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Thursday, January 26, 2012

The Problem with Privatization

It's about competition.

Classical liberals commonly favor “privatization” of many government activities.  Their case, of course, is that the private sector would provide goods and services at lower cost and of higher quality than government can.  Since classical liberals are right about this, why do I think there’s a problem with privatization?

The answer is that the call for privatization does not get at the real reason the private sector works better than the political sector.  The great advantage of the private sector is not private ownership per se but that private owners compete with one another.  Classical liberals would do better to contrast not the “private” and “public” sectors, but the “competitive” and “monopolistic” sectors.  If the goal is efficiency in delivering the goods, private ownership is a necessary but not a sufficient condition.  Instead of calling for the “privatization” of government services, classical liberals should be calling for “de-monopolization.”

Private Monopoly

Suppose a local government decides to privatize trash collection.  This often means that rather than running the trash collection organization itself, the local government offers the monopoly right to collect trash to the highest bidding private firm.  Although the interested firms compete in bidding for the contract, they nonetheless end up with a monopoly privilege in the locality.  From the consumer’s perspective, a political-sector monopoly has been replaced with a private-sector one.

Private monopolies might be marginally more efficient than political ones, if only because they have a bottom line and presumably have to do the job well enough to get the contract renewed.  Those incentives may be stronger than those that flow from the public’s ability to complain or vote out local officials in the case of government provision.  However, notice that the private monopoly ultimately has to please the politicians who dispense the monopoly privilege, not the consumers.  How much the public really gains from swapping a government monopoly for a private one is not at all clear.

Imagine instead that the local government simply opened up trash collection to any firm that wished to sell the service to consumers.  This “de-monopolization” would lead to actual competition among (potential) providers, forcing trash collectors to serve consumers well, instead of just local politicians who hand out monopoly privileges.  Competition drives firms to provide better quality, lower cost goods to consumers rather than political benefits to government agents.  Yes, you can’t have competition without private ownership, but private ownership alone is not enough.  You need de-monopolization to generate the competition that is at the core of the private sector’s effectiveness.

Several Property

In some of his later writing, F. A. Hayek recognized a similar point when he suggested that it was problematic to talk of “private property” and that we should talk instead of “several property.”  The distinction is not merely semantic.  His point is that the important thing about “private” property is not that it is private, but that it is divided among “several” owners who then compete to make the best use of it.

The rhetoric of “privatization” may turn people off who might otherwise be more sympathetic to classical-liberal ideas if we were to frame them as opposition to monopoly rather than as support for shifting resources from “public” to private hands.  It’s also worth mentioning that the “public” sector is far more “private” than the private sector.  Compare how little we know about what “public sector” organizations like the CIA or the Fed do versus how much we know about Apple, Google, or other public corporations, which regularly open their books and provide annual reports to the public.  If we believe that the benefits of de-monopolization will go to “the public” as consumers, then let’s drop the talk of “privatization.”

Private ownership is not a goal but a means to an end.  What really matters is what best serves the public in its role as consumers.  Private ownership only does that if it’s within an institutional context that promotes competition. We classical liberals need to shift our rhetoric from promoting privatization to promoting competition by ending government monopolies wherever possible.  That is the path to lower prices, higher quality, and more freedom.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.