The Privatization of Everything

In The Privatization of Everything, Donald Cohen and Allen Mikaelian argue that, over the past four decades, private entities have wrested control of many of the functions of federal, state, and local governments. Free-market ideologues and cost-cutting “small government” bureaucrats have cooperated with business firms and nonprofits to substitute private services for government ones. However, advocates of privatization diligently overlook the fact that the competitive markets extolled for their fairness and efficiency have largely disappeared. Most privatized goods are supplied by firms with substantial market power in industries characterized by monopoly, oligopoly, monopsony, or oligopsony. Moreover, privatizers negotiate advantageous tax policies, subsidies, and government contracts that generate excess profits while protecting firms from losses. The results have been declining quality of service, rising costs, erosion of democracy, loss of public power, rising inequality, and, paradoxically, bigger government. 

Cohen and Mikaelian assemble evidence from many cases to reveal the waste and injustice arising from privatization. They define “privatization” broadly as “the transfer of control over public goods to private hands” (p. 4). Privatization includes selling publicly owned assets and substituting public-private partnerships for government programs, but much more as well. Using examples ranging from vaccination drives to student loan programs to parking meters, the authors show how public money is leveraged by private interests to yield extraordinary profits for a few. They provide historical accounts of the privatization of water distribution systems, roads and transit systems, prisons, libraries, and schools. Sometimes privatization simply means that corporations or nonprofits step into the vacuum that results when government abandons its responsibilities to protect public health, for example, or to ensure that citizens can satisfy their basic needs for food, shelter, and education. In short, say the authors, Americans are treated not as citizens with equal rights, but as mere consumers and customers. 

“Our definition of public good boils down to a few simple ideas,” explain Cohen and Mikaelian. “Public goods are things we all benefit from even if we don’t personally use them …. They are the things that are essential for life, including water and clean air. They are things that can make such broad and fundamental improvement to our quality of life that no one should be excluded,” such as electricity or broadband (p. 284). 

This explicitly normative definition covers a diverse set of “public goods.” Undoubtedly, fair-minded people may disagree as to precisely which are the “things we all benefit from” that are “essential for life” or that constitute a “fundamental improvement to our quality of life,” but the central idea is that there are some goods and services from which “no one should be excluded.” We should avoid exclusions, say the authors, “because we are fundamentally interconnected.” We are interconnected not merely by markets, which exclude those unable to pay, but also by natural resource limits, by the environmental impacts of human activity, and by the social and political dynamics of an increasingly globalized world. 

The authors’ use of the term “public good” has little to do with the formal definition used by economists, according to which public goods are nonrival and nonexcludable, in contrast to private goods, which are rival and excludable [1]. A nonrival good is one such that its use or consumption by one person does not diminish the amount available for others. Vaccines, water distribution systems, seats in charter schools, prison beds, student loans—these are rival goods. Information is nonrival, however, and Cohen and Mikaelian analyze important cases in which information is privatized. Patent protections have been greatly expanded, especially for intellectual property. Privatization has transformed academic research and publication. Libraries and even weather forecasting have been privatized. So too has information about the budgets and administration of the private entities that have taken control of public programs. Accountability and transparency in government are essential for democracy to function, but for a profit-seeking firm, transparency is unacceptable, as it gives potential competitors a strategic advantage. 

A nonexcludable good is one for which it is impossible to exclude potential users. If exclusion is technically possible but exclusion costs are high, excluding “free riders” may not be worthwhile. The privatized “public goods” analyzed by Cohen and Mikaelian are mostly excludable. This should not be surprising, as it is hard to profit from providing a service that free riders can enjoy without paying, and the exclusion of disadvantaged citizens is the authors’ central criticism of privatization. 

The economic argument for government provision of public goods is straightforward: (a) if a good is nonexcludable, the equilibrium market price is zero, so there is no incentive for private provision, even if the good would yield large positive net social benefits; and (b) if a good is nonrival, the social cost of allowing an additional person to use it is zero, so the efficient price is zero. A positive price would exclude those for whom that price exceeds their marginal benefit, even though to include them would raise total net social benefits. 

Plainly, there would be no need to press the moral or legal case for inclusion if the good in question were a public good in the economists’ sense, and thus nonexcludable. By defining “public good” normatively, the authors sidestep basic policy questions regarding which goods are best supplied by the public sector, and how and for whom they should be provided. 

The related concept of externality is more pertinent to the authors’ thesis. Externalities are benefits or costs of a human activity that accrue directly to persons other than those who undertake the activity. Air and water pollution generate negative externalities by damaging our environment; the flower garden in my yard may generate a positive externality by pleasing my neighbor as well as myself. When Cohen and Mikaelian write that “public goods” benefit “everyone,” they suggest that these programs generate significant positive externalities. A vaccine that protects me may reduce infection risk for many others. Good public schools not only help students to succeed, but also lead them to become wiser voters, improving the quality of collective decision-making. Many external benefits (and costs) are nonexcludable, and some are nonrival, which may explain the authors’ broad definition of the term “public good.” This underlies the policy conclusion that such things as public schools, public libraries, livable neighborhoods, and functional infrastructure benefit “everyone” and so should be provided by governments and financed from taxes. 

Economies of scale and density are additional features of many of the goods studied by Cohen and Mikaelian. Economies of scale occur where average cost declines as a firm’s output rises. If economies of scale are so great that a single plant can satisfy market demand at a lower unit cost than can two or more firms, we call this industry a “natural monopoly.” Economies of density are present if average cost declines as the number of users within a given service area increases. Services that involve infrastructure networks, such as transportation systems and utilities, are characterized by economies of density. In both cases, it may be inefficient to have two or more competing firms serve the same market, but to allow private monopolies to arise may lead to still worse outcomes unless regulations are properly designed and enforced. 

We should not expect that privatized public services will be produced and sold under conditions that approximate a competitive optimum—even before we consider the distortions introduced by subsidies and tax preferences. Privatization seldom creates the conditions required for market competition to allocate resources efficiently. Cohen and Mikaelian show that privatization typically leads to higher private and public costs, poorer quality of service, and exclusion of marginalized communities. There is little room for a “free market” defense of privatization. 

A related motive for privatization is to permit tax cuts; taxes are said to infringe upon individual freedom and to violate private property rights. “Democracy had made taxes necessary,” goes the argument; “therefore it had failed to protect property rights” (p. 122). Cohen and Mikaelian counter that taxes need not violate rights when they pay for public goods to be used by “everyone.” They favor progressive taxes on income and wealth. 

Cohen and Mikaelian are correct that the existence of persistent supranormal profit is both a symptom of inefficiency and a driver of inequality. They do not, however, distinguish profit from rent as sources of unearned income. The “public goods” to which they refer include natural materials and forces—water, “clean” air, environmental services, parkland, and extractible natural resources. It is puzzling that, while the authors condemn the privatization of air, water, and subsoil minerals, nowhere do they challenge the private collection of the rent of ordinary land sites. There is no discussion of rent as an economic return to land, nor of the consequences of rent seeking and land speculation for industrial market power, income distribution, or economic efficiency. Theirs is a story of private entities looting the public for “profit.” Yet surely access to land is “essential for life.” 

For land that is held in individual parcels for homes and businesses, a proportional tax on rent or land value, which creates no disincentive to produce and innovate, could finance public goods and perhaps support a universal basic income (UBI) while alleviating market inefficiencies. Even if we allow that taxes on wage incomes are a violation of individual rights and a disincentive to work, it is hard to argue that community-created site rents are the rightful property of individuals and should be similarly immune from taxation. Nor do property rights arguments have much power against severance fees for the extraction of natural resources or charges for environmental damage [2]. 

“This book is about power,” write Cohen and Mikaelian. “A pro-public society is … one that ensures that the market does not capture power over public goods” (pp. 283-284). Yet their study of the privatization of “everything” overlooks one big thing: the privatization of land, an ancient and continuing source of power and driver of inequality [3]. In a political regime in which infrastructure, public goods, and perhaps a UBI were financed from rent, the tendency for ever-rising inequality of wealth and power would be countered by universal access to the values created by nature, governments, and communities. With less inequality, we might expect less political corruption driven by campaign contributions and corporate lobbying. With lower rewards for land speculation, capital markets might function more efficiently. If governments sought to maximize their net revenues by raising land values, they would legislate and invest so as to attract people and capital. Well-planned infrastructure raises rent in the areas served, so the revenue from a rent tax could go far to finance low- or zero-priced infrastructure that generates economies of scale and density. 

In the late nineteenth century, Henry George saw the injustice and inefficiency arising from the privatization of land. Cohen and Mikaelian do not consider his proposal to make land “common property” by taxing rent, which might have provided a context for their study and influenced their analysis of some cases. Nonetheless, they are right to call attention to the accelerated pace of privatization in recent decades, and to the exceptional profits extracted by private entities that have enjoyed ever-greater political and market power. This is an excellently researched book that should draw the attention of government officials all along the left-right political continuum.