The issues in privatisation

The author contends that liberalism does not imply unconditional support for privatisation and that there are ethical issues of market competition that liberal economists usually overlook

Another aspect of the so-called neo-liberal policies involves privatisation. Here also the empirical evidence is mixed. First of all, turning a public monopoly into a private monopoly does not serve the cause either of efficiency or of liberalism. 

Second, the general argument is that large public firms are often too big to fail and the near-certainty that they will be politically bailed out makes them lazy, inefficient and corrupt. But there are also too-big-to-fail private firms, and we know that supposedly efficient financial markets where the threat of takeovers is to discipline the bad-performing private firms often do not work so efficiently. In any case this disciplining is often carried out by shark-like but extremely myopic private-equity firms, who do not have the firm’s long-term health in mind. Privatisation advocates often overlook that management matters more than ownership in efficiency, and the performance incentives and internal organisation problems in managing large, necessarily bureaucratic, firms are similar between public and private firms. 

Third, large public utilities (say, in electricity or water or telecommunications) need to be carefully regulated, whether they are private or public. The problems of regulation in both, particularly with respect to pricing and quality of service, are quite complex, and the evidence on improvement with privatisation is mixed. 

Fourth, in many essential public services (say education or health) the arguments for public funding are much stronger than actual public provisioning of those services. People have thought about different ways of contracting out the actual provisioning to private or non-profit agencies. One problem of contracting out is that some elements of the desired quality of those services cannot be fully spelled out in the contracts (economists call this the problem of incomplete contracting). How do you make sure that the private contractor imparts certain civic qualities you may want through public education (or features like social integration that a society may value), or how to ensure a certain quality of humane treatment of prisoners in a private prison system? 

Illustration by Binay Sinha

Fifth, while the political manipulation of the running of public sector enterprises is a severe problem afflicting their efficiency in too many cases, the same problem can vitiate the privatisation process as well (with sales to, or asset-stripping by, crony oligarchs, as we have seen in Russia, with disastrous effects on its economy and polity). 

The privatisation zealots also under-appreciate the indispensable role of long-term public investment in encouraging private investment — in building infrastructure, in carrying out basic research and extension, and in initiating or pump-priming some risky forms of innovations (as the history of technological progress in computers, pharmaceuticals, or energy even in the US amply illustrates). 

All this suggests that market competition serves some important functions but they need to be regulated carefully, and the question often is about the capacity of the state to carry out such careful regulation, along with necessary promotion of public investment and welfare policies, and about the accountability processes that make the state answerable to the public. 

An alternative to both the state and the market is the community, and there are many efficiency as well as equity reasons for turning to relatively small community organisations for both governance and production and distribution. But, like market and government failures, there are also many ‘community failures’. I shall try to write a future column on this important issue. 

Finally, there are the problems of alienation and ‘immorality’ involved in market processes that liberal economists often overlook. The problem of alienation, however, more often depends on the scale and nature of work organisation and social interaction than on the market as such. This has remained largely unresolved in large firms both capitalist and state-socialist. 

The immorality issue involved in the marketability of all kinds of goods or services has been vigorously debated between philosophers and economists. Without getting into that intricate debate here, my own belief is that tradability of certain things (like kidneys or votes, or what used to be part of local commons) can fundamentally impair the soft tissue of social relations and moral sensibility, no matter what it does for efficiency. There is also the general morale issue of the spirit of relentless competition eroding the intrinsic motivation of cooperation and social norms that are inherent or latent in most humans. 

A deeper conflict in the conception of the individual may also be at stake in the general liberal advocacy of the market principle. In his recent book, On Human Nature (2017), the conservative philosopher Roger Scruton distinguishes between the liberal individual, self-possessed in her autonomous decisions, consent, contract, and trade, and the conservative individual who endows meaning to her life mainly through her identity in relation to a community with established traditions. If there is anything to this distinction the liberal needs to be careful in propagating her faith and exaggerating its supposedly universal applicability.

In this series we have thus tried to suggest the various positive aspects of liberalism particularly in its application of the principle of competition to the polity and the economy, without ignoring its severe pitfalls and ambiguities. So the neo-liberals, whoever they are, should be proud of their ideas sometimes (as in their fight against any form of concentration of power), and hesitant and sceptical at other times, and, of course, thoughtful and careful in their assertions at all times. 

Series concluded

(The article was first published in the international blog 3 Quarks Daily)

The author is Professor of Graduate School at University of California, Berkeley. His most recent three books are Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India, Globalisation, Democracy and Corruption: An Indian Perspective, and Smriti-kandyuan (a quasi-memoir in Bengali)