Myth: The government's services should be privatized.

Fact: Privatizing public goods like defense and natural monopolies like utilities is extremely difficult.


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 services.

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 laws.

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 issues.)

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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