>The Prophets of Privatisation

While we all believe in privatisation – otherwise we would choose to live in a kibbutz – many of us object to the privatisation of our essential or common services, what we used to call public works.

We are already aware of commercialised government, of ourselves as “customers” of what once were government departments.   We are aware of user-pays charges, of annual ‘dividends’ paid by Sydney Water or Integral Energy to the New South Wales Government, and the sale or lease of roads, airports, prisons and so on to private corporations.  

Despite being vaguely aware of the privatising activities of the Thatcher Government in Britain and the corporatising activities of Roger Douglas in New Zealand since the mid 1980s, what we are mostly unaware of is where these ideas have come from.

The Origins of Privatisation

Hayek and Friedman

To find that out let us search out some ‘usual suspects’: Friedrich Hayek, Milton Friedman, and Robert Nozick.    The Road to Serfdom (1944) is of little help.   Hayek in fact agrees that public utilities should be subject to central planning.

Free to Choose (1979) is a little more interesting.    While the reference to public utilities by Friedman is very brief, mostly a summary of what Adam Smith is supposed to have said, he does hint that, in a large community, it might be quite feasible to privatise infrastructure.   Doubtless, he passed on that idea to the senior public servants of the Thatcher Government.

The Wealth of Nations (1776) does not bear out Friedman’s summary.  In his discussion of the duty of government to construct and maintain large public institutions and public works Smith is quite inconclusive.   He describes the idea of user-pays – he even praises it – only to later raise serious objections to it.

 Nozick and Hardin

Anarchy, the State and Utopia (1974) is a book little known outside universities but influential there among future economists and managers.   In it Robert Nozick argues for a state built upon the preservation of rights to life and property.    He rejects Smith’s (third) duty of the state to finance large public institutions and public works.    Taxation should only extend to the protection of our rights against force, fraud, or broken contracts.   Any other taxation is forced labour.    It is taking the fruits of one’s labour and giving them to others.   By implication public works should be privatised and completely unregulated.

The Tragedy of the Commons (1968) is a phrase with which many of us are familiar.   It is the name of short article published in Science in December, 1968 by one Garnett Hardin.

There Hardin summarises the ideas of an early and now forgotten Oxford economist, William F. Lloyd.    In 1833 Lloyd contrasted the wasted cattle on the commons to the fat cattle on adjoining enclosed farms.    His point was that a private owner would not add excess cattle to his fields since the excess livestock would feed at the expense of the cattle he already had there.   He would gain nothing.

However, those who overstocked the commons did so at the expense of others’ cattle.    They made a private gain even those, collectively, everyone (and the common fields) suffered. 

The context of this summary of Lloyd shows that Hardin did not understand the purpose of Lloyd’s article nor anything much about the administration of the common fields.    Lloyd was arguing that those on the generous poor relief of the time were overpopulating the country at the expense of the ordinary taxpayer.   The poor gained (they had their children reared at public expense) but the country as a whole lost.

Worse, Hardin knew nothing at the time he wrote the article about the vigilant and detailed administration of common lands that had existed in England for well over fifteen hundred years!

Nonetheless, his phrase “the tragedy of the commons” has come down especially to ignorant economists as justifying privatising the commons. .

If he had taken as his example Johnstown, Pennsylvania in 1889, rather than the common fields in 1833, he might have come up with a radically different conclusion.    There, in order to protect their fish, wealthy hunters and fishermen disregarded advice to clean a spillway to a large private dam.   It eventually burst.    Downstream, Johnstown was flooded with serious loss of life and property!   

The Case Against Privatisation

In this brief investigation we have, for example, not mentioned James Buchanan’s theory of public choice: the idea that government never governs in the common interest and thus that administration is best left to markets.   Neither have we mentioned those public servants, especially those from Treasury, who seem to have been the driving force behind privatisation.    They saw how to raise more revenue by commercialising public assets while propelling forward their own careers!

In a world given to original and complicated ideas privatisation made its way rapidly – even though turnpike roads and canals, and even private ports and dams were common at the time Smith wrote.

There are two answers to privatisation.    The first negative answer is, as Henry George points out in Social Problems, that it is the primary duty of government to secure our natural rights equally with others.   If some businesses are without effective competition their operators enjoy a privilege denied to others.    In the case of natural monopolies (public works) such “complete monopolies become properly the function of the state”.

Adam Smith provides a positive answer to the case for privatisation.    Discussing the administration of public works in China he says that the government gains its revenue from land rent.    Because it does it is interested to safeguard and foster the source of that revenue, agricultural production.   To do this it insists to its provincial governors that they ensure “the freest, the easiest, and the least expensive communication between the different parts of the country”.    Such public works “facilitate commerce”.

There a century before him is spelled out the fiscal doctrine of Henry George.   Could it be more simple?   Land rent is drawn from land held exclusively while to “facilitate commerce” public works are kept in the “the freest, the easiest, and the least expensive” condition.

It is by now becoming well known that, when public works are commercialised, either by private or public interests, prices are raised and infrastructure is run down.

Land, George wrote, is a reservoir from which man draws not only the materials of production but his very body.     It cannot be owned.   The primary duty of government is to ensure our right to use it.    Its secondary duty is to ensure that, as far as possible, our rights to use the earth are equal rights.    George’s proposal for a ‘single tax’ on land held under exclusive title while leaving common land and common services free so to “facilitate commerce” is a perfect fiscal system.

It equalises our right to “possess” land while maintaining our right freely to use common land and common services. As George argued free transport simply adds to the land rents of the land it serves.  It is paid for from the one overall charge for locational advantages. It and the use of other public works is not met from a multitude of user-pays charges.

Conclusion

In a strange way Robert Nozick comes closest to Henry George for he argues like George that the state exists to protect (natural) rights.  The weakness in his system is that, first, he cannot adequately explain how we come to have a right to acquire land from which property is made and, second, while he posits that there must be taxation he does not say from where this taxation comes.

George on the other hand offers us a theory upon the same premise of rights which does two fundamental things. It equalises our right to use privately held land.  And it provides for the “freest, easiest, least expensive” use of common land and common services.What else is the doctrine of ‘free trade and land values’?