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Differentiating Between Privatization and Free Markets

J. Matthew Bennett
|
September 30, 2016
free markets, privatization, private prisons, capitalism

It may seem like a trivial or semantical argument, but too often are the terms ‘privatized’ and ‘free markets’ used interchangeably. While free markets do encourage reserving government functions to the private sector, the concept of privatization is a completely different process.

The purpose of free markets is to foster an environment for private individuals to utilize their skills and desire for profit in exchange for providing services that people demand. Many often make the unfortunate argument that even if people may not necessarily demand a certain service or product, government may have a responsibility in providing it. And, that some services and products are too difficult for private firms to provide sufficiently, thereby requiring government intervention in these areas.

While arguments certainly can be made for both sides on that issue, it should be made clear that the act of governments paying private firms to provide specific functions in society, is not the same concept a true free market, where government isn’t involved in the interaction at all.

Take a grocery store, for example. There is no definite role that government must play in the funding, or otherwise providing resources for a grocery store to exist in society. Private individuals seeking their individual interests naturally have an incentive to buy goods in bulk and sell them individually to wanting consumers. This is a perfect example of free exchange. The government is not required for this transaction to take place. For all intents and purposes, this is an example of free enterprise.

Privatization, on the other hand, is the use of private firms to carry out government functions. Most examples of privatization can be found at the local level, with city governments contracting with trash companies or energy firms, for example. But there is a great deal of private contracts awarded to companies by the federal government for the manufacturing of arms, payroll services, and even prisons.

Governments tend to contract private companies to perform these functions because private companies are more cost-efficient and productive than government staff. And, because there is a perception that the free market would otherwise not provide these functions, government is compelled to intervene.

The key element of privatization is that while the functions are transferred to the private company, the funding and control remains in the hands of government officials. Unlike in a free and competitive market, problems of cronyism often ensue as a result of a cozy relationship a politician or bureaucrat may have with a private firm recently given a contract. As reported in the International Business Times, New Jersey Gov. Chris Christie signed an executive order in January 2015 awarding a very generous contract to a firm the governor’s brother was hired on to a few years prior. And there are plethora of other examples one can find of this form of graft permeating its way from the government to private coffers as well.

Unfortunately, this kind of cronyism is too often labeled as a product of the “free market.” This is purely a fallacy. Privatizing government functions are not the same as advocating for free markets. If a market is free, it is because the government has no role in the market. Instead, goods and services are available in an open market with multiple competing entities vying for consumer business. Essentially, privatizing a government function is usually just exchanging a government monopoly for a private monopoly funded by the government.

Now, the concept of privatization shouldn’t be assumed to mean that it is somehow evil or cannot foster a positive outcome. Despite the outcry from many on the left, localities often rely on privatizing many functions as the government simply just doesn’t have the capacity, revenue or the know-how to accomplish certain tasks. This is exactly why the city of Sandy Springs, Georgia decided to privatize, well, virtually everything.

In 2005, the city decided to outsource many government functions and processes, like park maintenance, road servicing, and emergency dispatch. As a result, efficiency and quality have greatly improved, and the city now runs budget surpluses as opposed to the previous budget deficits.

But Sandy Springs didn’t free up these markets. The city simply outsourced these functions to a single private company who is capable of providing the desired results. As one may be able to see, the perverse incentives for cronyism and graft still exist, which is what has frustrated many about “private” prisons.

A handful of very large corporations owns a significant portion of federal and state prisons throughout the country. Inmates, in many instances, are forced to work for literal pennies to procure profits for these prisons and their investors. Many have argued that the for-profit model in private prisons has created perverse incentives leading to the overall increase in incarceration despite dropping crime rates.

But what is really “private” about these prisons? Aside from the fact that private entities own these prisons, they are usually funded, staffed and managed by government officials. Even the medical staff is often on the government payroll.

So it is not as if these are private institutions running these prisons; they are still largely controlled by the government. Even by the technical definition of privatization, these institutions wouldn’t qualify. But one thing is evidently clear, there certainly is no free market influence in these prisons, except for maybe the black markets created therein.

History has clearly shown that when a few individuals have a significant degree of power over others, they tend to abuse that power for their benefit. And what’s worse, is that often this power is used to advance the interests of a select few in society, in lieu of what would otherwise be a competitive exchange.

We should never confuse the failure of governments to provide a desirable outcome having leased out its services to a private firm, with the ability or strength of a free market to do the same.

In all honesty, we should expect governments to fail in adequately providing services to the public, as that is often the case. It is for this reason that we should look not to privatize government functions, rather, to remove them from the hands of government entirely, and let the entrepreneurial spirit that is the free market guide the way.

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