Jump to content

Privatization

From The Austrian Economics Wiki, the global repository of classical-liberal thought

Privatization is the transfer of an asset or a service from state ownership into private hands. The word covers arrangements that differ enormously in what they actually change, from an outright sale into an open market to a long lease granting one politically selected firm a protected revenue stream, and the Austrian literature is mostly concerned with telling those apart.

See also: Private alternatives to public goods and Private roads

Why ownership matters

The case for privatization is not that private managers try harder. It is that a state enterprise cannot know whether it is succeeding.

Ludwig von Mises's argument is that rational allocation requires money prices for the means of production, and those arise only where the means of production are owned and exchanged. An enterprise whose capital was appropriated rather than bought, whose revenue is voted rather than earned, and which cannot be sold, has no way to compare the value of what it consumes against the value of what it produces. It may be efficient or wasteful and neither the managers nor anybody else can establish which.[1] See economic calculation problem.

Privatization matters because it restores that test. Profit and loss are not rewards for virtue but signals about whether resources are in the hands that value them most, and the signal only exists where somebody bears the loss. This is also why the bureaucratic alternative of imposing performance targets does not substitute: a target measures what the target-setter thought to measure, while a loss measures everything at once.

Privatization that is not privatization

The Austrian complaint about most actual privatization programmes is that they transfer the asset without transferring the exposure.

A utility sold as a going concern with its statutory monopoly intact, its prices set by a regulator, and its revenue guaranteed by a captive customer base has changed owner and not much else. What has been sold is a privilege rather than a business, and the buyer's return comes from the privilege. Hans-Hermann Hoppe argued that halfway measures of this kind can be worse than state ownership, because they add a private incentive to maximise the yield of a coercive position while removing the political accountability that at least nominally constrained it.[2]

Three tests separate the real thing from the appearance of it. Is entry open to competitors afterwards, or does the buyer inherit an exclusive franchise? Can the firm fail, or is it too politically consequential to be allowed to? And was the price set by open bidding, or negotiated with a buyer chosen in advance? A transaction that fails all three has privatised the revenue and socialised nothing.

The British programme of the 1980s is the standard illustration in both directions. Competitive manufacturers such as Jaguar and British Aerospace went into a real market. The network utilities did not: British Telecom was floated with a regulator, Oftel, created alongside it, and a price formula requiring its charges to fall faster than the retail price index, which is a way of administering a monopoly rather than ending one.[3] That the shares rose is not evidence either way, since the price of a protected franchise should also rise.

To whom? The post-socialist problem

Where a state is disposing of property it took by force, a question arises that an ordinary sale does not raise: the seller has no just title.

Murray N. Rothbard pressed this against the sell-to-the-highest-bidder approach adopted across the former Eastern bloc. A government auctioning a factory it confiscated is selling stolen goods, and the proceeds accrue to the thief. His alternative was to treat the assets as unowned and return them by a rule of just title: to the original owners or their heirs where these can be identified, and otherwise to the workers and managers who have been mixing their labour with the assets, as homesteaders of property the state never legitimately held.[4]

The objection to this is that it disperses ownership among people with no capital to invest and no obvious way to consolidate it, and the Czechoslovak voucher programme of the early 1990s is the case usually cited. Vouchers were distributed to the public and exchanged for stakes in investment funds holding shares in some 1,491 enterprises; take-up was almost universal and four-fifths of state enterprises were nominally private within seven years. What the scheme distributed, however, was shares rather than control, and control concentrated in the funds, many of which were owned by banks in which the state retained a holding. Dispersed formal ownership with concentrated real control by state-linked intermediaries is a fourth thing, neither state ownership nor a market.

Infrastructure and the case of roads

Roads are the asset most often said to be inherently public, and the historical record does not support the claim. Privately financed turnpikes and bridges were normal in Britain and the United States before public works departments existed, and private capital has repeatedly returned when public budgets failed: France financed thousands of miles of autoroutes through private concessions from 1955, and by the late 2000s American state governments were leasing existing roads, most visibly the Indiana Toll Road and the Chicago Skyway, for large up-front payments.[5]

These leases are worth examining precisely because they are the mixed case. The operator takes real commercial risk over a term long enough to be a sale in substance, which is genuine. But the tolls are capped, the operating standards are specified in advance down to the response time for clearing debris, and the concession is exclusive, so the arrangement is a contracted-out monopoly rather than a market in roads. Walter Block's The Privatization of Roads and Highways argues the full case, including the part most people find hardest, which is that road deaths are a product of the ownership structure and would fall under owners who bore liability for them.

See also

References

  1. ↑ Ludwig von Mises. Human Action, 1949, ch. XXVI, "The Impossibility of Economic Calculation under Socialism".
  2. ↑ Hans-Hermann Hoppe. "The Rationale for Total Privatization", Mises Daily, March 2011.
  3. ↑ Eamonn Butler. "The mother of all privatizations", Adam Smith Institute, 28 November 2004.
  4. ↑ Murray N. Rothbard. "How and How Not to Desocialize", The Review of Austrian Economics 6:1, 1992, pp. 65-77.
  5. ↑ Steven Malanga. "The New Privatization", City Journal, Summer 2007.
Retrieved from "https://wiki.freecapitalists.org/index.php?title=Privatization&oldid=25796"