Friday, March 18, 2011

Government Contracts vs. Free Market Competition


Alex Taborrok had a recent blog post over at Marginal Revolution where he criticizes an argument for public trash collection made by Arnold Kling. Here is Kling's argument:
Surely, if we all lived in small mountain communities we would need less government. But imagine purely private trash collection in an urban area. If you pay for somebody to collect the trash in front of your house, then instead of paying for my trash to be removed, my strategy is to put my trash in front of your house and free ride on your trash collection.
Taborrok's reply, in brief, is that there are cases of successful private trash collection, including in his own Fairfax, Virginia:
I know because my neighborhood has two private, competing garbage collectors and the service is better than I have ever experienced in any other neighborhood. I get two trash collections a week (three counting yard matter such as leaves and cuttings), they take everything including recycling, the price is low and they work on government holidays. Most of Fairfax County has private trash collection. In fact, around the United States and the world private trash collection is quite common and there are typically substantial cost savings, on the order of 20-30%.
I agree with Tabarrok, in that private trash collection, at least in some contexts, does not constitute a public good problem. (Even if it did, the state is not necessarily the best solution; we must always compare imperfect free market and other imperfect consensual solutions to the imperfect state-based solutions of offer.) I am more interested, though, in the point Tabarrok makes in his following paragraph:
It is important to note that cost savings come from creating competition rather than from privatization per se–substituting a private monopoly for a public one is not very helpful but creating and maintaining a competitive environment can work wonders.
A common mistake is made by both pro-business and anti-free market factions (the latter is actually a species of the former, though most people don't realize this): a "privatization" scheme in which the government pays a private contractor to perform a service will not, in general, lead to much or any improvements in the price or quality of the service. But this is not because of a failure of the free market.

A moment's contemplation should make this clear: when the government uses tax money to pay a private company for a service, this is not a free market transaction. Free markets only exist when buyers are not coerced into paying for products (which does not fit the case of taxpayers), and when sellers are free to enter the market at any time and seize market share from rival firms (which does not fit most or any government contracting schemes). That is, a free market involves competition, and that's the only reason why free markets often contribute to the common good. Take away competition, and you have the same kinds of high prices and low quality that often characterize services provided by the most obvious monopoly of all, which is government.

The fact that "pro-business" factions often push for privatization schemes of this nature should not cloud our judgment. Government contracting is not a substitute for genuine free markets, because the same kinds of incentives are not in place. Most pro-business groups are perforce anti-free-market, since the free market is never in the interest of a particular firm. The best outcome for a firm is if it receives subsidies and protections from the government, not if it has to cover all its own expenses and compete on an even footing with rival firms. It's true that people in general are benefitted by free markets, but from the perspective of a particular firm, competition is not the best situation to be in, but rather protection, subsidy, and, if possible, sweet, sweet monopoly. Support for genuine free markets is therefore a radically "anti-business" position, but this does not seem to be widely understood. (Reading Adam Smith's Wealth of Nations may help, since the godfather of the free market is excoriating in his attacks on the business interests of his day, who had paid off people in the government to restrict competition.)

Unfortunately, this is often obscured in debates over privatization. The failures of government contracting are then often blamed on the free market. What is interesting about most debates over privatization is that genuinely free market positions are never even considered: the choice is often between government provision of a good or service and provision of a good or service by a private firm on a government contract. Neither of these supports the common good.
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