The Waste Of Privatisation

Libertarians advocate reliance on the private sector and the down play or even abolition of the public sector. However, what they don’t seem to realise is that this system is enormously wasteful. Privatising public industries would result in duplication, under capacity and under use of resources. Libertarians fail to recognise the power of economies of scale that the state wields to keep costs low. There are simply are some times when we are better together than alone.

Look at transport. One bus can transport 50 people cheaply and easily from one place to the next. There are slight problems such as having to wait for a bus and not getting dropped off exactly where you want, but otherwise the system works well. If this was privatised and all 50 people had their own cars, this would involve an enormous waste of resources. It would cost far more without any benefits. In fact there would be additional disadvantages of traffic and pollution. Even if the bus is half full, it is a far better use of resources than everyone buying their own car. The fuel and insurance costs of running a car, plus the difficulty in finding parking outweigh the benefits of “more freedom”. Like most libertarian notions, the idea of more freedom is really an expensive illusion.

I had a debate with a friend who argued we should abolish public education and instead rely on competition and the free market to provide a cheaper and more efficient system. However he didn’t seem to realise the enormous waste of resources involved. For example I attended my local secondary school (or high school to any American readers) which was the only one in my town. It had a population of roughly 700 students and 50 teachers. Nearly everyone attended it because it was the local school and that’s where all our friends were going (never underestimate social norms; they have the power to dwarf economic considerations). For competition to work there would have to be multiple schools in this small town, each with enough classrooms and teachers to achieve critical mass (no one wants to go to a school that no one else goes to and for competition to work it must be between identical options).

Imagine if there were even 5 schools in my town. Each one would require enormous investment in building the school and require the hiring of a large number of teachers. If there was a roughly even distribution of students among them, then the schools would be near empty and operating at only 20% (one-fifth) capacity. In other words massive waste of resources. If there wasn’t an even distribution then some schools would go bankrupt and we would be back at square one with only one or two schools. At which libertarians would undoubtedly claim there was no competition therefore the free market had never been tried and could not be called a failure.

This would work better in urban areas where larger population could support a larger population. Even still people are quite parochial and there would have to be a massive increase in the number of schools (and therefore waste of resources). There is little room for increased efficiency in the education system. As a labour intensive industry, teachers can only be more productive if classes are larger or school days are shorter, neither of which is beneficial to a child’s education. So a completely private system would be far more expensive than the current one and I haven’t even mentioned the inevitable elitism and snobbery that private schools produce or the inferior opportunities children of poor parents would suffer.

My friend also proposed that the police force should likewise be privatised (admittedly more of an Anarchist than Libertarian proposal). This too would be enormously inefficient. Imagine if every single shop, no matter how small, had its own security guard? This would be a huge source of employment, but would draw people away from other industries. It would be a chronic waste as security guards are not productive and even those that stop crime spend about 99% of their time doing nothing. A privatised security force would be an enormous cost for all businesses that would particularly cripple smaller ones. Before you argue that a group of businesses could band together and hire one guard to protect them all, this is what the state does. The state is a combination of citizens for mutual protection and provision of services.

While it could be claimed that the state relies on coercion, this is necessary due to the free rider problem. If all my neighbours are protected then there is little incentive for me to hire a guard. As a result a sub-optimal number of guards are hired. I may also not trust or wish to share with my neighbours. A private system would protect large wealthy businesses while leaving poorer ones at the mercy of criminals. Whereas the state can protect all citizens cheaply and efficiently. It can purse and imprison criminals, as well as prevent all crimes not just property crimes (rape and murder etc).

Imagine if instead of one regional hospital in each city as it currently is in Ireland, we have several. How would this be anything other than a waste of resources? The inevitable result would be duplication and under capacity. Specialisation is no solution as the whole point of competition is that there is more than one supplier of identical resource. Complete privatisation would not lead to lower costs but would actually be more expensive, both on an individual and societal level.

Libertarians fail to see the advantage of the state and instead focus solely on the disadvantages. True, the state is subject to political influence and bureaucracy (problems that affect corporations as well) but it has the advantage of economies of scale. Public services greatly simplify our decisions and make things cheaper and easier. Most industries have room for innovation and competition, but libertarians make the mistake of applying a one size fits all logic. They fail to realise that this is not the case for all industries and fail to realise that exceptions exist.

Libertarians love the idea of competition. To them it is a miracle worker always reducing costs and increasing quality. However, it is not a solution to every problem. If the core sectors of the economy were privatised, the result would be an enormous increase in costs and a giant waste of resources. That is why the state runs them in the first place. Libertarianism is not the ideology of freedom but that of waste.


Filed under Economics

9 responses to “The Waste Of Privatisation

  1. GM

    Why do you assume that the market would replace all buses with cars? That there might be five schools instead of one for a single town? That every shop would need its own security guard? Supporting the free market does not mean that you have specific answers for what quantity of anything should be supplied. It means only that you think market forces should determine these things. And it means allowing economies of scale to develop spontaneously, not pre-specifying how big companies should be allowed to get.

    As far as waste is concerned, private enterprise means private shareholders who directly pay the price of misallocating their resources. Public enterprise means taxpayers paying the price – taxpayers who do not have the individual choice about whether or not to invest in those enterprises. It is little surprise that public sector waste is legendary, while private sector companies can often gain reputations for being cheap (e.g. Ryanair).

    • This post is a response to the claim we should remove the state from all economic activities. So if we abolished public transport and everyone drove cars, what would happen? Would it be better or worse. I heard the argument that if we abolished public education then the free market and competition would result in a better system. In other to have competition you must have several choices. If we abolished the state police then every shop would have to have its own security guard.

      My point was that it isn’t a simple question of redistributing waste from public to private hands, but rather than the absolute amount of waste would soar.

      I notice that you didn’t address any of the points I made in the post. If you believe a world without state intervention or state firms would be less inefficient, please explain how.

      • GM

        “So if we abolished public transport and everyone drove cars…” Why you are still flogging this dichotomy? There are private sector buses all over the world. Indeed, there was a private company which tried to compete with the subsidised and State-protected Dublin Bus not very long ago, and they were shoved out through anti-competitive practices (

        Again: the argument for the free market is not an argument for many choices for everything – it’s an argument for allowing market forces to determine how many choices we have. There are few libertarians I know of who believe that the mainstream economic notion of “perfect competition” would appear in the absence of the state, so if you are arguing against that, you are not arguing against libertarians.

        As far as the police are concerned, it is slightly more complicated because of the associated legal powers. But as far as plain security functions are concerned, the private sector is already heavily involved. Many stores do employ private security guards. Governments themselves are huge customers of security companies like G4S. Who protects the UK embassy in Afghanistan? G4S. So it doesn’t make any sense to say that we are benefitting from nationalised security and that privatised security would be wasteful: security is already heavily privatised despite the “free” provision of public security services.

        • Let me just clear up one misunderstanding. By privatisation I do not mean the selling of state assets but rather the move from collective action to individual action as promoted by libertarians. So when discussing transport, I mean a change from collective buses to individual cars, not simply public to private buses.

          You may not be aware of it but there are a large number of libertarians on the internet who believe government is always inefficient and competition is the solution to all economic problems. A quick browse of the economics tag on wordpress turns up large numbers.

          Yes Britain is moving towards a more privatised police but also a more expensive one. Consider this post a warning of where Britain is going.

          • GM

            “By privatisation I do not mean the selling of state assets but rather the move from collective action to individual action as promoted by libertarians.”

            That’s not what libertarians promote, and it’s not the meaning of privatisation. You are arguing against something that nobody is advocating.

            “The government is always inefficient” does not imply “government-run services should be abolished and replaced with many a multitude of tiny private firms”.or “people should stop co-operating and sharing major resources”. You are simply not arguing against libertarianism.

            • Libertarianism is the ideology of the individual. It is based on the idea that individual action always leads to the best outcome. Any collective action is equal to socialism.

              I simply followed this logic through. A private bus is still a form of collective action which only differs from the state in terms of size. This post is about how people move from the public sphere to the private sphere. I am aware that those words have a host of connotations but I couldn’t think of any better ones to describe what I mean.

              • GM

                Individual action, as you refer to it in that context, means allowing individuals to decide which associations they wish to be a part of and which forms of co-operation they wish to engage in. It doesn’t mean preventing people from associating with each other or from co-operating, or promoting individual action at the expense of those things. On the contrary, the free market is described as allowing for the division of labour to become more advanced. The free market allows people to learn more advanced forms of co-operation and for their economic activities actually become more integrated. Consider the many millions of people who have co-operated with each other to produce the vast array of consumer goods in nearly any Western household. Contrast with the individualistic cottage industries which were prevalent in the West prior to the Industrial Revolution.

  2. There are sectors of the economy that if it were left to private individuals our goose would be cooked. The state, where I live, has to take care of power or energy costs would be too high, healthcare which you have already mentioned. Anytime I go to a private hospital for treatment, the consultation fee alone would cover several services in a government hospital. The only problem we have with our government hospitals is poor service delivery.
    The entire security system can’t be privatised, there is room for a few private firms but security must rest with the state or what else do we elect a government if not to ensure that our rights are protected.
    Our urban transport is in the hand of individuals and for lack of a better word, it is chaotic at best and inconvenient at it’s worst.

  3. Pingback: Blame the media! | Fraser Sherman's Blog

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