but only of such as is forced, artificial, and unspontaneous,” according to Derk Bodde, the translator of Fung Yu-lan’s classic A History of Chinese Philosophy.

The Taoists saw a good government as one consistent with nonintervention so people could improve their welfare. Thus in the Chuang-tzu, we read: “Where knowledge and plans are not utilized, one must fall back upon the natural. This is perfect peace, the acme of good government.”

In the Han Fei Tzu (Han Fei was a legalist who died in 233 B.C.), one sees a clear understanding of the importance of free trade for creating harmony and prosperity:

When a man sells his services as a farm hand, the master will give him good food at the expense of his own family, and pay him money and cloth. This is not because he loves the farm hand, but he says, “In this way, his ploughing of the ground will go deeper and his sowing of seeds will be more active.” The farm hand, on the other hand, exerts all his strength and works busily at tilling and weeding. He exerts all his skill cultivating the fields. This is not because he loves his master, but he says: “In this way I shall have good soup, and money and cloth will come easily.” Thus he expends his strength as if between them there were a bond of love such as that of father and son. Yet their hearts are centered on utility, and they both harbor the idea of serving themselves. Therefore in the conduct of human affairs, if one has a mind to do benefit, it will be easy to remain harmonious, even with a native of Yüeh [a barbarian state]. But if one has a mind to do harm, even father and son will become separated and feel enmity toward one another.

This passage was written more than 2,000 years before The Wealth of Nations!

In 1987 China’s paramount leader and reformer Deng Xiaoping recognized the principle of spontaneous order when he said: “Our greatest success—and it is one we had by no means anticipated—has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously.”

Kate Xiao Zhou, in her 1996 book How the Farmers Changed China, describes the demise of China’s collective farms and the creation of the household-responsibility system (baochan daohu), with its township and village enterprises (TVEs), as “a spontaneous, unorganized, leaderless, nonideological, apolitical movement.”

China began to unilaterally liberalize foreign trade well before joining the World Trade Organization in December 2001. The first four special economic zones (SEZs) were created in 1980, and since then the coastal provinces (such as Guangdong, Zhejiang, and Fujian) have become highly “marketized.” The nonstate sector, including private firms, now overshadows the state sector.

Nicholas Lardy, a China specialist at the Institute for International Economics, has pointed out that in 1978 only 12 large state-owned enterprises (SOEs) were authorized to conduct foreign trade. However, by 2001 there were 35,000 domestic firms engaged in international trade, including private enterprises, and more than 150,000 foreign-funded enterprises. Today any registered firm can engage in foreign trade. Moreover, China reduced the average tariff rate from 55.6 percent in 1982 to 15.3 percent at the beginning of 2001. The average tariff on manufactured goods is now less than 9 percent. As a result of this dramatic liberalization, China is now one of the world’s most open economies.

China’s approach to development has been primarily “bottom-up,” or experimental. Typically, local leaders would permit reform on a trial basis and not penalize entrepreneurs who were experimenting on their own. When successful, politicians would take credit and let the experiment spread. At some point Beijing would sanction the reforms.

Piecemeal reform has led to numerous ownership forms, including cooperative shareholding, foreign-funded enterprises, private firms, and TVEs. Economists Gary Jefferson and Thomas Rawski call this process “induced privatization.” Under it the state sector has shrunk from a dominant position in 1978 to less than one-third of industrial output value today.

Property Far from Secure

By letting the nonstate sector grow, China has avoided the difficult political decision of outright privatization of large SOEs. Private firms were not legal until 1988, and in 2004 the PRC constitution was amended to give greater protection to the growing private sector. Private property rights, however, are still far from secure, and corruption is rampant. So while economic liberalization has progressed, and China has become the world’s third-largest trading nation, the Chinese Communist Party (CCP) retains its monopoly on power.

Nevertheless, China’s opening to the outside world has increased personal freedom and prosperity, and has led to a demand for safeguarding private property rights. Jianying Zha, in her fascinating book China Pop, writes, “The economic reforms have created new opportunities, new dreams, and to some extent, a new atmosphere and new mindsets. . . . There is a growing sense of increased space for personal freedom.”

Kathy Chen of the Wall Street Journal notes that the development model adopted by the newly emerging urban centers, such as Shishi in Fujian, is “small government, big society” (xiao zhen fu, da she hui).

When the National People’s Congress amended the constitution to make “legally acquired private property inviolable,” that was a clear signal the market was here to stay—and a far cry from Mao Zedong’s admonition to “strike hard against the slightest sign of private ownership.”  

There is no doubt that globalization and the information revolution have increased personal freedom in China. More than 100 million Chinese have access to the Internet. 

And I am sure that computer whiz-kids will stay one step ahead of government censors. Moreover, if Shanghai is to become a world-class financial center, there will have to be a freer flow of information and open capital markets.

President Hu Jintao has recently indicated his adherence to a policy of “peaceful development,” which is precisely the policy that China has been following since 1978. The United States would be wise to continue a policy of engagement and avoid destructive protectionism. Foreign-funded enterprises and private firms account for more than 60 percent of China’s foreign-trade sector. U.S. protectionism would harm the very sector that is working to decrease poverty, increase exposure to the West, and pressure the CCP to accept change.  

Institutional reform (especially trade liberalization) has substantially reduced poverty in China—real per capita income has increased nearly fivefold since 1978, with significantly larger increases in the highly marketized coastal areas. But there has been little increase in political freedom. Further economic liberalization—especially privatization of large SOEs and capital freedom—is constrained by political issues. Whether reformers in the CCP will gain the upper hand remains to be seen.

An array of government interventions continues to restrict economic and personal freedom, and, hence, China’s future development. Artificial constraints include capital and exchange controls, state-owned banks and enterprises, interest-rate controls, and especially the lack of a transparent legal structure that protects persons and property.

“Free Private Markets”

In 1988, at the Cato Institute’s historic conference in Shanghai, Milton Friedman called for China to abandon its socialist market economy and make the transition to a full-fledged system of “free private markets.” Progress has been made since that time, as markets not planners determine most prices. There is private housing and private enterprise, but China is still plagued by widespread state ownership and control, especially in the financial sector. Without capital freedom, investment alternatives will be limited and investment decisions will continue to be politicized.

Privatization is the only way to rid the system of corruption. But as long as the CCP gains from the present socialist market system, change will proceed slowly, if at all. Economic reform eventually will require political reform. The question is whether the gradual increase in economic freedom will be sufficient to bring about political change that supports, rather than retards, further liberalization.

We should not forget that trade expands choice and, therefore, should be promoted as a fundamental human right. U.S. protectionism would be self-defeating and strengthen Chinese nationalism and anti-American sentiments. Engagement is the only rational policy to promote peace and prosperity.

But liberty is inconsistent with any use of the government to obtain supposed “security” for oneself or others through coerced redistribution of income and wealth. The free man considers it immoral to obtain any benefits at the forced expense of others in society. For this reason the existing Social Security system should be abolished, and not be merely tinkered with as the current “reform” plans propose.

For 70 years the United States government has assumed the paternalist role of overseeing and planning our retirement. We Americans have been viewed and treated as irresponsible children who cannot be trusted to plan for our own future. Government has claimed the right to take a portion of our honestly earned incomes supposedly to care for us in our “golden years.”

In addition, the government has deceptively fed us what Plato would have called a “noble lie”: that our money has been put aside and invested for our own retirement, when in fact the money collected during any given year has been spent to cover the Social Security costs for the current retirees. Any “surplus” has been “invested” in U.S. government bonds, with nothing behind them other than the government’s own police power to tax the next working generation to cover any shortfalls in the future.

Now the deception is coming to an end. The demographics of the country are undermining the illusion behind the Social Security shell game. Thirty years ago there were about five workers in the labor force for every retiree who was receiving Social Security payments. That number is rapidly shrinking to a mere two to three workers per retiree. To make good on the government’s pension promises the working population will have to be taxed a lot more—or benefits will have to be cut back significantly, along with raising the retirement age for Social Security eligibility.

The government’s own projections highlight the trends at work. At the end of 2004, 48 million Americans received Social Security benefits: 33 million retired workers and their dependents; seven million survivors of deceased workers; and eight million disabled workers and their dependents. Total benefits paid in 2004 came to $493 billion. During 2004 an estimated 157 million working Americans paid into Social Security “trust funds.” The system had tax revenue of $658 billion, with “assets” of $1.7 trillion dollars in the form of U. S.Treasury securities.

Because Social Security revenues will continue to exceed annual expenditures on retirees between 2005 and 2014, the total “assets” in the trust fund in the form of Treasury securities are projected to increase to $3.9 trillion. But with the coming retirement of the Baby Boom generation, Social Security expenditures will rapidly rise between 2010 and 2030.

Present government projections anticipate that annual Social Security expenditures will start to exceed Social Security taxes collected in 2017, with the resulting deficit covered by cashing out the Treasury securities. By 2041 all of these “assets” will have been cashed out and used up in payments to retirees. The total unfunded obligations over the next 75 years have been estimated to have a current present value of about $4 trillion.

Some critics of the current system have proposed a partial “privatization” of the Social Security funds. But these personal retirement accounts are just another version of the same deceptive game. Americans are to be “allowed” to “invest” a small portion of their own money in a group of government-approved mutual funds, with the bulk of their Social Security taxes continuing to go into some “reformed” version of the existing system.The government will decide for you what it considers “safe” investments. Over time the payoffs from these mutual funds and the stock market in general will become, even more than now, politically sensitive issues that will make them targets for increased regulatory manipulation by the “public policy” masters in Washington.

The only answer, therefore, is to abolish Social Security and return responsibility to individual citizens. In other words, what is needed is a full and real privatization of retirement planning by removing it completely from the hands of government.

But how can the Social Security system be abolished when so many people over several generations have had a significant part of their income taxed away? How would those who have paid into the system over many years, especially among the older and retired members of society, have the wherewithal to take responsibility for their own futures?

What I propose for ending Social Security is the privatizing of government-owned and -managed property. The territory of the United States totals about 2.3 trillion acres of land, out of which the U.S. government owns and manages 507 million acres—or slightly more than one-fifth of all the land in the country. Over a reasonably short period, say, five years, a vast majority of this land could be sold at public auction, with the proceeds being used to pay back what has been taxed from the American citizenry.

The revenues from the sales would be disbursed beginning with the oldest groups until as many Social Security taxpayers as possible had their wealth returned to them. As each group was being paid back, Social Security taxes on workers would be commensurately reduced, leaving them free to plan more of their own retirement. At the end of five years, all Social Security legislation would be repealed.

Expected Land Revenues

Just how much revenue might be available from these land sales? According to a variety of government departments, bureaus, and agencies responsible for control and management of these lands, federal land and the mineral reserves on them have, in 2005, an estimated total value of over $4.5 trillion.

The following are the estimated market values of just some of the leading mineral reserves on government owned land: copper, $1.9 trillion; nickel, $837 billion; gold, $531 billion; zinc, $151 billion; platinum, $44 billion; lead, $29 billion; and silver, $27 billion.

There is, in addition, 250 million acres of timberland and 257 million acres of grazing land under federal control; these are estimated, respectively, to have market values of $214 billion and $350 billion, for a total of $564 billion.

In other words, if the revenues from the sales of government lands and the accompanying mineral rights were to come even close to their current estimated market values, their privatization would equal the projected present value of all unfunded Society Security obligations over the next 75 years.

Of course, if Social Security were in fact abolished over a relatively short period through the type of real privatization plan proposed here, there would be no future governmental pension obligations, and the cost of ending the system would likely be a dollar amount significantly less than presently projected over the remainder of the 21st century.

The great financial albatross of the coming decades would be eliminated, and a crucial aspect of freedom would be restored to the American people.

Among potential options, Robert Poole has long proposed privatizing airline safety and security through the insurance industry.¹ The financial risks involved provide the insurance companies incentives to regulate the airlines effectively and efficiently without imposing costly rules that serve little or no purpose. Competition and entrepreneurship would then shape the evolutionary development of air safety and security, rather than politics and monopoly bureaucracy. The fallacies in the command-and-control approach show why private security should be adopted.

To expose those fallacies we can examine the FAA’s own strategic plan for 2001.² The introduction states, “The Federal Aviation Administration (FAA) consists of nearly 50,000 people dedicated to improving the safety, security, and efficiency of aviation and commercial space transportation in a way that protects the environment and national security.”³ Among the values it claims to respect are timeliness and accountability. It also asserts that it is “the leading authority in the international aerospace community.”⁴ This raises some questions.

First, what evidence can the FAA provide to support that assertion? The security failure of 9/11 stands as a major piece of evidence against it. In addition, the claim ignores all the knowledgeable people who actually work in the industry. It is unclear from FAA documents if the agency recognizes the value of these experts. If officials disregard those authorities, is it because the officials are in a better position to judge the measures most needed to secure the skies? If not, then their claim to being the ultimate authority on air safety, security, and efficiency is sheer arrogance.

Second, how were FAA employees held accountable for the security breach that led to the tragedy? Apart from some bad press initially, the institution and its personnel experienced few bad consequences from those events. On the contrary, Congress expanded the agency’s bureaucratic control. Thus the FAA actually prospered in spite of its failure. This would seem to call into question whether the agency’s commitment to accountability has any significant meaning. The question arises, to whom are officials of the FAA accountable?

Third, why should anyone believe that the institution is committed to respecting other people? The agency certainly showed little respect for pilots when it prohibited them from being armed in their aircraft. This rule treats pilots as irresponsible individuals who cannot be trusted with such weapons.⁵ Had the pilots actually carried firearms, it is unlikely that the hijackers could have succeeded with only box cutters. The pilots at least think so, since their union advocated lifting the gun ban. The FAA and the administration initially denied this request.

These questions can be easily answered when one realizes that the FAA and its workers are not liable for failure. The agency instead is rewarded.⁶ Those who have suffered losses have no redress.

Discovery and Innovation

The problem with the command-and control-approach to securing air travel is that it ignores the market process. Austrian-school economists have amply explained why, because of the “knowledge problem,” central planning does not work. The knowledge problem consists of people’s ignorance of all the factors related to their situations. While private market activity can readily overcome the problem through the use of the price system, central planning cannot.

Israel Kirzner has explained that the price system eases the knowledge problem not because prices embody accurate information, but rather because “disequilibrium prices . . . offer pure profit opportunities that can attract the notice of alert profit-seeking entrepreneurs. . . . To the extent that central planning displaces the entrepreneurial discovery process, whether on a society-wide scale of comprehensive planning or on the more modest scale of state piecemeal intervention in an otherwise free market, the planners are at the same time both smothering the market’s ability to transcend the basic knowledge problem and subjecting themselves helplessly to that very problem.”⁷

With this in mind, we can compare a private system with a command system for promoting air safety. To begin, perfect safety and security are not attainable by any arrangement. However, the security produced by the command system most likely falls far short of what a private market system could accomplish.

A private system would have important incentives enabling it to evolve better security practices. The reason for this is twofold. First is the liability exposure of airports, airlines, and insurance companies. While some measures may fail, such failure would prompt decision-makers to look for other options. Entrepreneurial activity would inevitably result in the development of better and more cost-efficient means of securing air travel.

Beyond tort liability, passengers themselves would have a greater interest in identifying air carriers with the best safety records. This would likely give rise to information bureaus that would track airlines. In another context Daniel Klein points out why this would occur: “[H]ow much do I know about, say, therapies for ulcers? Perhaps very little. One thing I do know, however, is that I know little about therapies for ulcers. In fact, I am the world’s foremost expert on the topic of my knowledge of ulcer therapies. . . . Knowledge of our being ignorant is often almost as valuable as not being ignorant, because the knowledge of ignorance directs us . . . to overcome ignorance. Not having much information about ulcer therapies matters less than our judgment of whether we are well informed. Indeed, wiser is the person who is ignorant and knows it than the person who has some information and thinks he is fully informed.”⁸

As a result, there would be an opportunity for firms to fill the void with useful information that could enhance consumer judgment. The problem with government control is that it stamps an imprimatur on any airline flying, in a one-size-fits-all approach that leaves passengers with no choice but to choose to fly or not. Thus we can ask, “Is the government really a more knowing assessor of relevant tradeoffs involving hazards, a better steward of knowledge, a speedier, more pointed, and more opportune messenger?”⁹ As the late Aaron Wildavsky wrote, “Safety results from a process of discovery. Attempting to short-circuit this competitive, evolutionary, trial and error process by wishing the end–safety–without providing the means–decentralized search–is bound to be self-defeating.”¹⁰

Benefits of Privatization

Past experience with private safety regulation through the insurance industry demonstrates its value. Poole shows how the National Board of Fire Underwriters (NBFU) established private inspection of U.S. fire departments beginning in the early nineteenth century.¹¹ Insurance rates offered to fire departments were adjusted on the basis of compliance with the Board’s recommendations. Thus departments had ample incentive from the liability standpoint to adopt the best-known safety practices. The NBFU evolved into the Insurance Services Office (ISO), which continues to conduct detailed analyses of city fire departments to determine the practices that minimize liability. ISO develops ratings that are used by insurers to set premiums.

This same approach could be used in the airline industry. The FAA would be cut free from its bureaucratic setting, and, following Poole’s suggestion, insurance companies would replace politicians as the ultimate authority overseeing FAA actions. The agency would be responsible to the insurers, which would hire it to conduct inspections and oversee operations to determine acceptable risks. It could not hide behind its government affiliation if its policies failed to provide adequate safety in air travel. In other words, the FAA and its officials would be accountable since they could be penalized individually and collectively by its customers.

The value of this approach is that it replaces subjective and capricious political controls with clear market incentives for progress. Insurers would drive the organization to adopt policies that produce the best safety results. Furthermore, since the airlines are free to shop for the best insurance rates, all insurers would have a strong incentive to press the FAA to search for the best safety practices. Today FAA officials have no particular incentive to heed the insurers. The main interest of officials now is largely bureaucratic, and thus its practices are typically expedient. This does not translate into the best policies because there is no financial consideration.

A privatized organization would likely adopt the latest technology, where the value relative to cost was demonstrable. Moreover, it would operate efficiently because of its need to generate revenues from private insurers.

Currently, the impact of politics is obvious in some regulations that make no sense. For example, there is a rule that forbids airlines from pushing away from gates until all passengers are seated. This rule seems laughable given that buses and trains routinely let passengers make their own decisions about taking their seats. Before the rule was adopted, Southwest Airlines (noted for its on-time performance) regularly pushed away as passengers were finding seats. They were only required to be seated before takeoff. No one was ever injured. After the new policy was imposed in 1986, at least 4.2 minutes was added to each turnaround, costing Southwest at least $150 million in 1994.¹²

This regulation could be imposed only in a political process. Given the record, it is not likely that a private insurer would be concerned with the minor risk exposure of relaxing this rule.

Opponents of privatization have several concerns, such as what would happen in a crisis if the FAA were private. This is not really an issue. Initially, nothing would have been different on 9/11. The government would have grounded aircraft because of the national emergency, and a private system would not have obstructed that decision. In fact, both United and American, the two airlines whose planes were used in the attacks, grounded their fleets before the government’s order was issued.

Opponents also raise concerns about bribery and corruption within a private clearinghouse for safety rules. But, this too is a non-issue. Corruption is a threat for all human institutions, “public” or private. Both the historical record and economic logic indicate that private organizations are generally less corrupt than government agencies. Private organizations that provide advice about product quality, such as Consumer Reports and Moody’s, depend on their reputations for their existence. If it were revealed that they had been bought off in order to secure a favorable judgment, consumer trust would be shattered and their operations would be jeopardized. That’s a strong incentive to stay honest. However, that is not the case with government officials and bureaucrats. While bribery might prove disastrous to some individuals in the public realm, it does not generally damage the institutions even where bribery is rampant. As a result, corruption and bribery flourish far better in the public sector as compared to the private sector.

Arthur Andersen vs. the FDA

The experience of Arthur Andersen is instructive. Andersen’s fate appears certain given the heavy losses suffered because of the accounting scandals. At this writing, the company is probably finished because liability issues loom large and clients are taking their business elsewhere. Compare this with the scandal involving the Food and Drug Administration (FDA) in 1992, when numerous employees were found accepting bribes to facilitate the approval of certain generic drugs. Rather than leading to the collapse of the organization, the agency received a budget increase to help solve its corruption problem. Moreover, then-FDA commissioner David Kessler was the only Bush appointee to be reappointed by Bill Clinton. A private company involved in such a scandal would probably not survive. But even if it did, its top executives would be fired for allowing such behavior to occur. Evidently, in government corruption is a key to success.

Beyond this example, it can be maintained that public authorities generally are more corruptible. Consider the FAA’s reaction to the 1996 crash of a ValuJet airplane. At first, the agency backed the company, but then abruptly abandoned this position by grounding the airline’s entire fleet. That led to the demise of the firm even though subsequent information revealed that the company’s liability was negligible. While details are sketchy on why the FAA changed its stance, there are some interesting political facts. ValuJet was a non-union airline. The crash occurred in a presidential election year, and the labor unions supported President Clinton. While this may all be coincidental, it seems fair to note the incentives politicians and bureaucrats have to gain from corruption.

A final concern opponents raise is that in a privatized world different firms may adopt different safety strategies. While true, it is also true that the airlines have more incentive to adopt strategies that will achieve the greatest safety at least cost. It is unlikely that one firm’s policies will vary wildly from those of other firms unless they are clearly superior. An airline’s track record is crucial in gaining the confidence of customers and securing insurance against liability. The benefit of privatization is that any advancement that can improve safety per dollar spent will be adopted by other air carriers quickly. Under government control, such changes are likely to take ages to bring about.

Paul Cleveland is an associate professor of economics at Birmingham-Southern College and an adjunct scholar of the Center for Economic Personalism. Thomas Tacker (tacker@erau.edu) is a professor of business at Embry-Riddle Aeronautical University.

Notes

1. 1. Robert W. Poole Jr., “Toward Safer Skies,” in Instead of Regulation, ed. Robert W. Poole Jr. (Lexington, Mass.: D.C. Heath and Co., 1982).
2. 2. “FAA Strategic Plan,” Federal Aviation Administration, Washington, D.C., January 2001.
3. 3. Ibid., p. 7.
4. 4. Ibid., p. 9.
5. 5. For an excellent discussion about why such rules amount to a frontal assault on human dignity, see Daniel B. Klein, “Liberty, Dignity, and Responsibility: The Moral Triad of a Good Society,” The Independent Review, Winter 1997, pp. 325-52.
6. 6. For a complete treatment of the process by which crises give rise to government expansion, see Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York: Oxford University Press, 1987).
7. 7. Israel Kirzner, The Meaning of Market Process: Essays in the Development of Modern Austrian Economics (London: Routledge, 1992), pp. 160-62.
8. 8. Daniel B. Klein, “Quality-and-Safety Assurance: How Voluntary Social Processes Remedy Their Own Shortcomings,” The Independent Review, Spring 1998, pp. 549-50.
9. 9. Ibid., p. 546.
10. 10. Aaron Wildavsky, Searching for Safety (New Brunswick, N.J.: Transaction Publishers, 1988), p. 288.
11. 11. Poole, pp. 231-32.
12. 12. Robert Kneisly, Samuel Fairchild, and Audrey Spolarich, “The Case for Regulatory Sunset,” Handbook of Airline Economics, ed. Darryl Jenkins (New York: McGraw Hill, 1995), pp. 217-18.