Even to the most casual observer, 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
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 for very specific
things -- like Ben & Jerry's ice cream over Haagen Daz. 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. And the public sector of the economy could be dramatically
improved by holding more frequent elections on more specific issues.
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