Content-type: text/html ~ Stephen's Web ~ Free Market Vs. Government

Stephen Downes

Knowledge, Learning, Community

Apr 07, 2007

Graham Glass writes,

When I used to live in the UK, many industries like gas, electricity, and transport were owned by the government. Since government services don't have to compete, there was little incentive for these industries to innovate, reduce costs, and otherwise behave like regular businesses. After years of stagnation, the government finally sold these industries to private enterprise and now they are run much more efficiently.

It is no surprise that businesses in a free market provide better service than those supplied by the government. Customers buy products and services from the businesses that best meet their needs, and businesses dissolve if they can't provide good value for money. Government services on the other hand are tax-fueled monopolies that don't have competitors. This allows them to expand even though they usually provide mediocre service at a high cost.

Surprisingly enough, even in the face of historical evidence, the success of free markets, and the poor performance of government services, most people actually want the government to provide critical services like health care and education! Why? I'll present my thoughts on this situation in a subsequent blog post.

prompting this reply (awaiting moderation on his site):

I'll wait for the follow-ups, but what I've read so far is just so much empty sloganeering.

First, there are very good reasons to maintain major infrastructure in public hands.

How much sense would it make to build a separate and competing underground system? Or road system?

Do you want to contract fire and police services to the lowest bidder? Or have people purchase their own service? What about people who cannot afford them?

Imagine the Royal Air Force in private hands. Germany could have won the war simply by outbidding London for its services. Private companies, after all, have no loyalty.

The health care system in the United States is privatized. 50 million people go without insurance. A major illness ruins them, if they have any assets. If they don't have any assets, they die.

Is the British transport system really something to boast about?

And if the separate railways had had to build their own railway lines, negotiate leases, etc., do you think that anything like the current system would exist? In countries where rail has always been private, there is virtually no rail service. Rail infrastructure costs too much for private industry to risk (but the companies are happy enough to come along and leech off systems that were build at public expense).

Do you want private industry building nuclear reactors?

I could go on, but you get the point.

Moreover, second - it is claimed that public enterprise has no incentive to keep costs down, and that private enterprise will accomplish this.

Where is the evidence of this?

To return to health case - the U.S. private system costs 40 percent more per capita than the Canadian public system (and that counts the 50 million uninsured - if you don't count the people who don't actually receive any service then the U.S. system is more than twice as expensive per person).

In countries where no public investment was made into internet service provision, access costs are more than three times higher than countries where the government built the network.

Private enterprise may be motivated (a bit) by competition (until the companies buy each other out and create a monopoly) but they create many additional costs.

They must pay for advertising, for example. They must pay dividends for shareholders (and companies that don't pay a good ten percent over inflation will be considered to be underperforming - in a 10 billion dollar industry at 3 percent inflation that means the company must pay $1.3 billion to shareholders - that's a *big* extra cost.

The private sector is also the home to a lot more crime and corruption. Think of companies like Enron. Or the current trials involving Conrad Black. To name but a couple. There must be oversight - paid for by the government, of course, an unattributed cost not mentioned in the corporate ledger.

And third, there is much more to consider than the cost of the system.

The postal service is privatized because it would cost a small fortune to send a letter or package to remote locations. Many places (such as Canada's Arctic) would not receive service at all.

Public services ensure equality of access.

Moreover, public services govern themselves by regulations no private sector would consider. In a public service, for example, the environment is genuinely a concern, while for the private sector its a set of 'red tape' to be finessed as quickly as possible.

Public services develop infrastructure and services that private sectors will not fund, because there's no profit in it. Any network infrastructure is a (huge) net loss until a certain number of people use it. Private companies don't take the risk.

Public engineers do work private companies won't touch. The city of Winnipeg, for example, is protected from floods by a spillway (a large channel that diverts floodwater around the city). No private company would build that. The City of Grand Forks was destroyed in the 1997 flood - it had low taxes and no spillway. Winnipeg? The flood was an ongoing concern but there was no flooding no services were even interrupted.

The space age is now almost 50 years old and there is still virtually no private investment in it. Why not? Because the benefits are still largely social, and not financial.

Private services require exclusivity in order to maintain profit. This is why it supports patents and copyrights. Thus private enterprise will not provide public access to research results, medical discoveries, software, or anything else, even though there would be significant social benefit (and even economic benefit to society as a whole) by doing so.

If they every find a cure for cancer, for example, you had better hope it happens in one of Canada's public research labs, and not, say, at Pfizer. Think of the companies holding Africa hostage because they cannot pay for AIDS drugs.

You need much more than empty slogans to make the case for the private ownership of major public infrastructure.

Somehow, I don't see it coming.

Stephen Downes Stephen Downes, Casselman, Canada

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