When debating the merits of privatization with statists, they will often attempt to frame the debate in terms of: “Explain to me how you can be sure that the private sector will produce better schools/roads/police/military protection than the government does.” While I fully believe there is plenty of evidence to suggest that this would be the case, I also think that such a debate is something of a distraction that moves us away from the larger picture. The problem with such an argument is that it takes as a given that “better” schools, roads, police, etc. would be a positive outcome for society as a whole. But how can we possibly know that?
Before engaging in any economic debate, it is important that we re-established a few basic premises. We live in a world of scarcity. All actions come with various costs (even if an action does not “cost” money, the opportunity cost of time is still a factor) and benefits (actions that are not in any way perceived as beneficial will never be conducted, and therefore do not merit discussion). Economics is therefore concerned with the allocation of scarce resources.
Let us imagine that currently, all of our resources are fully allocated. A certain amount of our resources are spent on obtaining food and water, a certain amount on energy, a certain amount on roads and bridges, a certain amount on military protection, a certain amount on police, and a certain amount on education. In this case, the only way to obtain “better” education is to expend more resources on it, which would thereby take resources away from something else (police, military, food, etc.)
It might be helpful to imagine a family on a tight budget. They spend a certain amount of money on rent, utilities, food, entertainment, and transportation. One member of the family comes along and says, “We could really use a better car.” Does that automatically mean they should go out and buy a new car? They cannot just wave a magic wand and see the quality of their existing car improved. Buying a new car would entail a certain sacrifice. Assuming they have no means to suddenly increase their income (if they had such means, we can assume they already would have utilized them), more resources must be expended on transportation, which would mean fewer resources would be available to the other categories of spending. In order to afford the new car, the family may have to buy cheaper food, or heat their house at a lower temperature. Due to these sacrifices, it is not necessarily a given that a new car would benefit this family.
The take-away from all this is that the main issue here is not the quality or quantity of any one particular item or service, but rather the allocation of scarce resources. Families must allocate scarce resources to meet their budgets. Societies also allocate scarce resources, mostly through voluntary market transactions, but occasionally through the command and control process of the government. Voluntary market transactions create a feedback mechanism of profits and losses. A competitive market pricing system is established. As firms compete to fulfill the desires of consumers, economic equilibrium (where the amount of goods supplied and the amount of goods demanded are optimized according to consumer preference) is approached.
Consider a farmer whose land is equally suited to growing corn and potatoes. He travels to his local farmers market, where hordes of customers show up and quickly buy out all of the potatoes available for sale. There are many customers remaining who desire potatoes, but they are all sold out. Meanwhile, there is an ample supply of corn for sale at the market, but very few customers. There are many farmers attempting to sell corn, but all of the customers are gone. The farmer returns to his farm, equipped with some valuable information. The demand for potatoes is quite high, and the supply is quite low. There is certainly an opportunity for profit here. Meanwhile, the demand for corn is low, and the supply is high. Growing corn would seem to be a poor business decision. The farmer, naturally, decides to grow potatoes.
What is the farmer doing here exactly? Those on the left might criticize him for greedily focusing on profits above all other concerns. After all, he is deciding what crops to grow based on entirely selfish motivations. What about the good of his fellow men? Well, let us recall that his “fellow men” at the farmers market preferred potatoes to corn. This preference is exactly why potatoes are more profitable in the first place. By choosing the most profitable crop, the farmer is also, at the same time, whether he intends to or not, choosing the crop that provides the greatest benefit to others. Now, such a situation as the farmers market we earlier described could not sustain itself for long. In a free and competitive market, two things would certainly happen. The prices would adjust (the prices of potatoes would rise until there was no excess demand, and the price of corn would fall until there was no excess supply), and the market itself would adjust (other farmers would also grow more potatoes and less corn, until the two crops were about equally profitable). This is how the pricing system allocates scarce resources to achieve a socially optimal result.
Now, let’s compare this to the coercive sector. Let’s say the mayor of a town happens to have a large revenue surplus (I know, I know, the odds of this are virtually zero, but just play along here). The mayor could use this money to either build a new school, or repave all of the roads in the city. How can they decide which is the socially optimal result? The simple answer is that they can’t. Because the government fully controls both the transportation infrastructure and the education system, there are no pricing signals. There is no market to generate profits or losses; therefore, there is no non-arbitrary way to make this decision, as critical information is missing.
Getting back to the point of this article, there is simply no way for anyone to know whether the government is supplying the proper amount of any particular good or service, due to the absence of a profit and loss system. The average person might concede that the government is doing a poor job in many areas, but their analysis usually does not run much deeper than “We need better schools, we need to repair our collapsing bridges, and we need to hire more police officers.” Sure, in a vacuum, if we could wave a magic wand and suddenly have those things at no additional cost that would be an improvement, but these magic wands unfortunately do not exist. Scarcity exists. In order to hire more police officers, other things must be given up. Therefore, we should hire more police officers if and only if additional police officers happen to be the most urgent unfilled need of a large number of citizens. But how can we possibly know which is the most urgent unfilled need? If all of these functions were privatized, the profit and loss system would emerge, and it would be remarkably easy to tell where additional resources should be directed. But under the government, the decisions might as well be made by a blindfolded monkey throwing darts at a chart on the wall.
Which gets me back to the “shock” title of this piece. Given that the government lacks the feedback mechanisms necessary to know where resources are most urgently demanded, it is not only possible that we don’t need “better” schools; it is entirely possible that our schools are already too good. Or at least, that we are allocating entirely too many resources to them. (The fact that spending more money on schools does not produce better results is an entirely separate issue, of which volumes could be written, and is outside the scope of this particular article. For the sake of analyzing the general economic impacts of these decisions, we are assuming that more resources = better results.)
Because the purpose of the free market is to allocate scarce resources, it is impossible to say whether any particular government function (schools, roads, police, etc.) would be “better” if privatized. What we can say, is that if everything were privatized, the free market would allocate available resources to bring them in-line with the preferences of all of the individuals which comprise society. This might very well result in fewer roads, a smaller military, and “worse” schools. But this would still be a socially optimal outcome, as it would more accurately reflect the wants and needs of society at large. Keep in mind that the resources that might potentially flow away from police, roads, and schools wouldn’t just be lost; they would be spent on other things, things we desire more. The money we save by having a smaller military might be spent on developing new technologies to search for a cure for cancer. The money we save by cutting back on schools might be spent on increasing crop yields, or expanding efforts to provide food for the less fortunate. There’s no way to predict ahead of time what priorities a truly free society might emphasize. But we can know, with absolute certainty, that a free society would be a society where the true preferences of individuals would be respected and catered to by “selfish” businessmen, cold-heartedly seeking to turn a profit. This would be a vast improvement on the current system of government coercion, which makes arbitrary allocation decisions not based on market signals, but rather on the decrees of technocrats and politicians.