Don't Privatize, Marketize!

by Marcel Votlucka

Exclusive to STR

March 27, 2009

Corruption.  Waste.  Fraud.  Inefficiency.  Irresponsibility.  Shortsightedness.  Lack of accountability.  You might immediately assume I'm talking about some of the, uh, virtues of government.  Normally you'd be right, but today I'm discussing so-called "privatization" schemes.  

John Stossel of ABC does some good work in his investigative reports on government waste, unfairness and general incompetence; I always look forward to his "Give Me A Break!" TV segments.  Unlike many media figures, he understands a little something about free markets, so he doesn't waste valuable airtime or brain cells crying out for cute stimulus packages to save the world.  But I often cringe at some of his "free market" solutions to public problems.  For instance, last week Stossel did a special on a highway privatization scheme in Indiana in which the state's governor leased one of the state's major toll highways to a foreign consortium of Spanish and Australian companies.  He also mentioned a plan in California involving a special high-speed bypass lane, managed by a private firm, to ease rush-hour traffic on a major highway.  

A market company has a natural incentive to manage things and conduct its affairs economically, efficiently, and responsibly in the long-term, or else they lose customers and crash.  No bailouts, no stimulus, no wars, no easy money and credit from Ben Bernanke.  By contrast, you're a "customer" of the government whether you like it or not, so there's no incentive for it to do better for you unless it’s election season.  Hence we get calls for turning over to the private sector functions traditionally usurped by governments, like rapid transit, roads, education, sanitation, courts, defense, even prisons. If private industry is more innovative and responsible than Big Government, isn't it logical to shift the burden off them via privatization?  

Well, not so fast.  

Is this really a libertarian solution?  Or is privatization, as currently practiced, just a cop-out; a half-assed way to "have the best of both worlds"?  

Here in New York City , we're having endless problems with corruption and mismanagement with our local state-subsidized subway system.  Due to budget problems, we're probably going to see yet another large fare increase and even more service cuts.  I remember back when it took 30 minutes at most to take one train from my home in Brooklyn to visit my family in Queens (5 miles away); now it takes an hour or more and involves three separate trains and multiple transfers, all hampered by increasingly unpredictable scheduling and re-routing due to "track work," which never seems to happen.  Nowadays I’ve taken to sidewalk hiking everywhere as a mild protest and to not waste my cash.  Alas, not everyone I know is 25 and healthy, so some of us have wondered if somehow privatizing the city subway would be better.  

Short answer:  no.  

Long answer:  if the New York subway system is basically a government monopoly, then simply leasing, selling, or transferring it from our local Transit Authority to a politically-vetted outside agency doesn’t make it less of a monopoly per se.  It’s just the same system with a different face and attitude to hide its statist legacy.  All that’s changed is that the privatized option is supposedly run more “efficiently.”  

Indeed, schemes like these are more about “efficiency” than they are about reducing the state’s presence and legacy.  

So many problems arose with the Indiana deal championed by Stossel that even the local arm of the Indiana Libertarian Party opposed it. The contracts were for a 75-year lease in return for $3.8 billion to the government’s coffers – pretty sweet deal, no?  The bidding process wasn't very transparent, nor did it even involve local community input as a courtesy.  Ultimately the foreign firms that were awarded contracts by the Indiana government to take over and manage its toll highway are now profiting from an infrastructure put in place neither by their own free efforts nor on their own dime, but by the state.  It’s a de facto double charge to drivers, who have to pay high tolls to access the very infrastructure they financed through their exploited tax dollars in the first place.  Is that so unlike the government taking away a family's home via eminent domain, giving the land to a corporation like Wal-Mart, and then celebrating this criminal act as if it were a part of free enterprise?  

Every market enterprise involves risks, costs, and profits.  The market way is that all three aspects are privatized.  For example, not even the pushiest salesman can force a vegan to eat at or subsidize a White Castle restaurant.  If the restaurant’s owner gets rich on the dollars of those with more carnivorous tastes, great.  If it fails for lack of vegan-friendly meal options, or due to the bad economy, the vegan wouldn’t concern herself with such risk factors since she’s free to have nothing to do with this enterprise.  But Indiana 's privatization scheme involves privatizing the profits while passing on many of the original costs and risks to everyone else whether they like it or not.  Governments aim to socialize all three factors – though here again it's usually small cliques of the politically-connected who reap the most benefits at our unwitting expense.  How utterly revealing!  Why do so many privatization cheerleaders, however libertarian they may be otherwise, ignore that?  

Because they want it both ways.  

The appeal of "public-private partnerships" is that they seem to be a win-win situation – capitalists are happy because they get to make profits through shifting day-to-day management from politicians to themselves; politicians are happy because they still have ultimate control and bargaining power, and can claim to cut waste and big government just in time for the election; customers are happy because the services become nominally more efficient and there's no taxes or surly public servants involved. Yes, they look like market entities on the surface, and yet we can still have the aegis of the State in the background so as not to appear too radical for the Zogby polls.  After all, we love capitalism, right?  

The idea that you can somehow run government like a business and get the best of both worlds is absurd because the incentives and economic calculation just aren’t there.  Public-private partnerships reek of the Original Sin of state privilege, monopoly and exploitation, and they can never escape that legacy.  Even the very language of privatization alienates so many people already that when libertarians talk about replacing government services with market-based ones, folks assume we’re shilling for corrupt things like Halliburton or Blackwater or wimpy school vouchers.  Instead of merely "privatizing" the management of existing monopoly government infrastructure, let’s focus on augmenting and replacing it outside the statist complex, through "marketization."  

We've never had a central state agency handling food production and distribution to all 300 million Americans.  We have thousands of independent enterprises big and small that have evolved instead, and this works just fine even with state subsidies and agencies in the mix.  This is marketization in essence.  We certainly don't need a monolithic Food Agency to develop, and then evolve into an equally monolithic "public-private" partnership, because it would be no more effective than the decentralized market structure that currently feeds us.   

So I propose to Indiana (and New York for that matter):  Instead of just transferring a government-run highway into the hands of some politically-connected firm in a sweetheart deal, why not simply permit firms to build and run their own independent (privately built and owned) highways, subways, schools, hospitals, and taxi/limousine services to supplement and replace the existing statist monopolies?  Or better, ignore the state and do it anyway?  That’s how the market really thrives – a diverse array of firms, services and infrastructure that people build around the needs of individual customers and communities, not Leviathan dragging out a cash register and "playing store."  

When we talk about markets, we're basically talking about people and their economic interactions.  Marketization is an organic process and not a state-orchestrated one like privatization.  It’s a better term for that reason.  It won't make politicians or certain economists happy because it's a passive process; it doesn't call on them to engage in grand campaigns, speeches, filibusters, studies, legislative prodding and other such hobbies.  But then, life generally works without prodding or approval from Congress or City Hall and we ought to embrace strategies that don’t feed into that legacy.