When privatisation doesn't work

There are many reasons to shun wholesale privatisation – but these days the concept of public goods is often forgotten

'Decent medical treatment should not be a privilege reserved for the few.' Photograph: Christopher Furlong/Getty Images

The economist's notion of public goods has lost currency in this age of commodities, not just in the EU but particularly in the Anglo-Saxon world. Unlike today, two generations ago, economics undergraduates were taught that such goods were different from soap flakes and hamburgers. Public goods and services are things which need to be supplied – or at least regulated – by the public sector because they are by their very nature collective. Clean water, unpolluted air, education and law and order are obvious examples; there is no doubt that everybody should have such goods, not merely those who can afford to buy them privately.

These days, however, the distinction between "public" and "private" has become blurred, and among mainstream economists the consensus appears to be that because the private sector is more efficient than the state, we should limit the public role almost entirely to that of supervision. In Britain, for example, the railways were privatised and an "internal market" was created within the national health service on the grounds that this improved the efficiency of service delivery for "customers". In the US, it has become common for everything from mass transport to prison services to be run for private profit. Indeed, there are some politicians who – as followers of the economist Friedrich Hayek – would abolish all forms of state supervision or control, and a few who would abolish all taxation.

Anti-state ideology goes back a long way, but its major driver in the last century was doubtless the Reagan-Thatcher revolution and, at a global level, what became known as the Washington consensus, ie, the rightwing orthodoxy associated with the IMF and the World Bank. Among others, economists such as Anne Krueger and Jagdish Bhagwati helped popularise the notion that civil servants are really "rent-seeking" bureaucrats whose contribution to society is nil.

Market fundamentalism, the best-known US apostle of which was Milton Friedman, was developed inter alia by Thomas Sargent into rational expectations theory, which argued that markets contain all available information and are populated exclusively by fully informed consumers and producers for whom all future risks are calculable. Such notions provided the intellectual foundation of the anti-Keynesian, anti-state views that came to dominate the profession.

For a short time after the financial collapse of 2008, it appeared that the Thatcher-era ideology of market fundamentalism – or neoliberalism as it is known today – was in terminal decline, but this view proved to be an illusion. While Keynesianism was briefly rolled out to save the advanced countries from total economic meltdown, once disaster was seen to have been averted most politicians returned to the dreary game of peddling austerity to the poor while helping the rich to prosper.

Nowhere was there more enthusiasm for this dismal sport than in Europe in general – where a transfer union was unthinkable and the welfare state was soon deemed "unaffordable" – and Britain in particular. Under David Cameron and his chancellor, George Osborne, privatisation is set to reach new heights as private companies bid for fat contracts to build and manage hospitals, schools, roads and whatever else can be hived off to the private sector in the name of reducing public debt.

Although there are some circumstances in which it is sensible to privatise, there are many good reasons why wholesale privatisation should be shunned. The first and most important reason is that abolishing universal free access to public services will make us less equal. For example, the notion of being "equal before the law" is a hallowed principle which goes back to ancient Greece. Few would deny that where legal aid is denied to the poor while the rich can evade it with the help of clever (and very expensive) lawyers, not only does this make a travesty of justice, but it also threatens social cohesion.

By analogy, a major reason for providing universal healthcare as a public service is that decent medical treatment should not be a privilege reserved for the few. Equally, because capitalist business cycles result in economic downturns, all taxpayers contribute towards funding unemployment benefit for those unlucky enough to lose their job during such times. When there are 10 job-seekers for every vacancy, "getting on your bike" simply doesn't work.

The same public logic holds for education. Universal literacy may be instrumental to developing a skilled workforce – a notion much loved by Tories – but the real reason we value education is because it is a necessary (though insufficient) component of a well-functioning democratic society. Education is not a commodity to be purchased according to individual preference; it's central to the meaning of civilised society.

What of the argument that the private sector is more efficient at running things because of competition? Although this may hold true for the production of many commodities (as we know from the sad experience of Soviet-style central planning), it is by no means a universal principle.

It used to be argued that publicly owned industries are necessary in the case of "natural monopolies"; ie, where long-term economies of scale in production make for "monopoly profits". It is only fair that government – through ownership or regulation – captures such revenues for the public benefit. Also, because natural monopolies (eg, water, energy, transport) typically require very large initial capital outlays, often the state alone is in a position to finance them. What has happened in recent decades to many public utilities is that, having been established and run by the state often with a strong element of public subsidy, they have been sold to private interests at knockdown prices on the grounds of fiscal rectitude (and with the blessing of the IMF).

Another reason for preferring public provision is where "external" costs or benefits exist. A contemporary example of such an externality is where an industry damages the environment. A private company might want to cut down swathes of forest to grow crops for biofuel, disregarding the long-term environmental impact. Such companies typically have short-time horizons – they must make profits for shareholders next year, not next century. Government needs to step in to take the long-tern environmental effect – or any other form of market failure – into account.

The notion that competition always makes the private sector more efficient than the public sector is therefore quite unjustified. Markets are not perfect, the future is uncertain, externalities are important and some goods and services by their very nature must be publicly provided. What politicians typically mean when they speak of greater efficiency is lower costs, typically achieved by employing cheap, non-unionised labour. This is the real reason so many public services are outsourced.

In short, arguments favouring private over public provision are not just theoretically flawed, but typically favour the few at the expense of the many. The pendulum has swung too far to the right: it's time to stand up for public provision.