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Friday, August 1, 1986

Privatization: The Rediscovery of Entrepreneurship

Dr. Peterson is director of the Center for Economic Education and holds the Scott L. Probasco Jr. Chair of Free Enterprise at the University of Tennessee at Chattanooga.

This article is adapted from a lecture given at a conference on entrepreneurship at McNeese State University, Lake Charles, Louisiana. It is used with permission of the Intercollegiate Studies Institute, Inc., the sponsor of the conference, Responding to market incentives, rather than political pressures.

Last February I participated in a conference on international privatization in Washington, along with some 500 others, mostly officials from the Third World. Perhaps surprisingly, the conference buzz-words turned out to be privatization and entrepreneurship.

I was struck by this seeming rediscovery of the world of Adam Smith and John Stuart Mill, and the fading from view of the world of Karl Marx and John Maynard Keynes. The trend is commendable, and I applaud it. But, alas, trends are reversible. And what irony, the trend seems more pronounced abroad than it does here in America. So the role of the private sector and the entrepreneur in preserving and expanding all over the world freedom and free enterprise, including the art of wealth-creation, has to be redefined and reaffirmed, in my judgment. To reassert an old homily, the price of freedom is eternal vigilance.

What is privatization? Privatization is a means of getting goods and services produced privately that were previously produced publicly. Sometimes it means the government will continue to finance the production Of a good or service but with the private sector actually producing the good or service. One such practice is contracting Out. Another such practice is giving individuals vouchers with which to purchase the good or service from private suppliers. Sometimes privatization involves the outright sale of state-owned enterprises to private investors. Sometimes it involves deregulation, the removal of legal restrictions on private provision of goods and services, and hence the allowing of a transition from a public or quasi-public to an unhampered private supply. A city’s cancellation of a limited number of taxi licenses to open the cab business to all comers is a case in point.

What is entrepreneurship? While it is possible to think of public entrepreneurship (such as the conceptualization and establishment of Social Security and Medicare), to me entrepreneurship is a strictly private matter. It is the risk-assuming organization and management of an enterprise. It is the ever-present fourth and most indispensable factor of production beyond the other three of land, labor, and capital. Its quality makes or breaks the enterprise. It exists under the sovereignty and suffrage of the consumer who has a life-and-death vote in the marketplace over the fate and viability of every enterprise. It is at the heart of productivity improvement, of getting more out of less. It is the sine qua non of freedom and free enterprise, of what Adam Smith called “the wealth of nations,” of the manifestation of his famous “invisible hand” in action—of self-interest harnessed to the public interest, the common good.

At the Washington meeting, Secretary of State George Shultz told the group that privatization and entrepreneurship are indeed ideas whose time has come, that success in economic development is at base a matter of choice of competing economic philosophies, that Third World debt has to be increasingly replaced by Third World equity, that with private enterprise, with the emergence of private savings, private investment and the ubiquitous private entrepreneur, comes industrial efficiency, economic growth and rising living standards. Said Agency for International Development administrator Peter McPherson to the conferees: “Interest in reducing the public sector is a new phenomenon. It results from the pragmatic realization that statism has failed in most parts of the world.”

The Failure of State Ownership

That failure is seen in the dashed hopes in state-owned enterprises and services around the globe. Guarded horror stories on state economic incompetency abounded at the conference, leading to the conclusion that state operation of enterprises leads to mismanagement of resources, low quality of products and services, reduced economic growth and even negative growth, capital flight to safer havens (most notably to Switzerland), forced migration of peoples (such as the waves of Mexicans and Central Americans across the U.S. border with Mexico), and frequent staggering financial losses. These losses have compounded the growing and precarious external debt load of developing nations at a magnitude currently estimated at $1 trillion.

(As Ludwig von Mises had long demonstrated, government intervention into peaceful private activity tends to make things worse rather than better. Adam Smith also would have been critical of the postwar worldwide splurge on the part of political leaders in nationalizing industries from communications to medicine, while admonishing citizens to curb their predilection for “private affluence” in the face of “a starved public sector”—to quote the verbiage of John Kenneth Galbraith. As Smith wrote in The Wealth of Nations:

It is the highest impertinence and presumption . . . in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.)

At the Washington conference, I soon gathered that the solution to what I label “intervention failures” has increasingly been privatization—the return to private entrepreneurship, to what Hayek calls “spontaneous order.” Countries around the globe are finding out anew that the production of government- provided goods and services can be well shifted to the private sector, with a practically immediate upgrade of quality and a reduction of cost, apart from other desirable results. I found that privatization—the re-emergence of the entrepreneur-has become a worldwide movement, with even communist countries along with socialist governments in places like Spain, Italy, France, and Sweden getting into the swing.

The People’s Republic of China, for example, under the leadership of Vice-Chairman Deng Xaiopeng, has opened its economy to foreign investors through the aegis of joint ventures, with guarantees against expropriation of property and for repatriation of earnings. It has permitted its collective farmers to sell their “surplus,” i.e., over-quota, produce in the cities and to keep the proceeds. It has permitted more than ten million small entrepreneurs to run restaurants, boutiques, repair shops, street stalls, and so on. Cuba is selling state- owned houses and apartments to tenants. Hungary, in the vanguard of privatization among communist states as well as its most affluent member, concedes the right of private entrepreneurs and capitalists to bid to the government to operate their own businesses, with the bidding falling on receptive ears. Poland authorizes more private farming, now around 40 per cent of the total.

Other privatization stories also abounded at the Washington conference. Pedro Pablo Kuczynski, formerly Peru’s minister of energy and mines and now managing director of the First Boston Corporation, told the conferees how his company assisted Spain’s socialist government to sell off more than 40 state-owned hotels. Canada plans to sell to private investors its two loss-making state-owned airframe manufacturers, Canadair and de Haviland, along with government mining businesses, including Eldorado Nuclear, a producer of uranium oxide. Also on the Ottawa government’s for-sale list are Canadian Arsenal, an arms producer, and Teleglobe Canada, a firm handling overseas telephone calls. Said Robert R. De Cotret, chairman of Canada’s Ministerial Task Force on Privatization, in announcing these privatizing moves (in a bit of understatement): “A key element of the government’s commitment to good management is our policy for the privatization of commercial crown corporations which no longer fulfill a specific public policy purpose.”

Privatization in Britain

The biggest privatizer of all countries, though, is Britain, home of a number of socialist governments, especially since the end of World War II. In his paper, Privatization around the Globe.’ Lessons for the Reagan Administration, conferee Peter Young of the Washington-based Adam Smith Institute-USA and the Dallas- based National Center for Policy Analysis, the publisher of the paper, reported that a “privatization revolution of enormous proportion” is taking place in Britain, transforming virtually the entire British economy. Last November, for example, British Telecom, a vast state-owned telephone and telegraph firm, was sold to the private sector in the largest public offering in history. Two million Britons snapped up shares. Jaguar, Britain’s state-owned auto manufacturer, was also sold to the public. The Thatcher government has sold 100 per cent of its stock in British Sugar, 51 per cent of its stock in Britoil (North Sea oil exploration), 51 per cent of British Aerospace, about 40 per cent of its stock in British Petroleum, and has sold off subsidiary operations of British Steel, British Rail and British Airways. In addition, the British government has sold 873,000 public housing units—13 per cent of all British housing—to tenants. To date more than 400,000 jobs—almost one-third of the total in nationalized industries—have been shifted to the private sector.

While not so pronounced, similar privatization moves have been made in France, Italy, the Netherlands, West Germany, Sweden, Denmark, and Portugal. Turkey has sold off its Bosporus Bridge and the Keban hydroelectric dam. It is also planning to privatize more than 30 state-owned companies, including the state airline, THY.

In Africa, Kenya sold off its national fisheries. Somalia eliminated price controls and turned over its grain marketing facilities to private enterprise. Mozambique privatized its radiator factory and truck and railroad parts plant. Togo’s minister of industry told me of his initial plans to privatize 12 of 70 state enterprises, including a steel mill capable of producing 50,000 tons of steel a year (with a local market of only 8,000 tons).

Japan is divesting itself of government-owned telephone, airline, and railroad systems. Already the partial sale of giant Nippon Telephone and Telegraph has brought billions of yen into the Japanese treasury. South Korea has unloaded onto the private sector many government banks and heavy-industry plants. Pakistan and Bangladesh are returning nationalized rice, flour, jute, and textile mills to their former proprietors. India and Malaysia are privatizing their highways. Sri Lanka has put up its telecommunications system for sale, and has sold off its bus system, once a monopoly of the Ceylon Transport Board.

Progress in America

In America, as I noted earlier, privatization has further to go than it has abroad, especially at the central government level. Even so, 35 per cent of all local governments now contract out residential garbage collection, 42 per cent contract out the operation and maintenance of their bus systems, and 80 per cent contract out vehicle towing and storage. Louisville, Kentucky sold its money-losing teaching hospital to a private hospital company in 1983, with the hospital today not only operating in the black but furnishing better patient care. Knoxville, Tennessee has privatized its residential garbage collection, with its mayor boasting of savings of around $1 million a year. Hamilton County, Tennessee has privatized its Silverdale prison, with the operator, the Corrections Corporation of America, charging Hamilton County $21 per prisoner per day instead of the $28 a day which the county had been incurring on its own. Scottsdale, Arizona has effected savings of around 50 per cent in fire-fighting costs through its contract with Rural Metro Fire Department, Inc.

And so it goes in municipal America. Private companies have contracted with city governments to control traffic, repair streets, provide ambulance service, effect crime control, maintain and clean public buildings, furnish water service, manage cemeteries, parks, museums, tennis courts, golf courses, liquor stores, auditoriums, hospitals, arts and cultural centers, and even entire city governments. The town of La Mirada, California, for example, has utilized the private sector for virtually all its key services, including social welfare, public works, and police and fire protection.

Privatization at the municipal level, and recent proposals to privatize state and Federal services, can be viewed as an encouraging move toward the free market. But a few words of caution may be in order. Much of what is being touted as privatization may, in time, extend the powers of government.

Consider, for example, the contracting out of “public” services. When a privately owned firm, which previously served only the private sector, receives a government contract, its relationship with the government necessarily changes. This is especially true if the firm receives a franchise—a monopoly privilege. Government funding brings government control, and the government contractor may soon find himself responding to political pressures, rather than market incentives.

It is important to bear in mind that true privatization reaches beyond achieving efficiency and coping with deficit spending. It reaches into the nature of man, of human incentive. As Peter Drucker noted in his new book, Innovation and Entrepreneurship:

The most entrepreneurial, innovative people behave like the worst time-serving bureaucrats or power- hungry politicians six months after they have taken over the management of the public service institution, particularly if it is a government agency. The forces that impede innovation in a public service institution are inherent in and integral to it and inseparable from it.

Ludwig von Mises put the matter even more forcefully, tying the issue to human liberty, in his 1944 Classic, Bureaucracy:

There are two methods for the conduct of human affairs within the frame of human society. One is bureaucratic management, the other is profit management . . . . The main issue in present-day social and political conflicts is whether or not man should give away freedom, private initiative, and individual responsibility and surrender to the guardianship of a gigantic apparatus of compulsion and coercion, the socialist state. Should authoritarian totalitarianism be substituted for individualism and democracy? Should the citizen be transformed into a subject, a subordinate in an all-embracing army of conscripted labor, bound to obey unconditionally the orders of his superiors? Should he be deprived of his most precious privilege to choose means and ends and to shape his own life?

  • William H. Peterson (1921-2012) was an economist, businessman and author who wrote extensively on Austrian Economics. He completed his PhD at New York University in 1952 under the supervision of Ludwig von Mises.