Friday, October 5, 2012

Against privatization.

In his extended essay ILL Fare the Lands Tony Judt makes an interesting argument against what he calls the cult of privatization. I will outline the argument briefly  below :

Why privatize? Because, in an age of budgetary constraints, privatization appears to save money. If the states owns an inefficient factory or a costly service - a waterworks, say , or railway - it offloads it onto private buyers.

The sale earns the state money and the 'asset' once again returns to profitability thanks to the combined effects of greater market competition and the workings of the profit motive in forcing a more efficient and cost effective operation. So the service improves, investors profit, the state increases it's tax revenue, and the newly privatized business is run with a view to long term investment and efficient pricing.

However, Judt notes that some social services are not appropriate for privatization due to the essential services they provide: schools, hospitals, railways, airports, energy utilities.

What we have been watching is the steady shift of public responsibility onto the private sector to no discernible collective advantage. Contrary to economic theory and popular myth, privatization is inefficient.

[...] such public good were inherently unattractive to private buyers unless offered at a steep discount. But when the state sells cheap, the public takes a loss. It has been calculated that in the course of the Thatcher era of UK privatization, the deliberately low price at which longstanding public assets were sold to the private sector resulted in a net transfer of 14 billion from the taxpaying public to stockholders and other investors. To this loss should be added a further 3 billion in fees to the bankers whose transactions facilitated the privations. Thus the state paid the private sector some 17 billion to facilitate the sale of assets for which there would otherwise have been no takers.

So why would private investors be willing to purchase inefficient loss making public goods? It is because the state agrees to limit or reduce the risk. Judt cites the London underground as an example: a 'public-private partnership' scheme was introduced to ensure that the purchasing companies were protected against serious loss, in effect putting the risk on the state and creating a mixed privileged market that privatized profits but charged losses to the state. The underground was too big to fail so the government picked up the tab when the enterprise eventually failed.

Are Irish airports too big to fail? Can an island survive without railways or ports? What about our forests? We may find ourselves borrowing even further to bail out private debt for the common good if we sell these assets at reduced bargain rates. Privatization can result in a small short term gain with long term consequences.

Curiously, this point escaped the otherwise sharp eye of Friedrich Hayek. In his insistence that monopolists industries be left in private hands, he neglected to foresee the implications: since such vital national services would never be allowed to collapse, they could take risks, misspend or misappropriate resources at will, and always know that the government would pick up the tab.

Economies aside, there is also the moral case. Privatizations essentially remove moral responsibility from a state accountable to it's citizens. Judt asserts the UK privatizations of health care for the elderly, young or mentally ill 'naturally' led to reduced services in order to increase profits and dividends. He concludes the welfare states were stealthily unwound since the 1970's to the advantage of a handful of shareholders to the collective disadvantage of the majority.

This reduction of society to the mere interaction between private individuals is presented as the ambitions of libertarians and free marketers. But if there is nothing to bind us together as a community, then we are all utterly dependent upon the state because, Judt argues, privatization in no way reduces the power of the state. Indeed governments who were also the most enthusiastic about privatization - Thatcher, Blair, Bush - actually increased the power and control of the state over it's citizens through increased CCTV covered, wiretapping, Homeland Security etc. This point is important and constantly overlooked by libertarians.

Judt concludes that the privatization and the contracting out of essential social services to private companies weakens our social responsibility and social communities while providing little to no benefit to society.


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