Wednesday, March 13, 2013

Five Poisons of Privatization

Paul Buchheit, of, has published an interesting piece titled Five Poisons of Privatization. In this article, he discusses the consequences of privatizing sales of public lands, rights to water, education, healthcare, and free speech. The introduction of the article can be found below, but I encourage you to read the entire article:
It gets more maddening every day. Essential human needs are being packaged into products to be bought and sold. The right to food and water, education, health care, public spaces, and unrestricted speech shouldn't be based on who can pay the most, or on who can generate profits with the slickest marketing pitch. The free-market capitalism that drives our economy is a doctrine of individuals pursuing profit. Nothing else matters. An executive for Roche, a healthcare company, said "We are not in the business to save lives, but to make money." With privatization of the common good we risk losing both our heritage and our humanness.


  1. I am not sure whether to start with the general or the specific indictments here. Let's start with the general, and have a separate comment for the specific.

    The notion that just because the government claims to be motivated by public interest, and that private companies are motivated by private profit, that government must be a better defender of the public good is facile. Stated incentives are meaningless. Real world incentives matter.

    I will begin by confessing that some defenders of the free market are too slow to admit that individuals and companies do hose customers in their pursuit of incremental profit.

    But here is the key: Companies that try to grow fat by doing a poor job for their customers lose all their customers. And companies that treat employees like dirt eventually have a hard time hiring the best employees. And the market kills them. Accountability looms every day for private companies in the form of extinction.

    Government agencies can misbehave for, well, forever and never see a reckoning. Look at pensions systems in Illinois and California. The post office. Most DMVs. Public agencies may SAY they are for the public good, and they may do some good things, but for most, their are run primarily for the good of their employees and the reelection of the political patrons, and only secondarily for the public. And they can do this virtually forever. Even in Detroit, bankruptcy will probably not bring accountability.

    My company runs public parks. I get a lot of questions about how I can be trusted to operate public lands for the public interest better than public officials. But I only get paid if people have a good experience and come back. If I do a lousy job, I go bankrupt. If the government does a bad job, they just cut back on maintenance a bit more to make sure they keep everyone employed. Oh, and right now folks at the NPS are trying to help their political patrons by making sequester-cuts in the ways that will bring the most possible pain to the public, rather than the least.

    Real incentives and associated accountability practices matter.

    By the way, I am sure those who disagree will be gearing up with examples of screwed up companies that were not punished by the market. I will help you name them -- GM, Chrysler, Goldman Sachs, Bank of America, AIG, sugar producers -- you know what they all have in common -- the government bailed them out or protected them. That is not the free market.

  2. Here are some specific thoughts about the article:

    1. Water should be more expensive (note this is a western perspective, Eastern US water situation is unknown to me). It is too freaking cheap. Demand clearly outstrips supply, because reservoirs like Lake Mead and underground aquifers are draining. Water should be sold at a price where supply and demand balance. Increasing water gives a strong incentive on the consumer's part to conserve and on producer's part to find more.

    Instead of privatized water, we have politicized water. Constituents like farmers who have political pull get water that is absurdly too cheap. Then politicians impose crazy building codes and mandatory rationing schemes to try to balance supply and demand caused by their own feckless politicized pricing practices. Instead of a market that works like, for example, in about everything else we buy, we get low prices but have to endure washing machines that won't clean clothes and toilets that have to be flushed twice to actually work.

    2. I am with the author on things like SOPA an PIPA and CISPA. But these aren't privatization. They are the overturning of private markets in favor of a politically connected group (Hollywood) who did a lot to elect the current administration

    3. Why is it that people who generally oppose monopolies and promote consumer choice take the opposite view when it comes to schools. The fact is that lots of real life individuals like Charter schools more than their public school. Charter schools almost always get less state money per student than the local public school bureaucracy gets per student, so where is the harm in allowing choice? You personally hate charter schools - fine, don't send your kid there. By the way, why is it that a huge percentage of politicians in Washington who make the same argument as the author send their kids to private school?

    4. The notion in the last paragraph about cooperation is absolutely true - economic advancement is all about cooperation. But there are two ways to organize such cooperation. The private way is to cooperate voluntarily, based on incentives and accountability systems to mutual self-interest. The public way is through coercion. At the end of the day, that is the difference between public and private -- the government can legally use guns and jail to get its way, where people truly acting privately, outside of any crony corporatist government system some falsely label capitalism, cannot.

  3. A final general thought -- privatization and cronyism are not the same thing. This is the same criticism I had for Michael Moore's Capitalism a Love Story. All his examples (and he once admitted this in a Q&A session you can find on YouTube) are really of crony capitalism, not of free markets. They are the negative effects of government intervention. This often happens in the privatization world - negative effects of government crony intervention in markets are used as a justification for more such interventions.

    Here is the interesting question for privatization, which I think about a lot and I would love to see academics address -- How does one privatize a service without it becoming a crony sweetheart deal? There are good examples and bad examples out there. Unfortunately, my view is that academics are in two camps, either working in absolute opposition to or blind support of privatization, and won't stop to address a more nuanced position of "this works, but this doesn't."