All Commentary
Tuesday, October 1, 1996

The Privatization Revolution

Smaller Government Serves Us Better


There’s a revolution underway. It’s worldwide, nonviolent, and pro-freedom. It’s known by a word that wasn’t even in dictionaries 20 years ago—privatization.

Privatization, in its broadest sense, is the transfer of assets or services from the tax-supported and politicized public sector to the entrepreneurial initiative and competitive markets of the private sector.

Done properly and with care, privatization harnesses the powerful market forces of competition, accountability, and incentive. It means that government officials don’t have to be hemmed in by an indifferent bureaucracy; instead, they can shop around, as other consumers do, for the best available buys.

State and local governments have routinely experienced cost savings of 10 to 40 percent through privatization, and often with improvements in the way an asset is managed or a service is delivered. When and where assets and services can be put entirely in private hands—with the middleman of government absent altogether—even greater efficiencies are possible.

The most common form of privatization—contracting out to private firms—has become more than just a trend. With decades of experience, it has become something of a science at the local level in America. We now know what it takes to make this work: open, competitive bidding for contracts that are subject to periodic renewal; careful writing of the contract terms to incorporate clear language and appropriate safeguards; and effective monitoring of performance to ensure the contract is being carried out.

Commercialization is another form. That happens when a unit of government simply says, We’re no longer going to do this work with our own workforce. We’re not going to contract it out either. We’re simply going to get out of this business altogether. The customers we used to serve can take care of the job themselves by contracting with the private provider they choose.

This is how, for instance, cities across America have pulled out of the garbage business. Individuals shop among several private, competitive firms that specialize in picking up and properly disposing of garbage. No middleman, no taxes, no boring city council meetings to sweat through in order to register a complaint. You hire the service and if you’re not happy, you fire it and hire a different one. This form of privatization tends to enhance both our liberties and our pocketbooks.

Other forms of privatization include:

• the outright gift or sale by government of a physical asset (a piece of equipment or a building, perhaps) to a private entity;

• the sale of stock in a newly privatized company that was formerly state-owned;

• the ending of subsidies and all the red tape and regulations that came with them, liberating an industry to produce for the market instead of for the government.

In a few places around the world, privatization is occurring because the enlightened leaders in power are motivated by ideology. They know that free markets work and socialism does not.

In most places, however, privatization is occurring for more pragmatic reasons. Countries, states, provinces, or communities have hit the tax wall. They have no more room to raise taxes. Doing so would either violate some constitutional or statutory limit, or send people and businesses packing for friendlier climes. So, for practical reasons, hard-pressed politicians are exercising the best or only option they have: privatization.

At the federal level in America, little has been privatized but much could be. The power of entrenched bureaucracy and special interests who support the status quo is greater in Washington, as a rule, than it is at the state or local level. Proposals to privatize everything from Social Security to federal lands to the post office are now on the table, but they probably await a more friendly administration.

At the state level, there’s much more going on. States are privatizing utilities, prison management, data processing, child foster care, and a long list of other items. It is, however, at the local level of government—counties and cities and schools—where the privatization revolution is gaining momentum. Just about any asset or service that a local government owns or provides has been privatized somewhere, in some manner, partially or wholly. That includes fire protection, certain elements of police protection, wastewater treatment, street lighting, tree trimming, snow removal, parking structures, railroads, hospitals, jails, and even cemeteries.

Thinking seriously about privatization prompts officials to open their minds and think about the role of government services and good stewardship of the public purse. It forces them to find out, for instance, how much it is actually costing them to provide those services. When they add up all their true costs—including hidden ones—they discover how hopelessly inefficient government is.

Studies by the dozens verify effectiveness of privatization. Objections, however, are still heard and sometimes loudly. Here are the most common ones, along with a brief response:

Privatization is anti-public employee. We must remember that government should not exist for the benefit of those who work for it; its only legitimate purpose is the protection of everyone’s life and property. Governments that employ more people than necessary, or that pay their employees more than the market will bear, are not doing any favors for the citizens—including the poor—who are picking up the tab.

There are instances where it didn’t work, so we shouldn’t do it anywhere. I have yet to see a case where a failure was really an indictment of privatization itself. Failures are almost always arguments for avoiding such poor practices as noncompetitive bidding, sloppy contract writing, or nonexistent monitoring of performance.

It can breed special interests who will lobby for more contracts and services from government, even when that’s not warranted. Public bureaucracies lobby for more government, too. This is an argument for taxpayers and the press to be vigilant, not an argument against privatization.

Government officials may not do the right thing with the savings. It’s true that when privatization generates lower costs, officials may have multiple options for realizing the gain. They may choose to avoid raising taxes or actually cut them, passing on the savings to taxpayers. Or, they may simply take the savings and squander them on some other dubious enterprise of government. This is, again, an argument for vigilance, not against privatization.

All citizens who value freedom and free markets should be encouraged by the privatization revolution. Smaller government will leave us a freer, more responsible, and better-served people.


  • Lawrence W. Reed is FEE's President Emeritus, having previously served for nearly 11 years as FEE’s president (2008-2019). He is also FEE's Humphreys Family Senior Fellow and Ron Manners Global Ambassador for Liberty. His Facebook page is here and his personal website is lawrencewreed.com.