Problems with Privatization

For the last few decades, ideological libertarians have pretty consistently advocated the privatization of major government services, arguing that profit-maximizing incentives of free market competition inherently lead to greater efficiency than government administrative bureaucracy.

I’ll admit that during most of this time, I never gave much thought to this analysis, vaguely thinking that it sounded somewhat plausible but hardly conclusively persuasive.

Now however, over the last decade or two, the gradual movement of this ideological approach from the confines of pure theory to actual practical implementation, first in various cities and localities and more recently on the federal level, has begun to provide a great deal of empirical evidence. And in my own mind at least, this early evidence indicates that this particular doctrine is, like Communism, very nice in theory but utterly, utterly disastrous in practice.

An excellent and large scale example of this is our “privatized” military/supply/reconstruction effort in Iraq, which has seemingly spent tens or even hundreds of billions of U.S. taxpayer input dollars with—as far as anyone can see—virtually no actual output, nearly all the money having been essentially wasted or “stolen.”

The latest, and perhaps most egregious example of this appears in the morning’s papers, with a report that Halliburton billed the American government $27 million dollars for supply fuel it actually purchased for $87,000 in Kuwait. Obviously security and transportion costs are quite expensive in a dangerous environment such as Iraq, but a pricing markup of over 30,000(!) percent seems eerily reminiscent of Enron’s
electricity pricing policies in California just before the Democrats regained control of the U.S. Senate via the Jeffords switch in 2001 and began threatening Congressional investigations.


My own theoretical analysis of these almost universal problems with privatization is quite simple. Free market competitors do indeed seek to maximize their profits from government contracts, but the simplest and easiest means of achieving such a maximization is frequently “theft” backed by “bribery” of government officials. The quotation marks are meant to indicate that the “theft” involved may or may not formally be legal, and the same for the “bribery.” Thus, for all I know, Halliburton’s 30,000% fuel mark-up may technically be legal, as is certainly the donation of millions of dollars to politicians or paying their personal friends and relatives additional millions in “lobbying fees.”

My impression is that government bureaucracies or public employees in modern Western countries only rarely engage in theft on a large scale, with the sole important exception being that many of them may “steal their own salaries,” i.e. perform little or no useful work. But while it’s annoying to have government employees sleeping behind their desks
all day rather than fixing potholes in the road, that’s quite different from diverting a large portion of the public treasury into their personal bank account.

Also, one would hardly expect lazy and/or sleepy public employees to be the most ruthlessly effective political forces at lobbying for the maintenance of their racket, compared to (say) smart and energetic thieves who are stealing hundreds of millions from the government and spending a few percentage points of that money to maintain their control of the government. The most extreme example of this internationally was
Russia’s “privatization,” in which a handful of shrewd and ruthless thieves manqaged in just a few years to acquire an astonishing fraction of all the capital assets of their entire country.


Now obviously the libertarian philosophy is that the free market competitors we’re talking about will never, ever use “force” or “fraud” to get their profits instead of innovation and hard work.

But why in the world should we expect that, given human nature? I’d argue that such an assumption is rather similar to e.g. a Marxist/Communist assumption that Vanguard Party Leadership will brilliantly and selflessly act in the interests of the broad masses rather than just do stupid and/or selfish things.

It seems to me that setting up systems that generally minimize the incentives and opportunity to steal vast sums of money from the government or the entire society is a sensible policy-option. And “privatization” proposals seem the absolute polar-opposite of this approach.

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