The Meaning of PrivatizationCopyright 1988 by PaulStarr. Readers may redistribute this article to otherindividuals for noncommercial use, provided that thetext and this notice remain intact. This article may not beresold, reprinted, or redistributed for compensation of any kindwithout prior written permission from the author. If you have anyquestions about permissions, please contact the author at (609)258-4533 or by e-mail at starr@princeton.edu.Preferred Citation: Paul Starr, "The Meaning ofPrivatization," Yale Law and Policy Review 6 (1988): 6-41.This article also appears in Alfred Kahn and Sheila Kamerman,eds.,Privatization and the Welfare State (Princeton UniversityPress, 1989).The Meaning of PrivatizationPaul StarrPrivatization is a fuzzy concept that evokes sharp politicalreactions. It covers a great range of ideas and policies, varyingfrom the eminently reasonable to the wildly impractical. Yethowever varied and at times unclear in its meaning, privatizationhas unambiguous political origins and objectives. It emerges fromthe countermovement against the growth of government in the Westand represents the most serious conservative effort of our timetoformulate a positive alternative. Privatization proposals do notaim merely to return services to their original location in theprivate sphere. Some proposals seek to create new kinds of marketrelations and promise results comparable or superior toconventional public programs. Hence it is a mistake to define anddismiss the movement as simply a replay of traditional oppositionto state intervention and expenditure. The current wave ofprivatization initiatives opens a new chapter in the conflictoverthe public-private balance.This Article attempts to clarify the meaning of privatization asanidea, as theory and rhetoric, and as a political practice. In theprocess I hope to explain why I generally oppose privatization,even though I favor some specific proposals that privatizationcovers. But apart from this political judgment, I takeprivatization seriously as a policy movement and as a processthatshow every sign of reconstituting major institutional domains ofcontemporary society.I. Privatization as an IdeaIn the ideological world we inhabit, contesting interests andparties use "public" and "private" not only to describe but alsotocelebrate and condemn. Any serious inquiry into the meaning ofprivatization must begin, therefore, by unloading the complexfreight that the public-private distinction carries. In thissection I analyze, first, the general uses of the public-privatedistinction and, second, the recent political application of theconcept of privatization.A. The Public-Private Distinction and the Concept ofPrivatizationThe terms public and private are fundamental to the language ofourlaw, politics, and social life, but they are the source ofcontinual frustration. Many things seem to be public and privateatthe same time in varying degrees or in different ways. As aresult,we quarrel endlessly about whether some act or institution isreally one or the other. We qualify the categories: This group isquasi-public, that one is semi-private. In desperation sometheorists announce that the distinction is outdated or soideologically loaded that it ought to be discarded, or that it isa distinction without a difference. Yet the terms can hardly bebanished nor ought they.2 To speak intelligently about modernsocieties and politics without using the words public and privatewould be as great an achievement as writing a novel with the word"the." However, neither is necessarily the sort of achievementthatother theorists or novelists would care to imitate.The frustration with these ubiquitous categories partly arisesbecause public and private are paired to describe a number ofrelated oppositions in our thought. At the core of many uses arethe two ideas that public is to private as open is to closed, andthat public is to private as the whole is to the part. In thefirstsense, we speak of a public place, a public conference, publicbehavior, making something public, or publishing an article. Theprivate counterparts, from homes to diaries, are private in thataccess is restricted and visibility reduced. The concepts ofpublicity and privacy stand in opposition to each other alongthisdimension of accessibility. Public is to private as thetransparentis to the opaque, as the announced is to the concealed.Similarly,a person's public life is to his or her private life as the outeris to the inner realm.On the other hand, when we speak of public opinion, publichealth,or the public interest, we mean the opinion, health, or interestofthe whole of the people as opposed to that of a part, whether aclass or an individual. Public in this sense often means"common,"not necessarily governmental. The public-spirited orpublic-mindedcitizen is one concerned about the community as a whole. But inthemodern world the concepts of governmental and public have becomesoclosely linked that in some contexts they are interchangeable.Thestate acts for the whole of a society in international relationsand makes rules binding on the whole internally. Public thusoftenmeans official. In this sense a "public act'' is one that carriesofficial status, even if it is secret and therefore not public inthe sense of being openly visible. Indeed, according to theOxford English Dictionary, private originally signified"notholding public office or official position." As Albert Hirschmanpoints out, this is a meaning that survives in the army"private,"that is, the "ordinary soldier without any rank or position."3Now,of course, private is contrasted with public to characterize thatwhich lies beyond the state's boundaries, such as the market orthefamily.These different contrasts between public and private lead to someapparent conflicts in defining what lies on each side of theboundary. One such conflict concerns the location of the market.Toan economist, the marketplace is quintessentially private. But toa sociologist or anthropologist concerned with culture, themarketplace is quintessentially public--a sphere open to utterstrangers who nonetheless are able to understand the same rulesandgestures in what may be a highly ritualized process of exchange.While economists use the public-private distinction to signifythecontrast between state and market, analysts ofculture--particularly those concerned with the roles andrelationsof men and women--take the public sphere to include the market aswell as politics and contrast them both with the private domainofthe family. In this sense, the public-private distinction issometimes taken to mark out the contested boundaries of the maleand female worlds--a usage that takes us back to the notion oftheprivate as being more closed, more shielded from contact andview,than the open encounters of public life.4From these varying uses of the categories come severalcontrastingconceptions of the public sphere. The public sphere may beconceived of as the open and visible--the sphere of public life,public theater, the public marketplace, public sociability. Thepublic sphere also may be conceived of as that which applies tothewhole people or, as we say, the general public or the public atlarge, in which case the public may consist of an aggregate or amass who have no direct contact or social relation--the veryopposite of a sphere of sociability. Or the public sphere may beconceived specifically as the domain circumscribed by the state,although exactly where to draw the state's boundaries may bedifficult indeed.The general meanings of privatization, then, correspond towithdrawals from any of these variously conceived public spheres.Historians and sociologists write about the withdrawal ofaffectiveinterest and involvement from the sphere of public sociability.Forexample, in their work on the development of the modern familyPeter Willmott and Michael Young argue that as the modernhouseholdbecame equipped with larger homes, private cars, televisions, andother resources, more time and capital came to be invested in theprivate interior of the family and less in public taverns,squares,and streets.5 Similarly, Richard Sennett suggests that since theeighteenth century modern society has seen a decline of publicculture and sociability, a deadening of public life and publicspace, a privatization of emotion.6 Such arguments shade into asecond meaning of privatization: a shift of individualinvolvementsfrom the whole to the part--that is, from public action toprivateconcerns--the kind of privatization that Hirschman describes asoneswing in a public-private cycle of individual action.7 In thissortof public-to-private transition, the swing is not fromsociabilityto intimacy but from civic concern to the pursuit ofself-interest.Privatization can also signify another kind of withdrawal fromthewhole to the part: an appropriation by an individual or aparticular group of some good formerly available to the entirepublic or community. Like the withdrawal of involvement,privatization in the sense of private appropriation has obviousimplications for the distribution of welfare.From these meanings it is but a short step to the sense ofprivatization as a withdrawal from the state, not of individualinvolvements, but of assets, functions, indeed entireinstitutions.Public policy is concerned with privatization at this level. Butthe two forms, the privatization of individual involvements andtheprivatization of social functions and assets, are certainlyrelated, at least by ideological kinship. A confidence thatpursuitof private gain serves the larger social order leads to approvalfor both self-interested behavior and private enterprise.Thus far I have been talking about privatization as if bothspheres, public and private, were already constituted. But in alonger perspective, their constitution and separation representcomplementary processes. Much historical experience correspondstoSimmel's paradoxical dictum that "what is public becomes evermorepublic, and what is private becomes ever more private.''8 This istrue specifically of the histories of the state and the family.Thedifference between patrimonial domination and modernbureaucracies,as Weber describes the two, is precisely that in the patrimonialstate public and private roles were mixed and in the modern statethese roles are more clearly distinguished.9 The modern statedistinguishes offices and persons. The office is public, and itsfiles, rules, and finances are distinct from the personalpossessions and character of individuals. As publicadministrationand finance were separated from the household and personal wealthof the ruler, the modern state became, in effect more public; theperson and family of the ruler, more private.10 That the domesticsphere has generally become more private is one of the classicthemes of modern sociology and the history of the family.11The rise of the liberal state specifically entailed a sharpeningofthe public-private distinction: on the one hand, the privatizingofreligious and moral belief and practice and of economic activityformerly regulated by the state; on the other, a commitment topublic law and public political discussion. Classical liberalismisoften represented as a purely privatizing ideology, but liberalswere committed to suppressing markets in votes, offices, and taxcollection, not to mention human beings. Strengthening the publiccharacter of the state is a continuity in liberal thought fromitsclassical to contemporary phases. Moreover, as Stephen Holmesargues, the liberal effort to privatize otherwise rancorousreligious differences promoted a civilized public order.l2 Somekinds of privatization are not the enemy of the public realm butits necessary support.In liberal democratic thought, public and private are centraltermsin the language of claims-making. In particular, they provide adeeply resonant vocabulary for making claims against the state.These are of two kinds. First, the concept of a public governmentimplies an elaborate structure of rules limiting the exercise ofstate power. Those who wield power are to be held publiclyaccountable--that is, answerable to the citizens--for theirperformance. Government decisions and deliberations must bepublicly reported and open to general participation. In short,thecitizens of a liberal state are understood to have a right toexpect their government to be public not only in its ends butalsoin its processes. Second, when the members of a liberal societythink of their homes, businesses, churches, and myriad otherformsof association as lying in a private sphere, they are claiminglimits to the power of that democratic state. The limits are notabsolute--private property rights, for example, are not aninsuperable barrier to public control or regulation--but whencrossing from public to private the presumptions shift away fromthe state and any state intervention must meet more stringenttestsof the public interest.Public and private in liberal thought have become pervasivedualities--or, perhaps better said, polarities--associated withthestate in one direction, the individual in the other. Intermediateentities, such as corporations typically have been dividedbetweenthe two categories. Until the nineteenth century in the UnitedStates, there was no clear legal distinction between public andprivate corporations. Initially, cities were not sharplydistinguished in the law from business enterprise; but in themid-1800s cities became classified as agencies of the state,whilebusiness corporations came to be treated as individuals. Aspublicagencies, cities were allowed only such powers as statesdelegatedto them; as fictive individuals, private corporations came toenjoyrights protected by the Constitution.l3 This bifurcation betweenpowers and rights lies at the foundation of the contemporarylegaldistinction between the public and private sectors.Behind the legal categories, of course, the boundaries areblurred.On the one hand, private interests reach into the conduct of thestate and its agencies; on the other, the state reaches acrossthepublic-private boundary to regulate private contracts and theconduct of private corporations and other associations. Throughtaxpreferences and credit guarantees, the state shapes privateeconomic choices and relations. The state is immanent in theeconomy and society, but the degree of penetration varies, andthepublic-private system of classification is used to express thesevariations. So, for example, among private corporations, wedistinguish those that are privately held from those that arepublicly traded and subject to the regulations of the Securitiesand Exchange Commission. The latter are often called publiccorporations, by which we actually mean public privatecorporations. Among those public private corporations are somesubject to more extensive regulation, such as the utilities,whichare especially public, public private corporations. And since theutilities, in turn, have some lines of business defined as publicand others as private, the public-private boundary runs withinthemas well as around them.It is as if, on finding two boxes labeled public and private, wewere to open the private box and find two more boxes labeledpublicand private, which we would do again--and again--opening eversmaller boxes until we reached the individuals far inside, whomwecould then split into respective offices and persons.l4 Moreover,if the boxes have been assembled by reasonably competent lawyers,they may be extremely intricate and some will have misleadinglabels. But this complexity and the legal manipulation of thecategories do not invalidate their usefulness or underlyingmeaning. To speak of a public corporation in the private sectorought really to be no more confusing than saying that NorthCarolina is in the South. Public and private give us relativelocations.A further source of frustration with the public-privatedistinctionis that the terms do not have consistent meanings from oneinstitutional sphere to another. In the United States, thedifference between public and private schools is not the same asthe difference between public and private televisionbroadcasting.An American public school is public, not only in that it is stateowned and financed, but also because it is open to all childrenofeligible age in its area. Private schools can reject applicants,but public school systems are denied that option. Public is toprivate, not only as state is to nonstate, but as open is toclosed. However, in television broadcasting, the viewing publichasopen access to commercial as well as public channels. Thedifference lies in financing and programming. The public channelsreceive government support and do not choose programming tomaximize audience ratings, though in fact even publicbroadcastingnow competes for private corporate sponsorship, and some publicstations are legally organized as private nonprofitcorporations.l5To make matters still more complicated, the differences betweenpublic and private institutions do not follow parallel lines inother countries. To take broadcasting again, public television orradio in the United States is more dependent on privatefinancing,less subject to control by political authorities, and less thesymbolic voice of the state than the state-owned networks ofotherWestern nations, not to mention the Soviet bloc and ThirdWorld.To say public or private, therefore, is not sufficient to specifya form of organization or even its relation to the state.Consequently, it is extremely risky to generalize about publicversus private organizations--and, therefore, about the merits ofprivatization as public policy--beyond a particular institutionalor national context. No general theory about the performance ofpublic versus private organizations is likely to succeed if itfails to distinguish among political systems and the structuralvariety of public and private institutions. Privatizationdescribesa direction of change, but it does not denote a specific originordestination. Its meaning depends on the point of departure--thepublic-private balance previously struck in a particular domain.And it is a critical question whether moving from public toprivatein the sense of state to non-state entails a movement in theothersenses: from open to closed (in access to information) or fromthewhole to the part (particularly in the distribution ofbenefits).B. The Political Meaning of PrivatizationThe term privatization did not gain wide circulation in politicsuntil the late 1970s and early 1980s. With the rise ofconservativegovernments in Great Britain, the United States, and France,privatization has come primarily to mean two things: (I) anyshiftof activities or functions from the state to the private sector;and, more specifically, (2) any shift of the production of goodsand services from public to private.16 Besides directly producingservices, governments establish the legal framework of societiesand regulate social and economic life, and they finance servicesthat are privately produced and consumed. The first, broaderdefinition of privatization includes all reductions in theregulatory and spending activity of the state. The second, morespecific definition of privatization excludes deregulation andspending cuts except when they result in a shift from public toprivate in the production of goods and services. This morefocuseddefinition is the one that I shall use here. It leaves open thepossibility that privatization may not actually result in lessgovernment spending and regulation--indeed, may even unexpectedlyincrease them.Several further points about my definition need clarification.First, the public sector here includes agencies administered aspart of the state and organizations owned by it, such as stateenterprises and independent public authorities like the BritishBroadcasting Corporation (BBC) or the Port Authority of New Yorkand New Jersey. In the private sector I include not onlycommercialfirms but also informal and domestic activities, voluntaryassociations, cooperatives, and private nonprofitcorporations.l7Second, in the definition I am using, privatization refers toshifts from the public to the private sector, not shifts withinsectors. Thus the conversion of a state agency into an autonomouspublic authority or state-owned enterprise is not privatization,though it may well put the enterprise on a commercial footing.l8This was the objective, for example, of the conversion of theUnited States Post Office into a public corporation, the UnitedStates Postal Service, in 1971.19 Similarly, the conversion of aprivate nonprofit organization into a profit-making firm also isnot privatization, though it, too, may orient the firm toward themarket. Both of these intrasectoral changes might be described ascommercialization; in the case of public agencies,commercialization is sometimes a preliminary stage toprivatization. Third, shifts from publicly to privately produced services mayresult not only from a deliberate government action, such as asaleof assets, but also from the choices of individuals or firms thata government is unwilling or unable to satisfy or control. Inmanycountries, private demand for education, health care, orretirementincome has outstripped public provision. As a result, privateschooling, medical care, and pensions have grown to relativelylarger proportions. This is demand-driven privatization. Whenprivatization is a demand-driven process, it does not require anabsolute reduction in publicly produced services. Stagnation orslow growth in the public sector may be the cause. In somesocialist societies the growth of an "underground" economyrepresents a form of privatization that is not a planneddevelopment (though it may well result from developmentplanning).In other words, as a process, privatization encompasses moreinstitutional changes than those brought about by self-consciousprivatization policies. It seems useful, then, to distinguishinstances of privatization according to whether they arepredominantly policy- or demand-driven.Fourth, if one shifts attention from the sphere of production tothe sphere of consumption, one may alternatively defineprivatization as the substitution of private goods for publicgoods. A public good, in the economist's sense, has twodistinguishing properties: One person's consumption does notpreclude another's; and excluding anyone from consumption iscostly, if not impossible. The prototypical example is fresh air.A public good need not be produced by government. A broadcasttelevision program is a public good even if it is provided by acommercially owned station; but videotape is not, nor isprogramming on subscription cable services. Any shift towardtheseforms of nonbroadcast television represents a privatization ofconsumption, even if the local cable service is municipallyowned.20Depending on whether one is talking about the locus of productionor the forms of consumption, privatization can mean ratherdifferent things. In regard to production, "privatization ofhealthcare" might mean a transfer of medical facilities from public toprivate ownership; regarding consumption, it might refer to ashiftin expenditures from public health (environmental protection,vaccinations, etc.) to individual medical care. Similarly,"privatization of transportation'' might refer to the conversionofan urban bus system from public to commercial ownership; or itmight mean a shift in ridership from buses to privateautomobiles,regardless of whether the bus company is municipal or commercial.Strictly speaking, public transportation is not a public good,since exclusion is possible and only one person at a time can sitin a seat; however, because buses and trains are open to thepublicat large, common carriers are a distinctively public form ofconsumption compared to private cars. More generally, thehistorical process described by Willmott and Young--theconcentration of consumption activities in the home--representedashift toward more privatized forms of consumption. This shift hasbeen the source of much criticism of contemporary society, as inJohn Kenneth Galbraith's famous contrast of private opulence andpublic squalor in The Affluent Society.21 In thisdiscussion, whenever referring specifically to a shift frompublicgoods to private goods, or from common carriers to privatecarriers, I use the phrase "privatization of consumption."Otherwise, I take privatization to mean a shift in the locus oftheproduction of services from public to private.Four types of government policies can bring about such a shift.First, the cessation of public programs and disengagement ofgovernment from specific kinds of responsibilities represent animplicit form of privatization. At a less drastic level, therestriction of publicly produced services in volume,availability,or quality may lead to a shift by consumers toward privatelyproduced and purchased substitutes (called "privatization byattrition" when a government lets public services run down).Second, privatization may take the explicit form of transfers ofpublic assets to private ownership, through sale or lease ofpublicland, infrastructure, and enterprises. Third, instead of directlyproducing some service, the government may finance privateservices, for example, through contracting-out or vouchers.Finally, privatization may result from the deregulation of entryinto activities previously treated as public monopolies.These forms of privatization vary in the extent to which theymoveownership, finance, and accountability out of the public sector.The spectrum of alternatives runs from total privatization (as ingovernment disengagement from some policy domain) to partialprivatization (as in contracting-out or vouchers). As I definetheterm, privatization may include policies anywhere along thisspectrum; however, the implications of privatization vary withitsdegree. In cases of partial privatization, the government maycontinue to finance but not to operate services, or it maycontinueto own but not to manage assets. Privatization may, therefore,dilute government control and accountability without eliminatingthem. Where governments pay for privately produced services, theymust continue to collect taxes. Privatization in this sensediminishes the operational but not the fiscal or functionalsphereof government action. By putting the delivery of services intothehands of a third party, governments may divert claims andcomplaints to private organizations, but they also risk seeingthose third parties become powerful claimants themselves. Whetherthis sort of partial privatization achieves any reduction ingovernment spending or deficits must necessarily be a practical,empirical question.Even asset sales sometimes involve only the transfer of a partialinterest. Often governments sell some voting stock in anenterprisebut refuse to surrender control. In these instances,privatizationmay amount to little more than a revenue-raising measure, astheremay be no change in management, management behavior, or theenterprise's relation to state authorities. Although it may seemodd, the product of privatization is not always a private firm:Privatization also yields hybrid enterprises with varyingbalancesof influence.The different techniques used to privatize assets affect whatemerges from privatization. Among the methods used are sales toprivate bidders, sales by public stock offering, conversion toemployee ownership, and transfer of title to the firm's currentmanagers. In the case of unprofitable businesses, far fromcharginga price, governments sometimes guarantee the new owners futurepublic contracts, tax benefits, or the monopoly on a franchise.These variations in privatization policy complicate simple-mindedpredictions of the effects of privatization on economicefficiency.Just as there are various methods for the divestiture of assets,sotoo, various methods are available for shifting from publiclyproduced services to publicly financed private provision.Governments face a basic choice as to whether state agencies orprivate parties will do the purchasing. If the state purchasestheservice, it may enter into contracts or grants. If, on the otherhand, the government allows private parties to purchase services,it may distribute vouchers, offer tax credits or other taxpreferences, indemnify beneficiaries directly for some proportionof their costs, or pay providers chosen by beneficiaries. (Thelatter shades into contracting-out if the transactions becomeroutine.) To introduce yet a further complication, the privateparties whose costs the government defrays in whole or part maybeindividuals (the consumers of services) or employers.Privatizationpolicy might, for example, call for the use of tax preferences toinduce a shift from publicly provided retirement benefits tobenefits provided by employers or to benefits provided throughindividual retirement accounts.22 When governments give upproducing services, they can "empower" many different parties.Privatization should not automatically be equated with increasedcompetition. Two related processes, privatization andliberalization, need to be carefully distinguished. Byliberalization one generally means a reduction of governmentcontrol; in this context, it refers to the opening up of anindustry to competitive pressures. Entry deregulation of publicmonopolies is a form of privatization that is also liberalizing.However, it is entirely possible to privatize withoutliberalizing.When the Thatcher government sold shares of British Telecom andBritish Gas, it substituted private monopolies for public onesandintroduced new regulatory agencies to perform some of thefunctionspreviously undertaken through public ownership. The option ofputting liberalization first--that is, encouraging greatercompetition--was expressly rejected, perhaps for fear that itwouldreduce the share price of the companies.23 Conversely, it is alsopossible to liberalize without privatizing--that is, to introducecompetition into the public sector without transferringownership.For example, governments may allocate funds to schools accordingtostudent enrollments where families are free to choose amongcompeting public schools; or they may require public enterprisesoroperating agencies to compete for capital or contracts fromhigherlevel authorities. Indeed, it is even possible to nationalize andliberalize at the same time, as the French socialistsdemonstratedin the early 1980s when they first nationalized banks and laterliberalized financial markets.24Finally, just as there are different routes out of the publicsector, so there are numerous destinations in the private sectortowhich privatization may lead. The alternative possibilities maybeclassified according to organizational complexity and proprietarystatus: first, the personal, domestic, or informal sector,thoughtto exemplify the virtues of self-reliance, mutual aid, andsensitivity to individual preferences; second, the voluntarynonprofit, or "independent," sector, consisting of formal,complexorganizations, thought to display the same virtues as theinformalsector, plus the advantages of professional leadership andmanagement; third, the small-business sector, acclaimed forentrepreneurship and revered as a fountain of new jobs; andfourth,the large-scale corporate sector, where hopes for improvedperformance rest not only on the profit motive but also onprofessional management and economies of scale. The first two ofthese destinations, the informal and nonprofit sectors, remind usthat privatization does not necessarily mean a reliance oncommercial markets. Indeed, instead of one destination and onemap,the advocates of privatization have several, distinctly differentconceptions of where they are going. I turn now to the theoriesthat provide the movement with its logic, intellectual coherence,and rhetoric.II. Privatization as Theory and RhetoricThe normative theories justifying privatization as a directionforpublic policy draw their inspiration from several differentvisionsof a good society. By far the most influential is the visiongrounded in laissez-faire individualism and free-market economicsthat promises greater efficiency, a smaller government, and moreindividual choice if only we expand the domain of property rightsand market forces. A second vision, rooted in a more sociallyminded conservative tradition, promises a return of power tocommunities through a greater reliance in social provision onfamilies, churches, and other largely nonprofit institutions.Privatization, in this view, means a devolution of power from thestate to ostensibly nonpolitical and noncommercial forms of humanassociation. Yet a third perspective sees privatization as apolitical strategy for diverting demands away from the state andthereby reducing government "overload." This last view,identifiedparticularly with recent neoconservative thought, does notnecessarily conflict with the other two--indeed, some advocatesofprivatization draw on all three--but each vision suggests adifferent framework for analysis and policy.A. The Economic Theory of PrivatizationEven within the economic theory of privatization, there are somesubtle but important differences between two approaches: theradical view of privatization as a reassignment of propertyrightsand the more moderate, conventional view of privatization as aninstrument for fine-tuning a three-sector economy.1. Economic Model 1: Privatization as a Reassignment ofProperty Rights. Private ownership and competitivemarketsare normally thought to go hand in hand, but the two issues ofownership and market structure are often separate. For theeconomist devoted to both, the question then arises as to whichobject of affection is more beloved: private ownership orcompetition. Here a difference of opinion appears amongeconomiststhat corresponds to a preference for either privatization orliberalization. Those who believe that efficient performancedepends on private ownership per se favor privatization, even incases generally regarded as natural monopolies. Conversely, thosewho see competition as the critical spur to efficiency are moreskeptical about the benefits of privatizing monopolies and oftenput more emphasis on other policies, such as deregulation. In thecase of a government telecommunications monopoly, for example,those who stress ownership may be willing to privatize themonopolyintact, whereas those who stress competition may prefer to breakitup before sale or even to keep it in public ownership whileallowing private firms to compete with it on equal terms.Thus the perspective that unequivocally points to privatizationasdesirable policy holds that property ownership is the fulcrum ofpolitical economy. Curiously, the two unlikely bedfellows sharingthis appreciation of ownership are Marxism and Chicago economics,which draw from it opposite but equally strong conclusions aboutthe overriding importance of getting ownership into the rightsector. From the Chicago tradition come two closely relatedclusters of work: the theory of property rights and the theory ofpublic choice. Both attempt to enlarge the conventional economicparadigm by treating the classical firm and modern package ofproperty rights as only one of various possible institutionalforms. In this enlarged model, public institutions merelyrepresentan alternative property rights configuration, which, ontheoreticalgrounds, the Chicago School predicts regularly will perform lessefficiently than private enterprise.As developed by economists such as Armen Alchian, Ronald Coase,andHarold Demsetz, the theory of property rights explainsdifferencesin organizational behavior solely on the basis of the individualincentives created by the structure of property rights.25 In thisview, property rights specify the social and economic relationsthat people must observe with each other in their use of scarceresources, including not only the benefits that owners areallowedto enjoy but also the harms to others that they are allowed tocause. A right of ownership actually comprises several rights,chiefly the rights to use an asset, to change it in form,substance, or location, and to transfer all or some of theserights. Insofar as the state restricts these rights, they become"attenuated." Thus the key issues for the theory are, first, towhom are property rights assigned? and second, how, if at all,arethey attenuated?Like other branches of microeconomics, the property rights schoolconceives of human action as purely individualistic. The moreindividuals stand to gain from tending to their property, thebetter will it be tended. Conversely, the more attenuated anddiluted their property rights, the less motivated individualswillbe to use property under their control efficiently. Privateownership concentrates rights and rewards; public ownershipdilutesthem. The property rights school does not recognize anyfundamentalchange in the working of private enterprise as a result of theseparation of ownership and management in the modern corporation.To be sure, shareholders in large corporations cannot monitormanagement as closely as the owner of the classical firm couldoversee his enterprise. However, in this view, the marketgeneratesthe needed spur to prevent corporate management from dissipatingvalue through excessive salaries or slack attention. If returnsfrom the enterprise are low, shareholders will sell their stockandthe price will be depressed. In the extreme case, the firm may beacquired by outsiders and the managers may lose their jobs. Thesecrucial deterrents to inefficient management are missing from thepublic sector. Since "shareholders" (citizens) have notransferableproperty rights in public enterprise, they cannot sell stock as asignal of dissatisfaction with performance; even moving toanotherjurisdiction is costly. Moreover, there is no "market forcorporatecontrol": public enterprises cannot be taken over by bidders whobelieve that they can make more efficient use of the assets.Hence,according to the theory, there is no check on the dissipation ofvalue by the management of public enterprises.It is worth taking note of the premises and implications of theproperty rights approach. First, the theory holds that the formofownership is the predominant explanation for the varyingperformance of different organizations. The theory gives noimportance whatsoever to organizational characteristics such assize, centralization, hierarchy, or leadership. Nor does itrecognize any variation in performance that might stem from taskcharacteristics, such as poor information or ambiguity aboutgoals.The theory does not even recognize the effects of economicincentives unrelated to property rights, such as thoseoriginatingin various types of contracts. The theory does not point to anycontingencies in generalizing about public-private differences;itdoes not identify any particular conditions or characteristicsthatmight cause public institutions to perform well. The disease thetheory diagnoses in the public sector is, so to speak, geneticandincurable.Second, the theory takes the market as the standard for judgingvalue and finds public institutions deficient because they failtomeasure up to that standard, e.g., their "shareholders" cannotsellstock. Survival in the market, of course, depends on the capacityof organizations to produce a residual reward for the owners--aprofit. This is not the standard that public institutionsgenerallyneed to meet. The property rights approach says that societywouldbe better off if, instead of meeting approval in the politicalprocess, public organizations or their assets were privatelyownedand had to meet the test of profitability.Third, the property rights theory assumes that the market forcorporate control is highly efficient and that the chief reasoncorporations are acquired is their management's poor performance.In the United States today, however, some corporations areacquiredbecause they have built up large pools of cash, while othercorporations avoid being acquired because their managers takepreventive but inefficient measures, such as piling up debt.Frequently, behemoths with large cash flow but low returns onequity and other indicators of poor performance have taken overfirms with much better records.26 Virtue is not always rewardedinthe market for corporate control; nonetheless, according to theproperty rights view, market discipline forces managers ofprivatefirms to be more efficient than public managers. The theory givesno weight at all to the monitoring capacities of the state, thepublic at large, and the various institutions of a liberaldemocracy, such as the press, that routinely scrutinize theperformance of public institutions. The reasons for this dim viewof public monitoring are spelled out in the theory of publicchoice."Public choice," ill-named because the only choices it recognizesare essentially private, is both a branch of microeconomics andanideologically-laden view of democratic politics. Analysts of theschool apply the logic of microeconomics to politics andgenerallyfind that whereas self-interest leads to benign results in themarketplace, it produces nothing but pathology in politicaldecisions.27 These pathological patterns represent differentkindsof"free-riding" and "rent-seeking" by voters, bureaucrats,politicians, and recipients of public funds. Coalitions of votersseeking special advantage from the state join together to getfavorable legislation enacted. Rather than being particularlyneedy, these groups are likely to be those whose big stake in abenefit arouses them to more effective action than is taken bythetaxpayers at large over whom the costs are spread. In general,individuals with "concentrated" interests in increasedexpendituretake a "free ride" on those with "diffuse" interests in lowertaxes. Similarly, the managers of the "bureaucratic firms" seektomaximize budgets, and thereby to obtain greater power, largersalaries, and other perquisites. Budget maximization results inhigher government spending overall, inefficient allocation amonggovernment agencies, and inefficient production within them. Inaddition, when government agencies give out grants, the potentialgrantees expend resources in lobbying up to the value of thegrants--an instance of the more general "political dissipation ofvalue" resulting from the scramble for political favors andjobs.Thus, like the theory of property rights, the public choiceperspective indicts public ownership and management across theboard. The exponents of these views have developed their positionthrough studies of the public management of land, forests, water,and other natural resources and comparative analyses of publicandprivate enterprises in a variety of industries, includingairlines,fire protection, and solid waste disposal.28 The property rightsview of natural resource management exemplifies application ofthetheory. Public ownership, in this view, inexorably leads to whatGarrett Hardin has called "the tragedy of the commons."29 Actingout of rational self-interest, individuals abuse and ultimatelydestroy. the commons but take good care of their own privateproperty. Thus publicly managed grazing land and forestspurportedly suffer from worse management than privately ownedlandand forests. Moreover, the public agencies responsible forresourcemanagement, such as the Forest Service, dissipate value throughself-aggrandizing expansionary policies. Consequently,privatizingthe public domain would better ensure its conservation andefficient use.30 One plan for "privatizing the environment" callsfor the sale to private investors of federal lands, includingnational parks, or their transfer to private associations such asthe Audubon Society; the same author even recommends solving theproblem of endangered species by creating new property rights inwildlife.31In short, starting with an individualistic model of humanbehavior,the public choice school makes a series of empirical claims: ( I)that democratic polities have inherent tendencies towardgovernmentgrowth and excessive budgets; (2) that expenditure growth is duetoself-interested coalitions of voters, politicians, andbureaucrats;and (3) that public enterprises necessarily perform lessefficiently than private enterprises.A thorough analysis of the claims of the public choice schoolwouldbe a book in itself, but the general lines of criticism may be atleast briefly suggested. First, while the theory presents votersasnarrowly self-interested, considerable evidence suggests that,evenon economic issues, voters identify their interests with theoverall performance of the economy, rather than simply voting inline with their private experience.32 Voters, in other words, arecapable of recognizing a collective interest apart from theirown.Indeed, the whole point of "government by discussion" is todiscover and express common interests not easily voiced orachievedin the private sphere. The public choice approach simply does notcomprehend this preference-shaping function of politicaldemocracy.It also neglects the restraints built into the architecture ofliberalism. While the theory holds that government issystematically biased toward dissipating value and increasingexpenditure, it disregards the checks and balances among branchesof government and within them. The scrutiny of spending programsbyCongress and the Office of Management and Budget is an example.According to the theory, spending programs get approved becausethey have concentrated benefits and diffused costs; however, thesame arguments apply to tax reductions for specific interests(thatis, tax expenditures). Thus "fiscal illusions" should besymmetrical on the spending and tax sides of the budgetaryprocessand cannot explain long-term tendencies toward higher tax levels.The "Leviathan theorists," as Richard Musgrave calls them, alsooverstate the historical trend toward higher governmentexpenditure; the evidence does not show an accelerating increaseasa proportion of national income.33The empirical evidence comparing efficiency in public and privateorganizations is also more complex than the property rights andpublic choice schools acknowledge. To take the example ofresourcemanagement again, Carlisle Ford Runge points out that theevidencesuggests that federally owned rangeland is in better conditionthannonfederal rangeland.34 In one of the few relevant studies offorestland, a survey in Minnesota indicates that extremely fewprivate purchasers of tax-forfeited public forests did anythingwhatsoever to maintain them.35 The "tragedy of the commons"argument confuses resources in common ownership with resources inpublic ownership; it fails to give any credit to the democraticprocess or to professional management in raising the timehorizonsof voters, politicians, and bureaucrats to a level higher thanthatprevailing in the marketplace. Many observers have noted thepropensity of American managers for concentrating on short-termprofits; the property rights school, by contrast, bravely assertsthat private firms have sufficient incentive to preserve wildlifeand wilderness for future generations.36The rhetoric of the public choice school is a kind of hard-nosedrealism. The theory dismisses as naive civic ideals such aspublicservice; it denies the capacity of voters or politicians to actonthe basis of a national interest wider than their own privateaggrandizement. Rather like Marxism, public choice theory claimstoface up to the self-interested basis of democratic politics andtherefore treats all claims of higher purpose as smoke anddeception. And also like Marxism, the theory presents itself as ascientific advance over earlier romantic and idealized views ofthestate. But rather than being an advance of science overintuition,the appeal of the public choice school is precisely to those whoare intuitively certain that whatever government does, theprivatesector can do better. Together, the property rights and publicchoice schools show only that, if you start by assuming a purelyindividualistic model of human behavior and treat politics as ifitwere a pale imitation of the market, democracy will, indeed, makeno sense.2. Economic Model 2. Privatization as a Relocation ofEconomic Functions. Compared to the right-wing schools that condemn the public sectoras irredeemably inefficient, policy analysts trained inconventional microeconomics tend to have a more qualified, thoughstill highly critical, view of public institutions. Rather thanattribute the performance of public organizations to theincentivescreated by public ownership per se, mainstream policy analystsgenerally think of designing the right incentives within theframework of public organization. Of course, the overwhelmingconsensus is that private ownership is more efficient inprovidingprivate goods in competitive markets; hence it is rare to findanyrespectable opinion in favor of government ownership of factoriesproducing high-performance sports cars. Mainstream views do vary,however, about the proper role of public institutions inproducingpublic goods and managing natural monopolies. Viewing competitionas the critical issue, the neoclassically trained are inclined tofavor privatization insofar as it represents a move towardcompetition under conditions when markets should be expected towork efficiently. However, in recent years the requirements forefficient markets have come to be understood more liberally,whilethe reputation of public enterprise has markedly declined. Hence,the prevailing consensus in economics and policy analysis hasbecome more sympathetic to privatization than it was two or threedecades ago.While the property rights view is parsimonious and unambiguous inanalyzing the basis of public-private differences, the moreconventional approach is a patchwork of theories about theconditions under which the market, the state, and the nonprofitsector fail to perform efficiently. In this tradition, the theoryof market failure is the historical point of departure. Accordingto the received neoclassical wisdom, imperfect information,externalities, increasing returns to scale, and (in someversions)inequalities of wealth prevent the market from achieving optimalperformance; it is then a short--though not a necessary--step tosay that where the market fails, some form of public ownership orregulation is justified. (The theory says nothing about thechoicebetween regulation and ownership.) However, two recentdevelopmentshave suggested more caution about public intervention. First,markets need not be perfectly competitive to perform efficiently;they only need to be contestable--and the requirements forcontestability are more easily met.37 Second, public choicetheoryhas successfully raised the challenge that where markets fail,so,too, may government; indeed, the theory suggests thatgovernment'sperformance will only be worse. Attempting to state the argumentsymmetrically, Charles Wolf, Jr., has spelled out a series ofconditions for "nonmarket failure.''38These twin theories of market and nonmarket failure have, inturn,suggested a role for the nonprofit sector; for if states andmarkets have peculiar weaknesses, perhaps philanthropy can beexplained as an attempt to fill the void.39 But, rather thandefinethe voluntary sector as residual, Lester Salamon has argued thatinthe United States nonprofits are the "preferred" mechanism fordelivering public services and that government programs arise tomeet the problems of "voluntary failure."40 The upshot is atheoretical amalgam that defines the limits of the three sectorsand suggests in what form different kinds of activities are mostefficiently organized. From this perspective, privatizationbecomesa way to move activity from a less efficient to a more efficientform--a tool of economic adjustment rather than radicalreconstruction.41The expanded theory of sector failure is a kind of ecologicalapproach to institutional choice. The various sectors providealternative environments, and the problem is to decide whether aparticular set of tasks is best carried out in one or morelocations. However, the theory does not exhaustively assign allactivities. No sector gets high marks for performing tasks forwhich there is poor information. The theory is also ahistorical;itmakes no allowance for sunk investments in organizationalcapacity.Relocating an industry in a different sector is not, after all, acostless exercise. However, the most serious defect of thisapproach is that, like all the economic models, it is principallyconcerned with efficiency and has little to say about the effectsof organizational design on other values. To subject anorganization to market forces is to push it to maximize thereturnsto residual claims holders; perhaps it will generate thosereturnsmore efficiently, but as George Yarrow has observed, someactivities have been turned over to the public sector preciselytobe protected from such pressure.42 The economic models cannot saywhether or not that is a sensible choice.B. Privatization as Community EmpowermentA different set of arguments, not chiefly concerned withefficiency, comes from a more sociological theory ofprivatizationthat emphasizes the strengthening of communities. In the mostnoteworthy exposition of this position, Peter Berger and RichardNeuhaus propose that government "empower" voluntary associations,community organizations, churches, self-help groups, and otherlessformal "mediating" institutions that lie between individuals andsociety's "alienating megastructures."43 In their view, themodernliberal state has undermined these "value-generating,""value-maintaining," "people-sized institutions" by establishingservice bureaucracies that take over their functions. Berger andNeuhaus are not opposed to the provision of social welfare, butthey urge that, wherever possible, public policy rely onmediatinginstitutions for the delivery of publicly financed services.The view of privatization as community empowerment stands insharpcontrast to the conception of privatization as an extension ofproperty rights. Berger and Neuhaus emphatically reject anarrowlyindividualistic view of human motivation. Indeed, they criticizeliberalism precisely for defending individual rights over therights of social groups to assert their own values; for example,they defend the capacity of neighborhoods to sustain"democratically determined values in the public sphere" byexhibiting religious symbols in public places.44 They alsosuggestthat attacks on the ideals of voluntary service "aid theexpansionof the kind of capitalist mentality that would put a dollar signoneverything on the grounds that only that which has a price taghasworth."45 Their concern is not to expand the domain of the profitmotive but rather to strengthen local, small-scale forms ofsocialprovision. This is privatization with a human face, and it bearssome resemblance to left-wing interest in community organizationsand cooperatives.46Although I find the community empowerment view more attractivethatthe property rights perspective, the Berger and Newhaus claimthatliberal state undermines mediating institutions ignores thehistorical partnership between the two. The history of socialprovision in the United States does not, in fact, betray adisregard for the virtues of voluntary institutions. Salamonpointsout that the twentieth-century expansion of social spending intheUnited states has been largely a growth of what he calls"third-party" government (the third parties including localgovernment as well as private nonprofit agencies).47 Manynonprofitcommunity organizations have depended for their survival ongovernment subsidies. Moreover, today there is often a divisionoflabor between the public and voluntary sectors. A still greaterreliance on the nonprofit sector might pose serious problems forthe voluntary institutions themselves. To be sure, privatizationistaking place in many social services, but the growth is chieflyofnew for-profit organizations that are far from the local"people-sized" institutions envisioned by Berger and Neuhaus.Someof them, like the national chains of nursing homes, are every bitas alienating as other corporate "megastructures." It is probablyan illusion to think that a major shift toward private socialservices would lead to a proliferation of communityorganizations,if only because the private institutions would need much morecapital than they traditionally have had available. If notsuppliedby the state, the capital must be supplied by the financialmarkets. In health care, the demand of capital formation is oneofthe principal pressures producing a shift from nonprofit tocommercial organization, often national in scale.48 Communityempowerment might be a good idea, but if it is to come at all, itwill come from more government intervention, not fromprivatization.C. Privatization as a Reduction of GovernmentOverloadA final theory justifying privatization holds that privatizationisdesirable for its likely political effect in deflecting andreducing demands on the state. In the 1970s, some criticssuggestedthat the Western democracies were suffering from an "overload" ofpressure, responsible for excessive spending and poor economicperformance. I9 In that framework privatization represents one ofseveral policies encouraging a counterrevolution of decliningexpectations. In a similar vein, Stuart Butler of the HeritageFoundation has argued that privatization can cure budget deficitsby breaking up the kind of public spending coalitions describedbypublic choice theory. Privatizing government enterprises andpublicservices, in this view, will redirect aspirations into the marketand encourage a more entrepreneurial consciousness.50The political theory of privatization has several different,overlapping elements. First, the privatization of enterprises isaprivatization of employment relations. The advocates ofprivatization hope to divert employees' wage claims from thepublictreasury, with its vast capacity for taxing and borrowing, toprivate employers, who presumably will have more spine inresistingwage demands. Moreover, the proponents hope for a trickle-down ofentrepreneurship from the newly privatized managers to theworkers;for that very reason, privatizers often are perfectly willing tosell to the workers, at an advantageous price, whole enterprisesorat least some proportion of the shares. In addition, by shiftingtoprivate contractors even in a few selected areas, governmentmightsignal a harder line on wage concessions and thereby weakenpublicemployee unions.Second, the advocates of privatization hope also for aprivatization of beneficiaries' claims. Instead of marchingoutsideof government offices when things go wrong, the privatizers wantthem to direct their ire to private service providers--or betteryet, simply to switch to other providers. In other words,privatization could mean a wholesale shift, in Hirschman's terms,from "voice" to ''exit" as the usual and preferred tactic ofcopingwith dissatisfaction.51Third, the privatization of public assets and enterprises is alsoa privatization of wealth. Advocates such as Margaret Thatcherwantprivatization to increase the proportion of the population whoownshares of stock and therefore take a more positive view ofprofitmaking.52 "People's capitalism" is an old idea, but usingprivatization of public assets to bring it about is new.Moreover,by privatizing other assets such as public housing and SocialSecurity trust funds, privatizers hope to turn public claimantsinto property owners and engender in them a deeper identificationwith capitalism. They expect the worker who receives a retirementincome from a private pension or individual retirement account tohave a more conservative view of the world than that of theworkerwho depends on rent subsidies and a government check everymonth.This political theory of privatization, like the economic andsociological theories, contains empirical predictions as well asnormative judgments. The predictions concern the probable effectsof privatization on political consciousness and action; thenormative judgments concern the desirability of weakening thepolitical foundations of public provision. Empirically, it seemsunlikely that contracting-out, vouchers, and other arrangementsforpaying private providers will reduce pressure on governmentspending; the contractors are as likely as public employees tolobby for larger budgets.53 However, some forms of privatizationmay, indeed, change the underlying political values,understandings, and capacities for action in society. Turningpublic tenants into private homeowners, public employees intoprivate employees, and Social Security beneficiaries intoinvestorsin private retirement accounts could very well change their frameof social and political thought. These prospects raise ratherdifferent issues from the usual efficiency-minded discussions ofprivatization; they demand that we consider the meaning ofprivatization not only as a theory but also as a politicalpractice.III. Privatization as a Political PracticeI said earlier that the structural variety of public and privateorganizations, political systems, and national contexts makes itdifficult to generalize about public-private differences and theeffects of privatization. The task of generalization is stillmorecomplex because the forms of privatization vary so greatly. Inthissection, I spell out some of the contextual factors and criticalchoices that shape what privatization means in practice and thathelp to explain why political practice often conflicts withtheory.A. The Political Contexts and Uses ofPrivatizationThe meaning of privatization depends in practice on a nation'sposition in the world economy. In the wealthier countries it iseasy to treat privatization purely as a question of domesticpolicy. But where the likely buyers are foreign, as in the ThirdWorld, privatization of state-owned enterprises often meansdenationalization--a transfer of control to foreign investors ormanagers. Since state ownership often originally came about in anact of national self-assertion, privatization appears to be aretreat in the face of international pressure. In that sense,national memory colors the meaning of privatization. However,evenin the United States, privatization would be understood ratherdifferently if public assets up for sale or contracts up for bidwere likely to be taken over by the Russians or even theJapanese.The more dependent a nation is on foreign investment, the greaterthe likelihood that privatization will raise the prospect ofdiminished sovereignty and excite the passions of nationalism.Where privatization raises such issues, it is often blocked, orcitizens and domestic firms are reserved exclusive rights topublicly offered assets, shares, or contracts. In many Westerncountries, state ownership owed more in the first place tonationalist than to socialist sentiment; hence it is scarcelysurprising that nationalism is liable to derail or distortprivatization plans.Throughout the world, the privatization of enterprises withstrategic military or economic significance raises especiallysensitive questions of sovereignty and security. In mostoil-producing countries, for example, no government is likely totry to privatize the state oil companies because of the likelydomestic political reaction. Even in Great Britain, theprospectivesale of a helicopter company to an American company caused apolitical stir.54 Despite its commitment to free markets, theReagan Administration intervened in 1987 to prevent the sale to aJapanese corporation of a private American semiconductor companywith important defense contracts.55 On the other hand, the Reaganadministration has sought to privatize some of NASA's satellitelaunch operations partly in the hope of strengthening the privateAmerican space industry in its competition with the Europeans.56Yet this case only reinforces the general point: The conflictbetween privatization and national interests depends on therelative power of a given state in the world system--the weakerthestate, the more likely the conflict. Economically strong nations,knowing that they can privatize without jeopardizing theirsovereignty, lecture the weak on the perils of state enterpriseandrestrictions on investment.Like national interests, the more parochial concerns ofpoliticallydominant racial and ethnic groups may also confound privatizationplans. In many countries, ethnic minorities, such as Indians inEast Africa, make up disproportionate numbers of the potentialdomestic buyers of public assets. When a country's bureaucraticandentrepreneurial classes differ in ethnic composition,privatizationmay be understood as a transfer of wealth and power from onegroupto another and be politically resisted for that reason. Even ifprivatization is adopted, the field of potential buyers may be sorestricted that potential gains from more efficient managementevaporate.The larger point in these examples of "distorting" influences onprivatization is that private sectors are not only characterizedbyprivate ownership in the abstract. The potential private ownersofpublic assets and contractors for public services representspecific interests and groups. Privatization is unlikely to becarried out with indifference to those social facts.In general, the political uses of privatization are bound tocompromise the avowed efficiency objectives. Governments that arein a hurry to sell state-owned enterprises may make concessionstocurrent managers, whose cooperation is instrumental indivestiture.Privatization then becomes an occasion for managerial enrichmentand entrenchment. It is striking that in Great Britain, France,andother countries that have privatized state-owned enterprises,privatization usually brings about little or no change in topmanagement.57 Moreover, governments commonly offer assets andenterprises up for sale to political allies. Some of theseproperties, such as broadcasting stations, are not simplyeconomicbut political assets; the incumbent government gains obviousadvantage by placing them in the hands of political allies. Thesame patterns have long been evident in the contracting of publicservices; indeed, contracting is the locus classicus ofthepolitical pay-off. Even public offerings are not immune frompolitical use. When governments underprice shares--as has beentheoverwhelming pattern in Britain--they may be seeking to ensurenotonly that privatization is successfully realized, but also thathappy shareholders have the opportunity to repay the governmentatthe next election. Indeed, rather perversely, one could turn thewhole force of public choice analysis on privatization itself:Thelogic of concentrated benefits and diffuse costs makes italtogether likely that the diffuse efficiency gains ofprivatization will be sacrificed in the effort to satisfy the bigstakeholders--incumbent politicians and bureaucrats and theirallies and supporters.Politically inspired privatization is all the more likely becauseprivatization attracts support not only from economists with adisinterested belief in liberalized markets but also from aprivatization lobby consisting of investment banking firms,government contractors, and other corporations whose businessesstand to benefit if the public sector cedes ground. Rather thanbeing an escape from interest group influence and thepoliticization of resource use, privatization typically providesaprime example.I do not want to suggest, however, that the view of politics aspure self-interest captures all that is going on, even in thecaseof privatization. Privatization is a worldwide policy movementcarried along by a combination of objective forces, imitativeprocesses, and international financial sponsorship. Manycountrieswhose public sectors expanded sharply in recent decades now findthemselves confronted by rising debt and strong resistance tohigher taxes. Privatizing state-owned firms promises to bringsomefiscal relief, particularly where the treasury has been heavilysubsidizing unprofitable enterprises. Privatization may help bothto cut expenditures and boost revenues, and, by converting debttoequity, states may improve the overall financial structure oftheireconomies and reduce pressure for even less palatable austeritymeasures. Privatization is not the only possible response, but asin other institution-shaping movements, like the postwar spreadofpublic enterprises, organizational forms spread by imitation.Institutional models are disseminated through a variety ofpolitical networks and the direct influence of internationallending organizations. Privatization is now one of the policiesthat the International Monetary Fund promotes in negotiatingloanswith developing countries.59Of course, proponents of privatization see the process more aslearning than as imitation or imposition. In their view, the poorperformance of public enterprise and, more generally,overexpandedpublic sectors has simply taught that privatization makes sense.But experience is never so transparent. Even where stateenterprises are generally agreed to be highly inefficient, it isnot necessarily clear that privatization will be a remedy.Moreover, the performance of some state-owned enterprises--forexample, in Malaysia and France--has been excellent, and it issimply not true that as public sectors grow, rates of economicgrowth fall.60 To be sure, the record of central governmentplanning is dismal, but that experience cannot simply beextrapolated to all publicly owned organizations, particularly instates with more autonomous forms of public sector management.The property rights approach predicts politically imposedinefficiency on the basis of public ownership alone, but thevariety of public sectors and state-owned enterprises in theworldsuggests instead that performance may be contingent on politicalculture, the structure of the state, and public policy towardenterprises. In some countries public management iswell-established, professional, and prestigious, whereas inothersthe political party in power expects to give its own people jobsatevery level. The mode of public sector control depends also onthestructure of political-administrative relationships. It is amistake in this context to view the state as a unitary actor.Public sectors often comprise a vast sprawl of organizations inpublic ownership, many of them, like public universities in theUnited States, only loosely connected to the centers of politicaldecisionmaking. A great array of institutional devices, such asindependent governing boards with self-perpetuating membershipandearmarked financing, can serve to insulate public organizationsfrom political intervention. In their legal status, publicorganizations variously include agencies under direct politicalauthority, independent authorities incorporated under public law,state-owned enterprises incorporated under private law, andprivatecompanies in which the government has some ownership. Of course,the legal differences may or may not matter; autonomy is neverguaranteed purely by formal structure. Finally, as a matter ofpolicy, governments may or may not require public enterprises toberun on a commercial, business-like basis. Privatization may havelittle impact on the efficiency of organizations already operatedon a commercial basis, and the effect of privatizing morepoliticized organizations depends on their previous politicaluses,some of which may be eminently defensible.Political culture and preexisting administrative capacities arenotunreasonable bases for choices about state versus privateownership. Where the state is the only domestic institutioncapableof sustaining the confidence of foreign creditors oradministeringlarge undertakings and where it has demonstrated managementcompetence, the case for state enterprise may be correspondinglystrong. On the other hand, in some regimes the penchant forpolitical intervention produces endemic overstaffing, poorlocationof plants, extravagant wages, and prices far out of line withmarket levels. Like alcoholics unable to cut down except byquitting altogether, these governments may be unable to avoiddisrupting public enterprises, except by privatizing themaltogether. Moreover, in much of the world, state enterprisegivesthe dominant elites too powerful a grip over civil society. Forexample, the Argentine military is said to use its huge networkofindustrial enterprises as an instrument of patronage and power.6lIn such cases, privatization may well be justified as a means ofreleasing society from bureaucratic domination.Whether the advanced capitalist societies suffer from too strongabureaucratic grip is, of course, exactly where the right and leftdisagree. In this respect, the United States, which has nevernationalized industry in the first place, stands in a positionfundamentally different from the Western European countries withextensive public enterprise sectors. The sphere of publicownershipin the United States has been so limited that I find implausiblethe view that Americans suffer from an oppressive government rolein the production of goods and services. The relations betweenthepublic sector and political leadership are drastically differentinthe United States from those prevailing in Latin America, theSoviet bloc, and even many Western European countries. Ifpoliticalmeddling is the chief problem in public sector organizations, theUnited States has an effective alternative to privatization intheestablishment of public corporations (often called publicauthorities in the United States). Their insulation frompoliticalcontrol, the independence of the judiciary, and thedecentralization of power in the federal system prevent publicauthorities from being easily bent by political caprice.Indeed, the problems of the American public sector seem to be ofthe opposite kind. So deeply entrenched are the barriers tounitarycontrol that legitimate interests in coordinated management arethwarted. American public institutions at all levels ofgovernmentsuffer from rampant credentialism and proceduralism that hampertheability of managers to hire and fire, reward, and motivate theirsubordinates. Ironically, many of these rigidities result fromprevious reforms, passed in the name of curbing corruption. For avariety of reasons, public organizations also do not respondquickly to change, such as the emergence of new technologies andconsumer demands. The long lead times required by theappropriations process often prevent agencies from adaptingquickly. Privatization is one route out of the proceduralthicket;however, we might achieve some of the same ends by making publicadministration more flexible and giving public managers moreindependent authority.To be sure, government cannot be run "just like a business" inpartbecause its more elaborate procedures are meant to producesomething else besides the specific services that the privatesector provides. Reviews by advisory committees and congressionalhearings, designed to increase accountability or to give a fairhearing to complaints by clients, contractors, or employees,cannotbe dismissed simply as a source of inefficiency. Democraticgovernment cannot narrowly concern itself with getting the jobdone, which is one reason why it should not concern itself withallthe jobs that need doing. Privatization is a legitimate tool forsharpening the focus of government on those activities mostimportant to the general welfare, but it is never simplyefficiencythat is at stake in such decisions.B. Privatization as a Reordering of ClaimsPrivatization needs to be understood as a fundamental reorderingofclaims in a society. As I indicated earlier, in the liberal worldthe terms public and private sum up a whole structure of rulesandexpectations about the proper conduct and limits of the state. Tosay some activity is public is to invoke claims of publicpurpose,public accountability, and public disclosure. To say something isprivate is to claim protection from state officials and othercitizens. The theory of property rights sees privatization as areassignment of claims to the control and use of assets, but itmisses the special claims of the public sphere in a democraticsociety--claims for greater disclosure of information, whichshouldimprove the social capacity to make choices, and for rights ofparticipation and discussion, which permit the discovery andformation of preferences that are more consistent with long-termsocietal interests. As a general movement of institutionaldesign,privatization undermines the foundation of claims for publicpurpose and public services.This reordering of claims holds distributive implications. Itshifts power to those who can more readily exercise power in themarket. It also may shift income and wealth, depending on thespecific form that privatization takes. Some forms ofprivatizationdo not logically require a reduction in public benefits to thepoor. It is hypothetically possible to conceive of aprivatizationprogram with highly progressive effects on income distribution.Imagine, for example, a program involving the sale of heavilysubsidized, poorly managed public enterprises: the conversion ofapublicly budgeted health service, covering only a minority ofemployed workers, into a voucher system covering the wholepopulation; and the empowerment of local nonprofit, grassrootsorganizations with funds stripped from elite-dominated centralbureaucracies. Taken together these steps would redistributebenefits to previously excluded or short-changed groups.In practice, however, a progressive effect on income distributionseems highly improbable. The same political forces that supportprivatization generally also support cutbacks in public spendingfor social welfare; the same arguments about incentives andefficiency used in favor of privatizing public services are alsocited by those who want to terminate public financing for theservices altogether. In addition, private service providers oftenmaximize profits by seeking out the least costly clients or byemploying lower-wage workers, often on a part-time basis. Sincewages tend to be more equal in the public sector, privatizationislikely to skew the income distribution in the direction ofgreaterinequality. Furthermore, while unions have lost ground in theprivate sector, they have generally made advances in organizingpublic employees. Privatization tends to undermine thosegains--aneffect not overlooked by advocates of privatization.In the extreme case, privatization is an instrument of classpolitics. Where privatization is used to break up public employeeunions and reduce the provision of services, it effectivelyrepresents a means of reordering class relations. PrivatizationinChile in the mid-1970s had this character. A vast shift in wealthtook place with the privatization not only of industry but of thefinancial assets of the social security system, which ended upconcentrated in the hands of a few private financial groups.62 Atthe other extreme, privatization is a relatively modest tool ofpublic management. In many cases of contracting, the privatefirmsreceiving contracts are as unionized as the public sector andthereis no change in wage levels. When New York City privatized itsschool busing, the drivers continued to be represented by thesameunion, and service costs did not change.63 But this is scarcelythekind of example that privatization advocates hope to imitate.Onceagain, while privatization hypothetically does not mean wagereductions, the intentions behind the policy raise strong andentirely reasonable suspicions that it will.Privatization is not only a policy; it is also a signal about thecompetence and desirability of public provision. It reinforcestheview that government cannot be expected to perform well. If, tomany Americans, private means better, it is partly because oflong-existing restrictions on the scope and quality of publicprovision. We commonly limit public services to a functionalminimum and thereby guarantee that people will consider theprivatealternative a step up. This niggardliness shows itself in wayslarge and small. In the 1960s, one congressman who was indignantover the costs of a public housing program succeeded inpersuadinghis colleagues specifically to forbid flower boxes as anunnecessary extravagance.64 The restricted quality of publicprovision is a self-reinforcing feature. Because the poor are theprincipal beneficiaries of many programs, the middle-class publicopposes expenditures to produce as high a quality of service asthey must pay for privately; and because the quality is helddown,the poor as well as the middle class develop a contempt for thepublic sector and an eagerness to escape it. The movement towardprivatization reflects and promotes this contempt, and thereinliespart of its political danger.Some individual proposals for privatization have considerablemerit, but the overall message is clearly to call into doubt thenation's capacity and need for collective provision. Thepossibilities for change being discussed are not symmetrical.Privatization advocates raise questions exclusively about theadequacy of the public sector; the comparable questions about theprivate sector do not receive the same attention. Even thoughprivatization is logically distinct from questions ofdistributivejustice, the privatization debate puts the advocates of moregenerous public programs entirely on the defensive. Thisone-sidedness is why I am opposed to privatization. I am opposedtothe political consequences that are likely to flow from pursuingprivatization as a solution to the difficulties of administeringdemocratic government.Privatization, as some advocates themselves point out, representsan effort to alter the conditions of political competition bybreaking up the coalitions supporting public provision and bypromoting more market-oriented political values. In other words,itis an attempt to fix in place the conservative orientation thathasemerged forcefully in the 1980s. No one need doubt that publicinstitutions like private ones, are bases of wealth and power.Theyare environments that encourage those who work within them todevelop different political orientations. To alter thepublic-private balance is to change the distribution of materialand symbolic resources influencing the shape of political life.Privatization ought to be frankly recognized as part of an effortof conservatives to reinforce their own power position. Since Idonot share the values for which that power is deployed, I distrustprivatization. Ultimately I fear that one form of privatizationdoes entail another--that as we move public provision into theprivate sector, we move from the realm of the open and visibleintoa domain that is more closed to scrutiny and access. And in theprocess, whether or not intending to change, we are likely tonarrow our involvements, interests, and vision of a good societyand a good life.AcknowledgmentsWork on this Article was supported by a grant from the PewCharitable Trust for the study of "Public Sector Reform andPrivatization." An earlier version was completed at the Institutefor Advanced Study at Princeton, New Jersey and delivered at aconference there on " The Public Sector and Its Problems." TheArticle will also appear in a slightly different version in avolume on privatization and the welfare state edited by AlfredKahnand Sheila Kamerman. I wish also to express my general debt toStephen Holmes, Jeffrey Weintraub, the members of the Yale LegalTheory Workshop, and others from whom I received ideas andsuggestions .Footnotes1. See, e.g., Klare, The Public/Private Distinction in Labor Law,130 U. Pa. L. Rev. 1358 (1982); Kennedy, The Stages of theDeclineof the Public/Private Distinction, 130 U. Pa. L. Rev. 1349(1982);Freeman & Mensch, The Public/Private Distinction in AmericanLaw and Life, 3 Tikkun 24-30 (Mar./Apr. 1988).2. Starr, A Response to Mensch and Freeman, 3 Tikkun 31(Mar./Apr.1988).3 A. Hirschman, Shifting Involvements: Private Interest andPublicAction 121-22 ( 1982) .4 . See, e.g. J. Elshtain, Public Man, Private Woman ( 1981~;Rosaldo. Woman, Culture .and Society Theoretical Overview, inWoman, Culture and Society 17-42 (M. Rosaldo & L. Lamphereeds.1974); L. Imray ,~ A. Middleton. Public & Private: MarkingtheBoundaries. in lhe Public and the Private 12-16 (E.. Camarnikow.etal. eds. 1983).5. See M.Young & P. Willmott, the Symmetrical Family(1973).6. See R. Sennett, The Fall of Public Man 16-24 (1977).7. See Hirschman, supra note 3, at 121-30.8. See G. Simmel, The Secret and the Secret Society, in thesociology of Georg Simmel 337 (K. Wolff ed. 1950). See alsoHorwitz, the History of the Public/Private Disctinction, 130 U.Pa.L. Rev. 1423 (1982).9. M. Weber, 3 Economy & Society 1028-31 (G. Roth & C.Wittich eds. 1968).10 See e.g., R. Braun, taxation, Sociopolitical Structure, andstate Building: Great Britain and Brandenburg-Prussia, in theFormation of National States in Western Europe 243-46 (C. Tillyed.1975); C. Webber & A. Wildavsky, A History of Taxation andExpenditure in the Western World 148-51 (1986).11. See P. Aries, Centruies of Childhood 411-15 (1962).12. S Holmes, Benjamin Constant and the Making Of ModernLiberalism241-52 (1984).13. See Frug, The City as a Legal Concept, 93 Harv. Rev. 1059(1980).14. 1 am grateful to Gerald E. Frug for this analogy.15. Powell & Friedkin, Politics and Programs: OrganizationalFactors in Public Televislon Decision Making, in NonprofitEnterprise in the Arts 245-69 (P. Dimaggio ed. 1986).16. E.S. Savas defines privatization as "the act of reducing therole of government, or increasing the role of the private sector,in an activity or in the ownership of assets." E. Savas,Privatization: The Key to Better Government 3 (1987). 1 seenothingwrong with this broad definition, so long as one realizes thatsomeactions may reduce one role of government while increasinganother.For example, selling government-owned utilities may result inestablishing a new system of public regulation. Setting up avoucher plan for education and housing may produce more publicregulation of private schools. In other words, policies conceivedas privatization may have unintended consequences tor otherdimensions ot state intervention.17. On the ambiguities of such classification, see generallvMusolf& Seidman. The Blurred Boundaries of Public Administration,40Pub. Admin. Rev. 124 (1980); A. Walsh, The Public's Business(1980).18. Glade uses the term "simulated privatization" to refer to theeffort to put a public enterprise on a commercial footing. Glade,Sources and Forms of Privatization in State Shrinking: AComparative Inquiry into Privatization 2. 12-13 (W. Glade cd.1987). S. Henrique Abranches reters to the same process as"privatization of the logic of operation'' of state enterprises.Abranchcs, Stale Enterprise and Modes of Privatizalion: ACriticalView Based on Brazilian Examples, in State Shrinking, supra, at75,79.19. Willey, Taking the Post Office Out of Politics, Pub.Interesl,Spring 1969, at 57-71.20. Starr, Television and the Public Household, in Television inAmerica's Future-- A Search for lhe Right Public Policy (M. Riceed.) (forthcoming).21. See J. Galbraith. The Affluent Society 195 (3rd ed. 1976).22. See e.g, Ferrara, Social Security and the Super IRA: APopulistProposal, in Social Security: Prospects for Real Reform 193 (P.Ferrara ed. 1985); Goodman. Private Alternatives to SocialSecurity: The Experience of other Countries. in Social Security,at103; O'Higgins, Public-Private Interaction and PensionsProvision,in Public-Private Interplav in Social Protection (M. Rein &L.Rainwater eds. 1986); Starr, Social Security and the AmericanPublic Household, in Social Security: Beyond the Rhetoric ofCrisis(J. Mashaw & F. Marmor eds.) (forthcoming).23. See e.g, Privatization and Regulation: The U.K. Experience(J.Kay & D. Thompson eds. 1987), Brittan, The Politics andEconomics of Privatisation, 55 Political Q. 109, 116-21(1984).24. Francls, French Financiers Marvel at "Capitalists inSocialists' Clothing." Christian Sci. Monitor,June 20, 1985, at21.25. See. e.g., Alchian, Some Economics of Property Rights, 30 IlPolitico 816 (1965); Demsetz, Toward a Theory of Property Rights,57 Amer. Econ. Rev. Papers & Proc. 347 (1967); E. Furubotn& S. Pejovich, The Economics of Property Rights (1974);Furubotn & Pejovich, Property Rights and Economic Theory: ASurvey of Recent Literature, 10 J. Econ. Lit. 1137 (1972); DeAlessi, Property Rights and Privatization, 36 Proc. Acad. Pol.Sci.24 (S. Hanke ed. 1987) (volume entitled Prospects forPrivatization).26. The acquisitions by General Motors, U.S. Steel (now USX), andW.R. Grace corporations provide illustrations.27. See. e.g. J. Buchanan & G. Tullock, The Calculus ofConsent(1962), W. Niskanen, Bureaucracy and Representative Government(1971); Budgets and Bureaucrats: The Sources of Government Growth(T. Borcherding ed. 1977).28. See. e.g, Ahlbrandt, Efficiency in the Provision of FireServices, 16 Pub. Choice I (1973); Davies, The Efficiency ofPublicVersus Private Firms, the Case of Australia's Two Airlines. 14 J.Law & Econ. 149 (1971); Bennett &Johnson. Public VersusPrivate Provision of Collective Goods and Services: GarbageCollection Revisited, 34 Pub. Choice 55 (1979).29. Hardin, The Tragedy of the Commons, 162 Science 1243(1968).30. See, e.g, Forestlands: Public and Private (R. Deacon & M.Johnson eds. 1985); Hanke & Dowdle, Privatizing the PublicDomain, 36 Proc. Acad. Pol. Sci. 114 (S. Hanke ed. 1987) (volumeentitled Prospects for Privatization).31. See Smith. Privatizing the Environment, 20 Pol. Rev. 11(1982);Smith. Resolving The Tragedy of the Commons by Creating PrivateProperty Rights in Wildlife, I Cato J. 439 (1981).32. The evidence against the public choice view of politicalbehavior is summed up in Orren, Beyond Self-lnterest, in ThePowerof Public Ideas 13 (R. Reich ed. 1988). See also Kelman, WhyPublicIdeas Matter, in The Power of Public Ideas, supra, at 31.33. Musgrave, Leviathan Cometh--or Does He?, in Tax andExpenditureLimitations 77 (H. Ladd & T. Tideman eds. 1981).34. Runge, The Fallacy of "Privatization,"J. Contemp. Stud.,Winter1984, at 3,12.35. Ellefson, Palm, & I.othner, From Public Land toNonIndustrial Private Forest: A Minnesota Case Study,J. Forestry,Apr. 1982. at 219.36. Krutilla. et al., Public versus Private Ownership: TheFederalLands Case, 2J Pol. Analysis & Mgmt. 548 (1983).37. W. Baumol,J Panzar & R Willig, Contestable Markets andtheTheory of Industry Structure (1982).38. Wolf, A Theory of Non-Market Failures, Pub Interest, Spring1979, at 114.39. J. Douglas, Why Charity? (1983).40. Salamon, Partners in Public Service: The Scope and Theory ofGovernment-Nonprofit Relations, in The Nonprofit Sector: AResearchHandbook 99, 113 (W. Powell ed. 1987).41. For an analysis of this perspective, see Young & Brodkin,The Political Economy of Privatization, in Privatization and theWelfare State (S. Kamerman & A. Kahn eds.) (forthcoming) .42. Yarrow. Privatization in Theory and Practice, 2 Econ Pol'y324,331-32 (1986).43. P. Berger & R. Neuhaus, To Empower People: The Role ofMediating Structures in Public Policy (1977).44. Id. at 11.45. Id. at 36-7.46. See, e.g., Donnison, The Progressive Potential ofPrivatisation, in Privatisation and Welfare State 45 (J. LeGrand& R. Robinson eds. 1984).47. Salamon, supra note 40, at 110.48. Starr, Social Transformation of American Medicine (1982).49. S. Huntington, M. Crozier & J. Watanuki, The Crisis ofDemocracy 163-6450. S. Butler, Privatizing Federal Spending: A Strategy toEliminate the Deficit 43-62 (1985).51. A. Hirschman, Exit, Voice, and Loyalty (1970).52. Francis. Britain Pushing ''People's Capitalism.'' ChristianSci. Monitor, July 17 1985, at 21; Smith. Thc British Scene, 64Foreign Aff. 923. 930-31 (1986).53. Starr, The Limits of Privatization, in 36 Proc. Acad. Pol.Sci.124, 128 (S. Hanke ed. 1987) (Volume entitled Prospects forPrivatization).54. Marshall, Copter Firm's Bail-out Splits Brilish Cabinet, L A.Times, Dec. 31, 1985, [[section]] 4 at 2, col. 5.55. Rempel & Walters, The Fairchild Deal: Trade War: WhenChipsWere Down, L.A. Times, Nov. 30, 1987, [[section]] 1, at 1, col.1.56. Broad, Space Drive's Tilt to Industry Gains Wide New Impetus,N.Y. Times,Jan. 24, 1988, [[section]] 1, pt. 1. at 1, col. 4.57. Seminar with Helene Ploix, executive director, InternationalMonetary Fund, Privatization Successes in Developed andDevelopingCountries, Princeton University, Jan. 14, 1988.58 Mayer & Meadowcroft, selling Public Assets: Techniques andFinancial Implications in Privatization and Regulation: The U.K.Experience, Supra note 23, at 322.59. See. e.g. Brooke, International Report: Guinea BoomsasMarkets Replace Marxism, N.Y. Times, Dec. 28, 1987, at D8, col.1;Killen, West Africa Turns to Private Sector for Efficiency,ReuterBus. Rep., Sept. 4, 1987 (BC cycle); IMF Approves $1.7 BillionStandby Loan for Mexico, 47 Wash. Fin. Rep. (BNA) No. 21, at 880(Dec. 1, 1986). However, see also Gains From Privatization May BeSmall Without Measures to Boost Competition, IMF Survey, March23,1987, at 82.60. See Generally Saunders. Public Expenditure andEconomicPerformance in OECD Countries, 5 J. Pub. Pol'y I (1986): R.Kuttner, The Economic Illusion: False Choices Between Prosperityand Social Justice (1994).61. Fontana, Armed Forces and Neo-Conservative Ideology: StateShrinking in Argentina, 1976-81, in State Shrinking, supranote 18, at 62-74.62. A. Foxley, Latin American Experiments in NeoconservativeEconomics 106-07 (1983).63. Bailey, Uses and Misuses of Privatizalion. 36 Proc. Acad.Pol.Sci. 138, 145-46 (S. Hanke ed. 1987) (volume entitled ProspectsforPrivatization).64. Talk by Lester Thurow, Williamsburg, Va. (Dec. 1984). |
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