In Defence of Privatisation

This article was written for CapX’s “Explaining Capitalism” competition

“ Privatisation is at the centre of any programme of reclaiming territory for freedom”

Privatisation.

To many on the left it’s become a dirty word. The sort of language you wouldn’t use in front of your mother. Nowadays its generally deployed as a verb — ‘to privatise’ — as in “DON’T PRIVATISE OUR NHS”. If you’re pronouncing it properly you don’t so much say the syllables as spit them, that way people know you’re using the word with the proper degree of contempt.

The thing is, capitalists tend to quite like privatisation. Not always, but as a rule we think it’s a good idea. One explanation for this is that all capitalists are greedy corporatists who want to flog the nation’s assets to school friends in the City. An alternative explanation — albeit not one that’s widely accepted — is that capitalists genuinely believe that businesses and charities are better at providing public services than the state. This blog offers four reasons why the latter view is probably correct before looking briefly at how those ideas could be applied in practice.

Privatisation has always been a contraversial issue
1. Government-run services have little incentive to innovate

In the private sector, business owners are strongly incentivised to continuously update and improve the goods and services they provide. For a start, they know that if they don’t, their competitors are going to swoop in and steal their customers. They also know that if they do well, the pay-offs are potentially huge. Government-run services don’t have the same incentives. If they do well, the profit gets channelled back to the Treasury to be spent on other things. If they don’t, they know that the tax-payer will always bail them out. That’s not to say that government services never improve. Clearly they do. But it is very rare to see government-run services at the cutting edge of any industry.

2. Politicians are incentivised to win votes, which doesn’t necessarily mean taking long term decisions

If you were forced to choose between keeping your job and doing the right thing, what would you do? Assume for the sake of argument that if you do the wrong thing no-one will find out until after you’ve retired, if at all. Politicians face these kinds of dilemmas every day. Do they do what’s right for the country, or do they take the short term political advantage? Inevitably, sometimes the benefits of kicking a difficult issue into the long grass prove too difficult to resist. When the issue in question involves public services that can be catastrophic.

Heathrow expansion — a good example of how difficult decisions get put off
3. Governments don’t always spend tax-payer’s money wisely

This is a point which was made powerfully by Novel Prize winning economist Milton Freidman. It’s an argument best expressed in his own words:

“There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.”

The man himself
4. Government’s find it difficult to respond to changes in demand.

In a market, when demand for something increases, it very quickly attracts new sellers to take advantage of the high prices. Similarly, if the demand for something goes down, sellers tend to leave the market, either because they go bust or because there are bigger profits to be made elsewhere. As a result, supply tends to equal demand. Governments can’t respond to changes in demand in quite the same way. If they set the price of a particular service too low, or make it free, they’ll be swamped, generally resulting in long waiting lists (this is why it takes so long to see a GP). If they set the price too high, some people who need the service won’t be able to afford it, resulting in riots on the street.

Putting these four considerations together, it’s easy to see why state provision of services tends not to be a good idea. Of course, sometimes we don’t have any choice. For example, if companies can’t stop people using their product without paying, they’re just not going to provide it. The classic example is lighthouses. Even if a ship hasn’t paid the ‘lighthouse levy’ it’s still going to benefit from the light. We call things like lighthouses ‘public goods’ and generally they have to be provided by the Government. The other reason you might not want to privatise something is because it would create what’s called a ‘natural monopoly’, where one company dominates the market and then jacks up the price. Rail tracks are a good example. In most other circumstances, we think privatisation is the way to go.

The desire to avoid natural monopolies is why Network Rail remains in public hands

Now to be clear, what we’re talking about here is the provision of services, not who pays them. It is perfectly compatible with capitalism to say that if someone can’t afford something, the Government should step in and help them out. The difference is that in our world, a person then takes that money and uses it to buy their services from a private company. Let’s take education as an example. Until recently, almost all the schools in this country were paid for and run by the Government. A capitalist model would be to take that money, share it out to parents, and then let them use it to buy ‘education services’ from whatever school they thought best. This would create competition between schools so that the best thrive and the worst don’t last.

“Education, education, education” — Tony Blair introduced ‘Academies’ to allow charities and private sponsors to get involved in state education

Now the big question. What about healthcare? Should we be privatising the NHS? Without delving into the nuance of what is obviously in an incredibly complex debate there are good reasons to think the answer may be…yes.

Think about it this way. Everyone accepts that people have a right to eat. Food, like healthcare, is something that everyone needs and everyone should be entitled to receive. But that doesn’t mean we should have a National Food Service any more than we should have a National Health Service. It is unfortunately true that, without help, some people simply couldn’t afford to eat, but we don’t respond to that by socialising the supermarkets! Instead, we give the people who need it income support and then set them off to ASDA, Sainsbury’s, Tesco’s, or any of the other many and various food outlets that have sprung up due to the benevolent effects of competition. The same reasoning applies in the health sector. Give the people who need it ‘healthcare support’ and then let them choose which insurer offers the best package for them.

Not quite…

No doubt many of you reading this remain unpersuaded. That’s ok. This is just a short article and the arguments are inevitably far more complex than I have been able to explain here. But I hope that for at least some of you, the next time someone on Question Time screams “PRIVATISATION!” in that incredulous and sententious way, you’ll think twice before nodding in agreement.

The Individualist

19 February 2017