Myth: The government's services should be privatized.
Fact: Privatizing public goods like defense and natural monopolies like utilities is
People buy goods and services from both the private and public
sectors. In the private sector, they vote with their dollars; in the public
sector, they vote with their ballots. Both sectors have different advantages
over each other; the public sector is better at handling natural monopolies
(where circumstances prevent competitors on a free market), because voters
can control prices through their ballots. Nations that have tried to privatize
their natural monopolies have failed disastrously.
The success of privatization depends on several factors. Unfortunately,
most governments have found that they cannot successfully privatize their
Even to the most casual observer, however, it should be obvious there
is something economically similar between government and the market, even
if one can't immediately say why. For example, we know that many services
are offered in both the public and private sectors -- such as schools,
libraries and hospitals. We know that Ronald Reagan and Margaret Thatcher
tried to privatize government services -- and the fact that this could
be done at all speaks to a fundamental similarity between the sectors.
And even entire economies have been run by governments -- although how
well depends on what type of socialism is practiced. The social democracies
of Northern Europe have some of the highest standards of living in the
world. The socialist dictatorships of the Soviet Union went down in flames.
The fundamental similarities between the public and private sectors
can be illustrated by the following example. Let's suppose that Organization
A is a group of professionals which provides a service to the greater economy.
People outside Organization A pay money in exchange for its goods and services.
In theory, the group is forced to keep quality high and prices low, because
it must satisfy the majority of the people. The fewer people it satisfies,
the more likely Organization A will be driven from existence and replaced
by its competitors in Organization B. This competition keeps it honest,
and allows the self-interest of its professionals to
be used for the greater good of society. In practice, however, Organization
A can find ways of subverting the will of the people, acting in self-interested
ways that are more harmful than helpful to the community. However, this
represents a perversion of the original ideal, and can be corrected by
enforcing better laws.
Which entity are we talking about here? Business? Or government? The
fact is that Organization A could be either! They may use different methods,
but the basic principles are the same. For example, both must obey the
will of the people, because the people vote with their ballots in one case
and with their dollars in the other. Competition is also similar. In the
private sector, companies compete on the free market; in the public sector,
candidates and parties compete in elections. Businesses which fail to attract
dollar votes are driven into bankruptcy and replaced by their business
rivals. Politicians who fail to attract ballot votes are driven out of
office and replaced by their political rivals.
The invisible hand works the same way in both sectors as well. A businessman
can pursue his self-interest successfully only if he markets a product
that pleases the greatest number of customers. Likewise, a politician can
pursue his self-interest successfully only by governing in a way that pleases
the greatest number of voters. But the invisible hand often gets corrupted
in either case. The businessman may decide that it's cheaper to dump toxic
waste than to treat it. The politician may decide to the let the
businessman dump it, because the businessman has lobbyists who bribe
him with campaign donations. The solution in both cases is to enforce better
These, then, are the similarities; are there any differences?
Yes. Under the current (and imperfect) system, markets have a number
of advantages over governments. First, elections take place only once every
two or four years, so "market" mechanisms are considerably weaker
in government. (This could be resolved by holding elections or referendums
more frequently). Also, markets allow people to vote on very specific things
-- like Ben & Jerry's ice cream over Haagen Daz, for example. In an
election, however, people vote on generalities -- like a politician's overall
record, which may include disagreeable as well as agreeable policies. (This,
too, could be resolved by allowing the public to vote on more specific
Furthermore, democracy only works when the people are educated. Voters
would be overwhelmed trying to educate themselves on the best prices for
bicycle parts, the best safety features for microwave ovens or the optimum
number of yogurt flavors. It is easy to see that a lot of ignorant votes
would be cast in a system where voters attempted to run every aspect of
the economy. In a free market, customers can become experts only on the
things they want to buy, and can then vote with their dollars.
Although this is an excellent rationale for the free market, going
too far in this direction also produces problems. A lot of ignorant votes
get cast even in the marketplace. For example, published research revealed
that silicon breast implants had a problem with leaking, long before millions
of women even bought them. However, the manufacturers and doctors had no
incentive to hurt their own sales by adequately informing the public. Nor
did most customers have the scientific understanding and expertise to police
the industry themselves. Just where, for example, could one have found
the obscure medical journals and studies that sounded the alarm? Government
therefore plays an important role in collecting this research, bringing
these complex issues to light, and regulating these products for safety.
So, as far as everyday sales and purchases go, the market offers the
consumer more advantages than the government does. However, this situation
reverses itself as the commodities become more national in scope. Defense
is a perfect example. The market is excellent for supplying individuals
with the means for personal defense, like fences, locks, guard dogs, mace,
intruder alert systems, etc. But only government can prepare a national
defense, one including nuclear missiles, tanks, battleships, etc. Another
example: the economy itself. Government built the national infrastructure
of roads, telephone lines, power cables and
more, while millions of businesses branched off from that infrastructure
to create the free market.
There is another fundamental difference between the public and private
sector, and that is how they deal with the problem of monopolies. Due to
inherent limitations of technology or circumstance, some industries form
what economists call natural monopolies. For example, only one local company
can usually provide service for telephone, or cable, or water, or electricity.
It would be enormously wasteful, not to mention foolish, to wire the nation
with competing telephone lines, or dig up the neighborhood
for competing sewer pipes. At the national level, natural monopolies
include defense, disaster relief and highway construction.
In these situations, government has proven much better at meeting the
needs of the people because the people can control these programs with
their votes, and candidates compete to win them. But when these natural
monopolies have been turned over to private enterprise, the result has
been complete failure. The lack of competition leads private companies
to raise prices through the roof, and consumers have nowhere else to turn.
If the utility were publicly owned, consumers could easily replace the
reigning political party with its rival.
The abuse of natural monopolies is what happened to Great Britain after
Margaret Thatcher sought to privatize public utilities. The experience
was a disaster. The British government first privatized telecommunications,
then gas, then electricity and then water with little thought about how
these monopolies would act on the free market. By 1987, public outcry over
the skyrocketing rates and dropping quality of British Telecom forced the
Thatcher government to reluctantly impose regulations. The same thing happened
to Gas. But what was truly disastrous was the way Britain privatized electricity;
it allowed a ludicrous arrangement where power providers could compete
with each other. Even though there were adequate power sources in Britain,
the industry rushed to build more power generators to compete with each
other, to the point that there was 70 percent overproduction by 1995. What's
worse, this competition nearly killed Britain's coal industry. Coal generators
are expensive to build but cheap to run; gas generators are the opposite.
Gas is also much quicker to install. As the power companies rushed to build
new power generators, they chose
gas over coal. By 1992, the British government closed half its coal
mines and laid off 70 percent of its miners.
Unlike most other nations, who use government to run their natural
monopolies, the U.S. has a hybrid system. It allows private ownership of
natural monopolies, but with federal price controls and regulation. Deregulation
of natural monopolies therefore creates instant problems. When Congress
deregulated the cable industry, they essentially created 11,000 local monopolies
that wasted no time hiking cable rates and lowering quality of service.
The subject of monopolies also reveals an inconsistency in conservative
thinking. Consider Microsoft, the computer giant who dominates over 80
percent of the market for operating systems software. They criticize liberals
for wanting to enforce the nation's anti-trust laws against Microsoft,
arguing that this would punish success, interfere with the free market,
etc. But when the government runs a natural monopoly, conservatives evoke
the problems of centralized government and dictatorships, lack of competition
on the free market, etc. Liberals find this discrepancy in broad daylight
to be amazing.
In conclusion, privatization only works when competition can be assured
on the market. If no competition is possible, then privatization only works
with government regulation to prevent monopolistic abuses. Even so, the
public sector of the economy could be dramatically improved by holding
more frequent elections on more specific issues.
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