Among the greatest failures of the free-market intellectual movement has been to allow its ideas to be categorized as a "public policy" option. The formulation implies a concession that it is up to the state--its managers and kept intellectuals--to decide how, when, and where freedom is to be permitted. It further implies that the purpose of freedom, private ownership, and market incentives is the superior management of society, that is, to allow the current regime to operate more efficiently.
This kind of thinking has been around a while. Murray Rothbard had noted back in the 1950s that economists, even those favoring markets, had become "efficiency experts for the state." There is a small step from that unfortunate stance to providing a free-market rhetorical cover for the state to do what it wants to do anyway, which is surely the ultimate compromise.
Such was at the heart of the Reagan Revolution, when tax cuts were first proposed as a tool to bring in more revenue. Who said that the purpose of freedom was to ensure more lavish funding for the state? And what if the funding didn’t materialize? Does that mean that the tax cuts failed? Twenty years later, of course, we see that the strategy was a disaster because it turned out that there is a far surer way to collect more revenue: to collect more revenue.
There are many examples of this awful concession operating today. In policy circles, people use the word privatization to mean not the bowing out of government from a particular aspect of social and economic life, but merely the contracting out of statist priorities to politically connected private enterprise.
School vouchers and Social Security "privatization" are the most notorious examples at the national level. At the state and local levels, any government contract awarded to a grafting business interest is deemed "privatization." A Washington think tank recently proposed that the CIA could become more efficient by contracting out to Washington think tanks.
What’s at stake is the very conception of the role of freedom in political, economic, and social life. Do we regard freedom as a useful device within the existing structure, or as an alternative to the current political system? This is not a matter of bickering libertarian sects. The very future of the idea of free markets is at stake.
Few opportunities for reform come along. When they do, libertarians ought to be out front not only demanding the full loaf, but warning against the dangers of a poisoned crumb. The worst mistake our side can make is to sell our ideas as a better means for achieving the state’s ends. Yet this approach--advertising market economics as the best political option among a variety of plans--has become the dominant one on our side of the fence.
For starters, this approach typically leads to unfortunate results in the real world, like the California energy "deregulation" fiasco. Such partial reforms can even bring about a worse system than pre-reform, along with a diminished moral authority for free enterprise.
Another case against partial reform was noted by Ludwig von Mises:
There is an inherent tendency in all governmental power to recognize no restraints on its operation and to extend the sphere of its dominance as much as possible. To control everything, to leave no room for anything to happen of its own accord without the interference of the authorities -- this is the goal for which every ruler secretly strives.
The only way out of this problem is for us to strive to eliminate the state’s involvement in the life of society and economy.
The tragic case of Poland has been in the news recently. After the collapse of communism, there was a burst of enthusiasm for the idea of the market economy. But the New York Times reports that in May, the shipyard in Szczecin was renationalized after workers threatened violence when banks stopped backing a losing business and the paychecks stopped arriving.
This is Poland ’s first renationalization after the collapse of socialism, undertaken in response to what would be a routine business failure in a market economy. Worse, the country is now in the grip of a leftist government. If the New York Times is right, disillusionment with capitalism is widespread. Will all-out socialism return? The fear may be exaggerated, but in politics, it is always a mistake to believe that the worst can’t happen.
After 1989, Poland underwent a series of economic reforms. Factories were privatized. Most of the 100,000 municipal firms were transferred to private hands. The currency was stabilized. Prices were freed. The government encouraged every manner of enterprise. The result was magnificent: foreign investment and a decade of respectable economic growth.
And yet, as with other East European countries, the privatization was far from complete. Communications were only partially privatized. The health sector was cleaned up but left mostly in government hands. Labor unions managed to retain huge legal privileges, and there was no active market for the control of corporations. Taxes are way too high (30 percent). One quarter of the labor force is still employed in the state sector, though until recently, the trend was heading downward.
Sadly, Poland did not set its sights high enough. The political class looked to the United States and other West European countries as the model, and thus retained or newly instituted a huge range of regulatory impediments to free enterprise, including antitrust law, health and safety regulations, environmental regulations, and labor controls. It’s true that they are no more severe than those in the U.S. or Europe, but Poland can scarcely afford such nonsense after the impoverishment of communism.
Many large factories were never touched by privatization, for fear that they would simply be shut down if they had to compete in a free market. Faced with such a prospect, the only answer is to permit them to go under, for it is absurd to burn money by subsidizing enterprises that are economically unviable. Decisive in the case of shipping, the government made no ironclad commitment to allow factories to fail if they could no longer compete. The reason was fear of the unions.
Interventions to save failing enterprises are bad on their own terms. They don’t actually help businesses. They only postpone the day when an enterprise must either become a complete state entity, like the Tennessee Valley Authority, or go belly up.
In Poland, the root of the problem was in the very word "privatization." It implies that everyone and everything will pretty much remain as before, except that ownership will be in private as versus public hands. Socialism is possible after all, so long as it is run by private enterprise!
The same confusion predominates in the U.S. We hear that if we "privatize" the schools with vouchers and other gimmicks, they will be cheaper to run and test scores will go up. We are told that if we "privatize" Social Security, it will produce higher returns for seniors. Here, the establishment libertarian policy people are saying: socialism is possible after all, so long as it is run by private enterprise!
In truth, if the education sector were ever completely in private hands, nothing like the current system would continue to exist. Most administrators would be without jobs in the school system. The schools themselves might become retail centers. Education would be radically decentralized and mixed with private enterprise. Schools would come and go. Teacher salaries would probably plummet. No one would have a right to an education guaranteed by the state. The state could ask for and expect no content or results from education at any level.
A huge range of alternatives would exist, but rare among them would be the current system of megaschools that operate as holding tanks for thousands. Of course we cannot know in advance what this sector would look like, what shapes it might take in the future, but that is precisely the point. The voucher proposal, and all the contracting-out schemes, wouldn’t even give the free market a chance to show its stuff. They would only add another layer of public spending and public guarantees to an already socialist system.
The same is true for Social Security. Those who say they want privatization are pushing a system no different in kind from the present one. Your money would still be stolen by the state. Pensions would still be guaranteed by the state. You might even end up paying more, one premium for current retirees and another to fund your own "private" one. The only difference is that a portion of the money will be permitted to be held by private companies, making them in part dependent on public subsidies.
A hundred years ago, a person who proposed such a system would have been considered a socialist. Today, he is a "libertarian public policy expert." If what you desire is true free-market reform, don’t call it privatization. We need to stop the present racket. Under real market reforms, no one would be looted and no one would be guaranteed anything. The slogan should be: stop the theft.
In Poland, large factories shouldn't have been "privatized." The state should have just walked away from them, selling the assets to the highest bidder, or turning them over to the workers and managers, and permitting the new owners to do with them whatever they want. In the United States, public schools and Social Security shouldn’t be privatized; they should be abandoned and full freedom permitted to take their place. In other words, market institutions shouldn’t be used as a tool of "public policy"; they should be the de facto reality in a society of freedom.
One objection to my thesis is that partial measures at least take us in the right direction. It's true that even a partially free system is better than a full socialist one. And yet, partial victories are unstable. They easily fall back into full statism. With U.S. schools and pensions, these privatization schemes could actually make the present system less free by insisting on new spending to cover new expenses to provide vouchers and private accounts.
In a decade of market-oriented reform, capitalism has been seen as a mechanism that might make it possible for failed sectors to continue to do what they have always done. In truth, free-market reforms are far more fundamental.
Free markets are not just about generating profits and productivity. They aren’t just about spurring innovation and competition. To make a transition from statism to the market economy means a complete revolution in economic and political life, from one where the state and its interests rule to a system where the power of the state plays no role. Freedom is not a public-policy option. It is the end of public policy itself. It is time for us to take that next step and call for precisely that.
