Public to Private is a One Way Economic Street

photo credit: taberandrew

A post entitled The New Robber Barons got me thinking about what happens when public and private enterprises compete in a marketplace. Thinking about that led to some interesting observations. The first of which is that progressives are right in their assertion that public and private enterprises can compete without eradicating each other. The problem is that the progressives don’t seem to recognize that this only works in limited cases. They like to point to the post office as an example – let’s go explore that.

Once upon a time there was a little thing called The Constitution which established a new government in a fledgling country. Among the provisions of the Constitution was a mandate that this new government provide a service in the nation that was not largely available, namely a postal system so that people in this relatively (geographically) large nation could communicate effectively (making it more likely that the nation could be successfully governed). This postal system functioned essentially in isolation, making use of private enterprises such as stage coaches to help provide the service they had been tasked to provide. As time and technology changed so did the postal system, adopting a pony express for example, to continue meeting the demands of communication over an expanding territory with a growing population.

One day a private enterprise began offering a similar service directly competing with the government option. They took nothing from the postal service but tried to offer a better service that citizens could freely choose over the government version – they found ways to operate for less, deliver faster services, and allow more options (not necessarily all three at once, but you get the idea) to their customers. Today we have many private companies (UPS, FedEx, DHL) competing with the USPS. This worked out because the government system existed before any effective private system and could not gain a monopoly position in the market by simply employing government practices such as subsidizing themselves to starve out their competition. This is a market that started out public in which private entities have found ways to compete and excel.

Now lets look at what happens in this country when the government begins to compete in an established private market rather than filling its designated role as referee.

In this country the majority of people believe in the value of private property and private enterprise. They believe in human ingenuity and so they are not inclined to abolish a private industry, even one that is not performing very well. This makes it impossible for government to cleanly step into a private market without adversely affecting the system. Because of the basic belief in the value of private markets government does not abolish competing private enterprises, it tends instead to work with those it claims to be competing with. This leads to perverse incentives where private enterprises find it more profitable to secure government funding through political connections than to find innovative ways to be more competitive in their industry. Even companies that might dislike being leeches on society realize that they cannot compete with companies who can secure lucrative government contracts without doing the difficult work of actually improving their product or process.

In short, we are unable to have a public service come in and compete in an industry in which private enterprises are already offering widespread service. We are incapable of getting positive results when the government tries to provide a service that is already being served (even poorly served) through private competition. The “best” we can hope for is something like the health care reform bill that just got passed in the Senate last week.

My startling conclusion was that if we truly feel that our health care system, our automobile manufacturing industry, or even our financial industry are unable to meet the needs of the nation the only viable government solution is to abandon the idea of a partnership or a public option and instead have the government take over the industry outright – leaving the option for private enterprise to come in and compete with the government once the industry has been stabilized.

My two question are – do we really believe that any of these industries are performing so poorly that they should be abolished outright and how many progressives have the stomach to directly promote replacing the private industry rather than “competing” with it.