A CRITIQUE OF THE PUBLIC CHOICE
THEORY CASE FOR PRIVATIZATION:
RHETORIC AND REALITY
MichaelD. Wright*
Privatizationis an integralaspect of the
attempt to decrease the size and
accountability of the state to its citizens,
which has substantial consequencesfor
the legal and politicalenvironment. This
articleexaminesone ofthe mostprominent
argumentsmade infavourofprivatization,
public choice theory. Publicchoice is the
economic analysisofpoliticalinstitutions.
The theoryposits thatpeople are rational
self-maximizers, which affects voters,
legislators and bureaucrats, and thus
makes it impossiblefor government to act
in the public interest. The theory is
explicated and its internal and external
premises are then critiqued.This critique
includes a discussion of the economic
arguments thatare often made in support
of the proposition that privatefirms and
the market are more efficient than public
provisionofmany goods andservices.The
natureand importanceofalegalframework
for competition, the form and extent of
regulation,and the basis of efficiency
improvements are explored, asare the
potential internal contradictions of the
publicchoice &hory
caseforprivatization.
It is concludedthat though thepublic
choice argument for privatization has
littleempirical value, it may have some
normative significance. Given this
La privatisation constitue une partie
int~grantedelatentativevisantiidiminuer
la taille de l'Atat et ses responsabilitds
envers ses citoyens et citoyennes, ce qui a
des consequences importantes sur
l 'environnement juridique et politique.
Dans cet article,l'auteurexamine un des
arguments les plus importants qui sont
invoquds d l 'appuide laprivatisation,la
thiorie du choix collectif c'est-a-dire
l'analyse iconomique des institutions
politiques. Selon cette thiorie, les gens
sont des atresrationnels qui cherchent d
maximiser leur potentiel individuel. Ce
comportement est aussi adopt6 par les
glecteurs, les glectrices, les membres du
corps l~gislatifetles bureaucrates,ce qui
empche le gouvernement d'agir dans
l'int~ratpublic. L'auteur explique la
thgorie en ddtails, puis critique ses
prmisses intrinsaques et extrinseques.
En outre, il discute les arguments
9conomiques qui sont souvent avanc~s ai
l'appui de la propositionselon laquelle
les entreprisesprivies et le marchg sont
plus efficaces que le secteur public
pour fournir de nombreux biens et
services. L'auteur examine aussi la
natureet l 'importanced'un cadre l~galen
matijre de concurrence, le type de
rkglementationet saport, lesfondements
* © 1993 M.D. Wright. Associate, Cavalluzzo, Hayes & Shilton. J.S.D., Stanford Law
School; LL.B., Osgoode Hall Law School; B.A., University of Toronto. My thanks to Mark
Kelman, William Simon and Laurie Stein, whose helpful suggestions on earlier drafts of this
article are reflected throughout. All errors remain my own.
Ottawa law Review/Revue de droit d'Ottawa
[Vol. 25:1
conclusion, an attempt is then made to de l"am~liorationde 1'efficacitg ainsi
explain how it has come to be so popular que les contradictionsinternes ventuelles
as the basisfor governmentprivatization des arguments apports c l'appui de la
policies. By situatingboth public choice privatisationpar la thgorie du choix
collectif
theory and privatization within the neoL'auteur conclut que bien que ces
conservative agenda, the article seeks to
understandboth the ideology anditsprac- argumentsaientpeude valeurempirique,
il se peut qu'ils aient une portie normative.
tice morefully.
Par consiquent, l'auteur essaie ensuite
d'expliquerpourquoiilat sipopulairedese
fonder sur ces arguments pour appuyer les
politiquesgouvernementalesdepivatisation.
Ensituantlathgorieduchoix collectifet la
p rivatisationdans le cadreduprogramme
no-conservateur,l'auteur cherche t mieux
comprendretant la th6orie que sapratique.
1993]
Privatization:Rhetoric and Reality
I. INTRODUCTION
The idea that the Anglo-American state should be involved in delivering goods
and services has been increasingly under attack since the early 1980s, leading to a
large lay and academic movement seeking to privatize many of these functions.
"Privatization" as a term has been used to describe various phenomena, but
generally involves a decrease in state participation in an enterprise or service,
though the form and amount of "disinvolvement" differs according to context.' Yet
because it is difficult to retain analytical precision at this level of generality, it may
be helpful to define privatization more specifically as the active shifting of public
duties to private organizations. 2 Though the Canadian federal government has
attempted to explain the benefits of privatization by referring to the apparently
neutral goals ofefficiency andreductioningovernment size 3-qualities with which
most of us find it intuitively difficult to disagree - it is contended here that this is
not the whole story: much of the discussion over privatization has either obfuscated
or ignored competing social norms. Moreover, the shift from a society heavily
influenced by public ownership to an increased emphasis on delivery of goods and
services by private firms has substantial consequences for the legal and political
environment which have scarcely been examined in the Canadian legal literature.
The American legal literature has consideredprivatization largely in the context
articles
arising out of symposia, andhas generally accorded the idea a favourable
of
4
reception. Perhaps the most popular basis for advocating privatization policies in
this literature is public choice theory, a school of thought which has attracted great
interest among American legal scholars. 5 Public choice is the label that has been
given to the economic analysis ofpolitical institutions. 6 The theory is both a natural
and frequent tool used to explain issues of government size and growth; public
choice also offers several prescriptions designed to effect reductions in the size and
growth of the state, one of which is privatization. In this article I will offer a critique
of the public choice argument for privatization and attempt to situate the theory
within the largerneo-conservativepolitical agenda, with aview to betterunderstanding
public choice.
I R.A. Cass, Privatization:Politics, Law, and Theory (1988) 71 MARQ. L. REv. 449 at
451.
2
J.D. Donahue, TiH PRIVATIZATION DECISION: PUBLIC ENDS, PRIVATE MEAs (New York:
Basic Books, 1989) at 3. According to this more narrow definition, deregulation policies will
generally be complementary to but distinct from privatization. Though regulation is an attempt
to manage particular economic sectors, deregulation does not necessarily shift production or
delivery from public to private firms. See discussion in the text accompanying infra note 41.
3 Hon. J. McDermid, Privatization:The Purpose, TheProcess(1989) 16 CAN. Bus. REv.
16 at 16-17.
4 See ThePublicandPrivateRealms:ThePrivatizationMovementandOtherDevelopments
(1988) 11:2 GEO. MASON U.L. REv. 139 at 139-173; Symposium, Privatization:TheAssumptions
and the Implications(1988) 71 MARQ. L. Rv. 445 at 445-648; and Overview: Perspectiveson
Privatizationand the PublicInterest (1988) 6 YALE L. & POL'Y REv. 1 at 1-108.
1 See generallySymposium on the Theory of Public Choice (1988) 74 VA. L. REv. 167
at 167-518, and, more specifically, see below Sections IV and V.
6 D.C. Mueller, PUBLIC CHOICE II (Cambridge, Mass: Cambridge University Press, 1989)
at 320.
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In considering the various activities of the state that have been or could be
privatized, it is perhaps helpful to imagine the endeavours of the state on a
continuum. Atone end are the activities most cornmonlyreferredto as "entitlements"
or "services", such as welfare payments, unemployment insurance, and disability
pensions: this is the welfare state as a response to individual need. At the other end
of the continuum are state enterprises which more closely resemble private sector
firms, andwhere theprivate sectormayinfactbe in direct orpartial competition with
government, in activities such as postal services, transportation, utilities and
energy. 7 The sense of need is less individually based in this latter group, and, to the
extent that it can be conceptualized, the state's involvement is based on a more
8
collectivist notion of need.
Privatization proponents generally would agree that the end of my continuum
where state enterprises more closely resemble the private sector represents a
stronger case for privatization. In fact, this is the area where efforts have been
concentrated and where the greatest successes have to date been achieved. 9 There
are several reasons for this. First, despite the well-documented and multi-faceted
attack on the Anglo-American welfare state, 0 there still remains a level of acceptance
for the basic goals of social welfarism that is surprisingly resilient."1 Second, despite
this evidence of some level of faithfulness to social welfarism, there appears to be
a corresponding and powerful consensus that the state should not be involved in
7 There are other ways of categorizing government enterprises and services. Janet
Rothenberg Pack distinguishes between the production of"immediate goods and services"
(desks, laundry services, highway maintenance) and the production of"final goods and services"
(education, health care, transportation): seePrivatizationofPublic-SectorServicesin Theory and
Practice(1987) 6 J.oFPoI'YANALYsis & MGMT.523 at 524-25. E.S. Savas also makes a distinction
between what he terms "physical amenities ofmodem life" and "personal services to the public":
see PIATON: Tan KEY To BErrm Govm ENr (Chatham, N.J.: Chatham House, 1987) at 121.
I prefer the idea of the continuum as Ibelieve it more accurately reflects the subtle changes and
levels of state involvement between different enterprises and services than does the use of two
separate categories.
8 For a discussion of the neoclassical economist's public goods continuum, see the
discussion in the text accompanying infra notes 28-32.
9 Pack, supra note 7 at 525-26, and Savas, supra note 7 at 167.
o See generally K.G. Banting, The Welfare State and Inequality in the 1980s (1987) 24
CAN. REv. Soc'y & ANTHROPOLOGY 309; F. Block et aL, THE MEAN SEASON: THE ATrACK ON THE
WELFARE STATE (New York: Pantheon Books, 1987); A. Moscovitch, The Welfare State Since
1975 (1986) 21 J. OF CAN. SruD. 77; andA. Budd, R. Solow & C.V. Weizsacker, The Conservative
Revolution: A RoundtableDiscussion (1987) 5 EcoN. POL'Y 181.
"
This sentiment appears to be much stronger in the Canadian context than in the United
States or even Great Britain. The 'national interest' strategy as first employed in the 1980s by
Reagan and Thatcher is generally thought of in Canada as a "weak, derisory ploy": see R.
Whitaker, Neo-Conservatism and the State in R. Miliband, L. Panitch & J. Saville, eds., THE
SocLALIsT REGISTER 1987 (London: Merlin Press, 1987) 1 at 23.
Yet there is also sociological data which indicates that Americans are even more disposed
than Canadians to favour increased spending for government social services by 70 per cent to 65
per cent: see Erik Olin Wright and John Myles' unpublished study referred to in S.M. Lipset, THE
CoNTINENTAL DIVIDE: THE VALUES AND INSTTTIONS OF THE UNrrED STATES AND CANADA (New
York: Routledge, 1989) at 148. There is also a strong attachment to public goods such as national
1993]
Privatization:Rhetoric and Reality
"ordinary business and commercial operations" that can function in the market. 12
This sentiment is in turn confronted by the various reasons advanced for state
involvement in particular sectors of the economy. 13 However, the fact that market
failures necessitate state involvement in the economy does not prescribe the form of
state intervention: public ownership is only one of several means of attempting to
deal with the shortcomings of the market. One difficulty we face is deciding which
of these functions- social welfarism or commercial output- our state enterprises
perform, and to what degree. It is because of the greater privatization activity in the
area ofpublic firms rather thanpublic provision, based inpart on this informal social
and governmental consensus that the state should no longer be involved in marketstyle ventures, that I wish to closely examine and critique the proposals and
justifications for privatizing these firms.
Put simply, public choice is a theory which posits that people are egoistic,
rational, utility maximizers, a characterization which affects the state in that this
behaviour is exhibited not only by voters, who seek to maximize their individual
utility, but also by legislators and bureaucrats, who seek the same end. 4 I am
particularly interestedin the argumentpublic choice theory advances forprivatization
for two main reasons. First, I find intriguing and perhaps more daunting the reliance
on empirical rather than normative argument in public choice theory. Its purported
forests and parks. When a 1983 poll asked whether the United States government should sell some
national forest land to private companies, 11 per cent said yes; 31 per cent had no opinion; and
58 per cent said no: see ABC News/Washington Post poll of April 1983 referred to in C.F. Runge,
The Fallacyof "Privatization"(1984) 7 J. Co'rri. Srr. 3 at 14.
It has also been shown that despite the rhetoric employed by the Reagan administration
(which actually promised a reduction in the growth rate of government, not in its absolute size),
government's growth rate was actually slightly higher than under the Carter administration.
Though increases in defence spending largely account for this increase, domestic program
reductions weremodest and the growth rate in entitlementprograms was "unabated": see LRauch,
The FiscalIce Age (1987) 19 NAT'L J. 58-59.
,2 This feeling was perhaps summed up most succinctly by formerCanadian Privatization
Minister Sinclair Stevens in 1978, during the term of former Prime Minister Joe Clark's
Progressive Conservative administration. Stevens commented: "We are determined to get the
federal government out of ordinary business and commercial operations and hand them over to
private enterprise where they belong." Quoted in M.J. Trebilcock & J.R.S. Prichard, Crown
Corporations:The Calculus ofInstrumentChoice in J.R.S. Prichard, ed., CROWN CoPoRAIoNs
INCANADA: THE CAucuLus OF INSTRUMENT CHOICE (Toronto: Butterworth, 1983) 1 at 89. It is
interesting to note that Stevens was later forced to resign from a government headed by Prime
Minister Brian Mulroney over allegations thathe used the power ofhis public office to furtherhis
own private financial interests.
13 In the Canadian context (which is more inclusive than the American example), seven
fields of involvement have been observed: natural monopoly regulation; nation-building and
community development; moderating the effects of economic transitions and stabilizing income;
the provision of capital funds; the promotion of national security and security of supply; the
creation of a yardstick competitor; and control of externalities: see Trebilcock & Prichard, ibid.
at 46-74.
4 Mueller, supranote 6 at 1.Public choice is actually aloose description ofvaried subjects
and analytical styles, which also carry labels such as rational choice, social choice, positive
political science, or positive political economy: see G.O. Robinson, AMmucAN BUREAUCRACY:
PUBLIC CHOICE AND PUBLIC LAW (Ann Arbor: University of Michigan Press, 1991) at 20.
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[Vol. 25:1
use of descriptive or "positive" theory has an attraction to policymakers which
normative theory cannot hope to equal (the preference for "hard data" over "soft
ideas"), and I wish to interrogate its claims more fully. Second, and somewhat
related to my first point, I have a more practical interest: public choice theory has
been the rationale most widely advanced for privatization attempts, and appears to
have gained the greatest acceptance at the highest levels of policy development and
within the legal and economic communities.' 5 For this reason alone it is an argument
which deserves a critical understanding.
This paper represents an attempt to develop a critique of the public choice
privatization model on two levels. First, meeting the public choice argument on its
own terms, I will attempt to show that public choice theory is flawed in some of its
basic assumptions about voters and legislators, that publicly owned enterprises are
not necessarily less efficient than privately owned firms which participate in the
market, and that even if we assume that the public choice critique of government is
correct, the privatization process would be corrupted by the same factors as affect
all political decisions, and which public choice theory seeks to address. Second,
given the incorrect or at least inconclusive empirical claims used by public choice
theory to offer insight into whether private firms are more economically efficient or
are to be preferred for some other reasons, I will argue that public choice's reliance
on empiricism is inappropriate, and is done so as to further a neo-conservative
political agenda by attempting to invalidate and therefore exclude debate over the
normative values we wishthe state to reflect. Finally, I also offer afew brief thoughts
6
on what I feel is a more consistently democratic view of our public enterprises.1
II. THE LIBERAL-PLuRAuST
ViEw OF THE STATE
A. The PoliticalTradition
The defining characteristic of the post World War II Anglo-American capitalist
state has traditionallybeen one of compromise. Originally, this notion of compromise
was encapsulated in the pluralist theory of government, in which political resources
are distributed widely, and interested parties would compete for the acceptance of
their vision. The state would generally respond by implementing a policy designed
'5
See, e.g., D.F. Linowes, PRIvATIZAoN: TowAD MoRE EFrEcrIv GovEmmrr (Report
of the President's Commission on Privatization, March 1988) at 233-37 & 243-51.
It has also been noted that legal economics, of which public choice theory is an important
strand, has better matched the ideological mood of the Reagan-Bush regime, and has had a real
impact on the way policy analysis is conducted. The libertarian view, on the other hand, has been
marginalized in part because though it has called for economic deregulation, it also would
deregulate behaviour such as consensual homosexuality, which clashes with the religious right,
thereby rendering "libertarianism as an ideology....unacceptable to a significant portion of the
Reagan-Bush coalition.": see M. Kelman, A Critique of Conservative Legal Thought in David
Kairys, ed., THE PoLincs OF LAw: A PROGRESSIVE CRITQuE (New York: Pantheon Books, 1990)
436 at 436.
16 These thoughts are currently being more thoroughly developed as part of a larger work
in progress which attempts to address the very real problems that remain in our large, highly
bureaucratizedpublic enterprises, so thatthe social potential ofwhich I speak can be meaningfully
pursued.
1993]
Privatization:Rhetoric and Reality
to maintain stability and a sense of equilibrium. Bynecessity this arrangementmeant
that the state did not itselfarticulate any fixed public values, but left this up to groups
and interests to be debated.' 7 This approach was paralleled by legal scholars who
argued that instead of attempting to enshrine non-existent universal values, courts
should be confined to ensuring that the process oflegislative decision-making is fair
and open."8
Pluralism shared the capitalist notion of an automatic society in the sense that
natural and harmonious competitionbetween different ideas wouldnecessarily lead
toward an equilibrium that could be defined as the public interest. 9 Unlike pure or
Smithian laissez-fairecapitalism, the theory ofpluralism also contained a conception
of equilibrium that was predefined largely by the more egalitarian biases of pluralist
theorists. As such, it was recognized that the market could not always successfully
provide for all individuals, and that inequalities in income and wealth must be
remedied or at least modified. There was a further concern among pluralist theorists
that unemployment and inflation must be avoided. This led to an increase in the
state's role in the economy with a view to adjusting the allocation of resources
caused by market failures (typically categorized as imperfect information orbarriers
to free entry), adjusting according to dissatisfaction with the distribution of income
and wealth as a result of market processes, and centralizing the banking and fiscal
policies of the state to gain more control over the levels of inflation and
unemployment. 0
Gradually, leading pluralist theorists began to ref6rmulate their views about the
relationship between economic andpolitical power even more as they saw the threat
that unequal wealth distribution continued to pose to the achievement of a legitimate
pluralist equilibrium. These developments led some theorists to suggest that if
pluralism were to be retained as a useful theory of government then it would have
to be structurally reformed and include significant redistribution of income and
2
wealth. '
'7 See generally RIA. Dahl, PLURALIST DEMOCRACY INTHE UNITED STATES: CoNucr AND
CONSENT (Chicago: Rand McNally, 1967); and D.B. Truman, THE GOVmNmENAL PROCESS:
POLITICAL INTERESTS AND PUBLIC OPINION (New York: Alfred A. Knopf, 1951).
S See, e.g., H.M. Hart& A.M. Sacks, THE LEGALPRocEss: BAsIcPROBLEMS INTHE MAKING
AND APPLICATION OF LAW, 10th ed. (Cambridge, Mass.: Harvard University Press, 1958); H.
Wechsler, TowardNeutralPrinciplesofConstitutionalLaw(1959)73 HARv. L. REv. 1; and J.H.
Ely, DEMOCRACY AND DISTRUST: A THEORY OF JuDIcIAL REVIEW (Cambridge, Mass.: Harvard
University Press, 1980).
'9
T.J. Lowi, Tan END OF LIBERALISM: IDEOLOGY, POLICY, AND THE CRISIS OF PUBLIC
AUTmoITY (New York: W.W. Norton, 1969) at 47.
20 R.A. Musgrave, THE THEORY OF PUBLIC FINANCE: A STUDY IN POLITICALECONOMY (New
York: McGraw Hill, 1959) at 5.
2,
See generallyR.A. Dahl, DILEaMAs OF PLURALIST DEMOCRACY: AUTONOMY VS. CONTROL
(New Haven, Conn.: Yale University Press, 1982); and the largely re-conceived second edition
ofC.E. Lindblom, THE POLICY-MAKING PROCESS (Englewood Cliff, N.J.: Prentice-Hall, 1980). Yet
the difficulty that remains with many pluralist or "centrist" (in the case of legal theory) policies
is a tendency towards what has been aptly termed "muddling", meaning that rather than radical
and responsive change, the state repeatedly applies "piecemeal, partial, and often contradictory
solutions to what is a broader social problem.": see J. Cohen & J. Rogers, ON DEmocRAcy: TowARD
A TRANsORMATON OF AMERICAN SOCIETY (Markham: Penguin Books, 1983) at 133-34.
Ottawa Law Review/Revue de droitd'Ottawa
[Vol. 25:1
The pluralist vision, even in its revisionist form, has been criticized by Marxist
theory. Marxism posits that the undemocratic consequences of income and wealth
disparities (as well as inequalities between capital and labour, men and women,
whites and people of colour, and heterosexuals and homosexuals) can never be
adequately addressed under a capitalist regime. The capitalist state, even as Dahl and
Lindblom attempted to reformulate it, has a particular interest in maintaining and
further supporting this inequality. The distinction made by Marxist theory is that
even though the state has its own particular interests, it remains the product of
capital: the state was developed by capital to respond to contradictions produced in
the economic base of society, and its actions produce modifications in the economic
base.2
Yet the activities of the state do represent a limitation on capital which it would
otherwise have preferred to avoid, and in the context of a fiscal crisis, the
accumulation or profit-facilitating function of the state will be emphasized at the
expense of legitimation. The goal of accumulation is paramount because the state
retains a class character, and as such it responds to crises by actively searching for
the "acquisition of inputs" for capital, with the result that state decision-making
appears to be less neutral and thus less coherent to society.Y3 In this sense,
privatization canbe understood as the attempt of the state to respond to the economic
crises that have characterized capitalism since the 1970s by stimulating private
accumulationby capital andthereby ensuring the state's abilityto continue performing
its own functions.
The pluralist view has also been criticized by conservatives on the basis that
there is no decision-making mechanism to define the struggle among individuals
and groups in the political arena, which suggests that there is no exogenous "public
good". If the satisfactory distribution and allocation of public goods rests largely on
competition between different interests, without a legitimate governmental
counterpart, then the problems of what rules should guide the distribution and24
allocation of public goods (defined as joint consumption) remains unilluminated.
There are two main conservative objections arising out of this view of the state. The
public choice critique is that given the organizational form outlined above, organized
interest groups will dominate the lobbyingprocess and come to have a disproportionate
say with respect to public goods issues, the result being the impossibility of genuine
publicparticipationingovernment.25 The libertarian objectionto pluralist government
L. Panitch, TheRole andNatureofthe CanadianStatein L. Panitch, ed., THE CANADIAN
(Toronto: University of Toronto Press, 1977) at
5. See also M. Castells, CITY, CLAss AND POWER, trans. E. Lebas (New York: MacMillan Press,
1978) at 19 & 170; and C. Offe, The Theory of the CapitalistState and the Problemsof Policy
Formation in L.N. Lindberg et al., eds., STREss AND CONTRADICTION IN MODERN CAPITALISM
(Lexington, Ky.: Lexington Books, 1975) 125 at 140-44.
C. Offe, The Divergent Rationalities of Administrative Action in J. Keane, ed.,
2
DISORGANIZED CAPITALISM: CONTEMPORARY TRANSFORMATIONS OF WORK AND PoLITICs (Cambridge,
Mass.: MIT Press, 1985) 300 at 305.
24 A. Breton, THE ECONOMIC THEORY OF REPRESENTATIVE GovERNMENT (Chicago: Aldine,
22
STATE: POLITICAL POWER AND POLITICAL THEORY
1974) at 4-8.
1 M. Olson, THE LOGIC OF COLLECTIVE ACTION: PUBLIC GOODS AND THE THEORY OF GROUPS
(Cambridge, Mass.: Harvard University Press, 1965) at 132-67.
1993]
Privatization:Rhetoric and Reality
is informed by its general scepticism to state involvement, especially in the absence
of an underlying theory of public goods distribution and allocation, and as such
attempts to define a notion of public or community goods are most often perceived
as impinging on liberal individualism. 26 The result is a rejection by conservative
theorists of the notion that broadened interest group competition can be the means
for developing policies that will reflect the public interest and will improve general
welfare.2 1 Instead, it is necessary to look elsewhere for improvements in general
welfare, and the most logical place for these theorists to look is the market, for it
allows individuals to maximize their utility and freedom. It is this dissatisfaction
with the traditional liberal-pluralist view of the state that laid the intellectual
groundwork for the privatization movement.
B. The Economic Tradition
Earlier in this article I set out a continuum which considered the various
activities of the state for the purpose of understanding privatization. Many of these
state activities were originally developed with the aid of the neoclassical economist's
continuum, which considers the appropriateness of state involvement through
reference to economic criteria. Neoclassical economics adopts a continuum which
counterposes goods which are more and less pure public goods. Pure public goods
have two distinguishing features. First, itis difficult to exclude those who do not pay
for the goods from consuming them (non-excludability). Second, additional
consumers of the goods do not deplete the quantity of the goods (collective
consumption). The usual examples of the pure form of public goods are national
defence and environmental quality. 28 On the demand side, market provision of these
public goods fails because each of us is inclined to free ride on the other, meaning
that no individual is either willing or able to pay the full cost of the good.2 9 On the
supply side, producers cannot obtain the marginal (incremental) value of their
investment in providing such goods and so they will tend to under-supply the good.
More typically, a public good will be less "pure" in the sense that it will either
be precluded from universal enjoyment (such as welfare payments) or will be
subjected to a user fee (such as tolls for public highways and entrance charges to
Though some libertarians do see a need for at least a minimal state: see R. Nozick,
ANAncHw, STATE AND UTOPIA (NewYork: Basic Books, 1974) at 117. In the area ofpublic goods,
libertarian legal theorist Richard Epstein has argued that there is in fact a delineated class ofpublic
goods that are public because the nature of the benefit provided (he gives the example of national
defence) makes it impossible for citizens to exercise choice because "a citizen is protected by
military whether he likes it or not.": see TAKnIGS: PRIVATE PROPERTY AD THE POWER OF EMINENT
DOMAIN (Cambridge, Mass.: Harvard University Press, 1985) at 167. For further discussion of
public goods, see below Section 11(B).
26
27 J.L. Mashaw, The Economics ofPoliticsand the UnderstandingofPublicLaw (1989)
65 CHI.-KE.T L. REv. 123 at 132.
28 See P. Samuelson, The Pure Theory ofPublicExpenditure (1954) 36 REV. OFEcON. &
A.S. Blinderet al., THEEcoNoMcS
STATS. 387; and P.O. Steiner, PublicExpenditureBudgetingin
OF PUBLIC FINANcE (Washington: Brookings Institute, 1974) 243 at 245-46.
29 J.A. Kay, THE STATE AND THE MARKET: THE UK EXPERIENCE OF PRIVATSATION (London:
Group of Thirty, 1987) at 7.
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provincial parks). The public good can thus be defined more widely as what the
private economy is not motivated to provide at levels that meet actual demand, but
a good which the public wants, is willing to pay for, and expects its government to
assist in producing or delivering: the question of what is public therefore becomes
one ofnormative significance. 30 Given this definition, to the extentthatprivate firms
are motivated to provide goods and services being provided or produced by the
public sector, and can meet actual private demand at a cost low enough to avoid
market failure, privatization becomes a possible alternative to public provision.
For my purposes the neoclassical public goods model is limited for several
reasons. The model primarily reacts to market failures rather than containing any
notion of'proactive public involvement in society aside from market provision. The
neoclassical approach is also problematic because purely economic factors cannot
specify the form of state action that is most desirable in dealing with public goods
problems. 3' Once the state is able to determine the public demand for a good or
service, and once a budget expenditure is set, neoclassical economics does not
distinguish between public and private delivery of that good or service. As I will
argue later, there are important distinctions to be drawn between the public and
private modes of delivery. Finally, the approach does not illuminate the reason for
privatization policies, which have occurred across the neoclassical public goods
continuum. Still, the neoclassical continuum is important in order to appreciate the
context in which public choice theory developed. Specifically, the development of
public choice was in part a response to the concern that the three alternative means
of supplying public goods (private unregulated monopoly, private monopoly
regulated by the state, and state ownership and operation) were subjected to little
empirical scrutiny to determine social preferences; instead, these preferences were
32
historically encapsulated inpolicy discussions under the rubric of"public interest".
111. THE FoRms OF PRIVATIZATION
Privatization occurs in a number of different forms, and it is helpful to briefly
describe these methods prior to analyzing the movement so as to understand the
policyimplications. Although other commentators list a greatervariety oftechniques,
these categories tend to overlap and include phenomena which are not privatization
as I have attempted to define it. For the purposes of this article, I have broken
30 Steiner, supra note 28 at 248-49. Take postal services as an example. Neoclassical
economics suggests that postal services are a private good because exclusion is possible (and
government does charge for providing the service) and the extra costs of providing the service to
an additional individual are significant: see LE. Stiglitz, ECONOMICS OF =rE PUBLIC SECTOR, 2d ed.
(New York: W.W. Norton, 1988) at 179. Yetneoclassical economics tells us little aboutthe social
purposes met by state-provided postal services or about the consequences of changing to private
provision. Some of these concerns are captured by the economist's evaluation of externalities.
Ultimately the decision about state involvement in a good or service such as postal services may
have less to do with whether the good or service is properly public or private but with numerous
other economic and non-economic factors.
3, Musgrave, supra note 20 at 43.
32 T.E. Borcherding, Toward aPositive Theory ofPublicSector Supply Arrangementsin
Prichard, ed., supra note 12, 99 at 123-24.
1993]
Privatization:Rhetoric and Reality
privatization down into the following forms: asset sales, contracting out, complete
cessation of state enterprises or services, and voucher systems. Each of these will be
explained in turn.
First, the transfer ofpublic assets to private ownership or asset sales is perhaps
the most complete version of privatization. Though this activity has been most
notable in European countries, such as under the Thatcher government in Great
Britain, it has occurred far less in the United States because ofits comparatively few
state enterprises and assets. In the late 1970s, the period in which the public sector
was perhaps at its greatest postwar size, state-owned enterprises accounted for an
average of 6.7 per cent of the labour force in other developed market economies, but
only 1.5 per cent in the United States.33 Of course the size of the American labour
force as a whole means that state enterprises still employ a large number of workers
in terms of sheer numbers.
According to its proponents, the sale of state enterprises and assets is designed
to achieve the following goals: to restore market forces to commercial activity that
has been in the government domain (the assumption being that it has been immune
to basic market imperatives, such as the need to keep costs below income); to raise
money if it can be proved that more cash can be gained from selling the enterprise
than by continuing to run it; and to move enterprises to the private sector which is
more sensitive to its customers and thus can more effectively achieve public
purposes.34
Second, contracting out functions that were previously done by public sector
agencies and employees to private firms is perhaps the most widespread form of
privatization.35 The rationale for this particular technique is primarily the reduced
labour costs that contracting out work to the private sector allows. The argument is
that government retains control of the management of its services and enterprises,
but routine commercial activities which are not unique to government can be
performed more cheaply by private firms, which do not have to contend with the
wages that government has agreed to pay in its collective agreements with public
sector trade unions. Of course, this form ofprivatization may also lead to increases
in the regulation of the contractors, which poses additional monitoring costs on
government and also may raise the costs of the contractors. 36
Third, the complete cessation of public programs can also be a form of
privatization. The goods or services previously provided by these programs are
expected to be produced and distributed by either the market or by private charity.
This government withdrawal is referred to in the literature as "load shedding". It
takes two basic forms. The first type of withdrawal is where government ceases to
produce orprovide goods or services, and the voidis filledby those groups that have
an interest in the good or service continuing to be provided (for example, privately
funded battered women's shelters that open after government shelters have closed,
13 Donohue, supra note 2 at 6.
31 S. Butler, PrivatizationforPublicPurposesin W.T. Gormley, ed.,
PRIVATIZATION AND
(Madison: University of Wisconsin Press, 1991) 17 at 18-20.
11 J.R. Pack, The Opportunitiesand ConstraintsofPrivatizaiionin Gormley, ed., ibid.,
irs ALTERNATIVES
281 at 281.
36 See infra text accompanying notes 88-94.
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pro bono legal representation for poor people by private law firms after legal aid has
been terminated, or the building of a private recreation area after the public one has
been closed down). The second version of "load shedding" occurs where the public
is dissatisfiedwith the government service, andthe private sector moves into satisfy
7
the need or desire (for example, private police forces in neighbourhoods). As is the
case with contracting out, ceasing to provide services and having these taken up by
private firms may result in increased regulation.
Fourth, voucher systems, whereby the provision decision is made by government
but individuals are provided with vouchers and can then choose a producer from
competitors, has been advanced in many circles as an answer to a variety of
perceived social problems. The idea has been put forward most strongly in the area
8
ofeducation, with a view to increasing choice and therefore consumer sovereignty.
Depending onthe sector, government would either be stimulated to compete against
private firms or would completely withdraw from the delivery of goods and services
under the voucher system.
Some commentators have included otherpolicy options as forms ofprivatization,
but given my definition ofprivatization as government disinvolvement coupled with
a shift from public to private production or provision, these measures seem to be
theoretically distinct. For example, what is generally referred to as "direct dollar
choices" by Cass, by which he means such policies as user fees for highways and
customs,39 would actually lead to greater state involvement in the regulation of these
goods and services, even though in the end they may lead to greater government
revenues. Starr includes some deregulation under the rubric of privatization,
because when governments deregulate entry into markets which were previously
40
protected as public monopolies, some production will likely shift to private firms.
Though deregulation may in fact lead to greater production by private firms, it can
only be specifically understood as privatization when it is accompanied by a
reduction in the production or provision levels of public enterprises. To use an
example, liberalizing competitionbetween the public postal service andprivate mail
or courier companies can be seen as privatization, since any gains by private firms
would be accompanied by reductions in the public enterprise, whereas allowing
greater entry into a market previously composed only of regulated private firms,
such as trucking and cartage, cannot be considered privatization since it does not
involve a reduction in state provision or production.
IV.THE PUBLIC CHOICE ARGUmENT FOR PRIVATIZATION
As noted earlier, it is somewhat difficult to speak definitively about the specific
content ofpublic choice theory given the different emphases of its proponents, but
37 Savas, supra note 7 at 235.
31
J.R. Chamberlin & J.E. Jackson, Privatizationas InstitutionalChoice (1987) 6 J.
POL'Y ANALYSIS & MGMT.586
OF
at 600.
39 Supra note 1 at461.
P.Starr, The NewLife ofthe LiberalState:Privatizationandthe RestructuringofStateSociety Relations in E.N. Suleiman & J. Waterbury, eds., THE PoLTCAL ECONOMY OF PUBLIC
40
SECTOR REFORM AND PRIVATIZATION
(Boulder, Colo.: Westview Press, 1990) 22 at 28.
1993]
Privatization:Rhetoric and Reality
it is possible to identifytwo main claims made by public choice which form the basis
of the case for privatization. 41 The first claim is that there is no acceptable method
for combining individual preferences into a unified societal preference, generally
referred to as the problem of collective choice. The second claim is that people act
to further their own material interests, and this view forms the basis of the model
used to evaluate both the public sector and private citizens. I will attempt here to set
out the public choice argument for privatization as fully as possible, and only in the
subsequent section do I begin to offer a critique.
The first claim advanced by public choice theory is that there is no means to
develop asocial consensus fromindividualpreferences. The relevance to privatization
is that if the rationale for state-owned enterprises is that they fulfil a function which
society has agreed, through its elected representatives, should be carried out by the
public sector rather than the private market, then public choice would deny the
possibility of such an agreement. Public choice theory asserts that this basis for
public ownership and activity cannot be empirically justified.
This type of analysis is conducted largely through game theory, and focusses on
the way in which individuals aggregate their preferences, and how this translates
into decisions. One method of decision-making is unanimity, which has the benefit
of ensuring that each individual will be in a betterposition as a result ofthe decision
than she or he would have been otherwise (Pareto-superiority), or else the decision
will not be made.42 The obvious difficulty with such a method is that even if one
individual will be worse off by the decision, then it cannot be made even if the
decision will be preferable to society as a whole. These kinds of solutions are
difficult-ifnot impossible-to find, the resultbeing that the majority ofthe group
will be denied a benefit.43
To avoidthese difficulties, majorityrule is most oftenlookedto as an alternative
method. Though it avoids many oftheproblems associated with unanimity, majority
rule creates new difficulties in that it cannot produce a definitive decision. This
approach is known as "Arrow's Theorem", and can be briefly demonstrated as
follows. 44 Imagine three voters (legislators or citizens) who must choose among
death, dishonour, and poverty. The voters rank their preferences in the following
order:
Number One - death, dishonour, and poverty
Number Two - dishonour, poverty, and death
Number Three - poverty, death, and dishonour
4' In addition, some of this argument will be constructed by borrowing from the public
choice work done on regulation, as it has received a more detailed treatment in the public choice
literature than has privatization.
42
E.L. Rubin, Beyond Public Choice: Comprehensive Rationality in the Writing and
Reading ofStatutes (1991) 66 N.Y.U. L. REv. I at 6-7.
41
J.M. Buchanan & G. Tullock, THE CALcuLus OF CoNsEN: LOGICAL FOUNDAnONS OF
CoNsrrmoNAL DEMocRAcY (Ann Arbor: University of Michigan Press, 1962) at 105-09.
4
K.J. Arrow, SOcIAuCHOICEANm INDIvIDUALVALUES (NewHaven, Conn.:YaleUniversity
Press, 1963) at 46-60. To briefly illustrate the relevant principles involved I have borrowed
Rubin's more straightforward lay example: see supra note 42 at 7.
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Now suppose the three voters are asked to choose any two of the options: death will
be preferred to dishonour by a majority made up of voters one and three; dishonour
will be favoured to poverty by voters one and two; and poverty will be chosen over
death by voters two and three. The result of this game is referred to as "cycling",
because each choice will produce a different majority, with no non-arbitrary
stoppingpoint. My description ofthis claimwillbebrief, however, because as Rubin
has noted, the theorem can actually provide a basis for understanding and improving
the quality of government decision-making and collective decisions by resolving
preference-aggregating problems, rather than giving rise to the pessimism regarding
4
the public sector that is more characteristic of public choice. 1This attitude tends to
be found more in the second claim, though it gains some of its resonance from the
inherent difficulties in the decision-making process suggested by this first claim.
The second claim made by public choice theory, the interest group or "capture"
argument, is based on a two part model which examines state expenditures in terms
of demand side and supply side analysis. On the demand side it is arguedthat citizens
acceptmore than an optimal amount of government spending because they are under
a misperception as to its true cost in taxes, in part because of the complexity in the
tax system. In addition, well organized and financed interest groups that stand to
gain from specific government programs will have a greater incentive to lobby for
these measures than unorganized individual taxpayers - with their more diffuse
interests - will have to oppose them. According to the theory, these efforts by
individuals and groups to further their own interests, referred to as "rent-seeking",
define the legislative process, making it virtually indistinguishable from any other
micro-economic system." This theory of narrow, private economic benefit from
public legislation is supported by studies which have examined different laws and
concluded that a specific interest benefitted economically from the passing of each
law. 47 In sum, the theory is based on the assumption that each individual favours an
48
arrangement in which her or his fellow citizens pay for her or his benefits. The
result is that legislation is enacted which "transfers wealth from society as a whole
to those discrete, well-organized groups that enjoy superior access to the political
process," 49 and society's overall level of wealth and economic efficiency suffers in
order to benefit these groups.
41
Rubin, ibid.at 8. For this reason I also will not embark on a critique attempting to show
that there are ways of avoiding these paradoxical voting results. For such a critique, seegenerally
D.A. Farber & P.P. Frickey, The Jurisprudenceof Public Choice (1987) 65 TEx. L. Rav. 873 at
902-04.
46 G.S. Becker, A Theory of Competition Among PressureGroupsforPoliticalInfluence
(1983) 98 Q.J. EcoN. 371. See also J.R. Macey, Promoting Public-RegardingLegislation
Through StatutoryInterpretation:An InterestGroup Model (1986) 86 COLUM. L. Rnv. 223 at 224
n. 6.
47 See S. Peltzman, An Economic Interpretationof the History of CongressionalVoting
in the Twentieth Century (1985) 75 AM. ECON. REv. 656; and S. Peltzman, The Growth of
Government (1980) 23 J.L. & EcoN. 209.
18 M.P. Fiorina, CONGRESs:
KEYSTONE OF THE WAsINGroN ESTABLISHMENT (New
Conn.: Yale University Press, 1977) at 40.
49 Macey, supra note 46 at 230.
Haven,
Privatization:Rhetoric and Reality
1993]
On the supply side, the theory asserts that the economic interests ofconstituents,
noted above, affect the voting patterns of legislators on bills, and their conduct in
general. The reason for this is that legislators and other political actors are similarly
motivated by self-interested behaviour, which can be generally categorized as the
principle of individual utility maximization. 50 This view of human behaviour is
based on the assumption that individuals act in an economically rational manner in
the market, and in other contexts as well. People consistently "maximize their utility
from a stable set of preferences and accumulate an optimal amount of information
and other inputs in a variety of markets." 51In the political sphere, this is repiesented
by the motivation of legislators towards vote maximization, or, to put it more
bluntly, their re-election fixation. There are two ways in which legislators attempt
to be re-elected. First, they maximize their appeal to constituents, by distributing
goods and income among those who vote according to their own economic selfinterest." This explanation assumes that government exists only to redistribute
goods and income, and that electoral candidates promise to redistribute income
towards those voters or groups of voters who support the candidate. 53 Second,
legislators conclude that since voters are generally ignorant, an election may turn on
financial backing, publicity and endorsements. The financial ability to mount such
acquire the
a campaign can be acquired through interest groups, which in exchange
4
ability to affect legislative action according to their interests.1
The public choice view of politicians represents a direct challenge to the
Keynesian and post-Keynesian theory of macroeconomics, which depends on the
presumption that legislators respond to considerations of "public interest" rather
than to the incentives imposed upon them by constituents. In other words, the public
sphere is supposed to be resistant to market pressures so that it can carry out the
functions which the market is unable to accomplish effectively. This is the
neoclassical basis for government provision of selected goods and services. In
attempting to undermine the traditional economic basis forpublic ownership, public
choice theorists emphasize thatthere is nothing necessarilypejorative aboutthe lack
of resistance legislators exhibit in exercising their individually based economic
choices. Put simply, it is not amatter ofa"bad" group ofpeople inpowerwho could
be replaced with a "good group". Rather, the theory is explicit in stating that the
economic model for predicting behaviour is devoid of valuation. The theory asserts
that unlike the public interest paradigm, legislators are economically rational,
s J.M. Buchanan, Toward Analysis ofClosed BehavioralSystems in J.M. Buchanan &
R.D. Tollison, eds., THEORY OF PUBLIC CHOICE: POLITICAL APPLICATIONS OF ECONOMICS (Ann Arbor:
University of Michigan Press, 1972) 11 at 15-16.
SI
G.S. Becker, THE
ECONOMIC APPROACH TO HUMAN BEHAVIOR
(Chicago: University of
Chicago Press, 1976) at 14.
52
S. Peltzman, ConstituentInterest and CongressionalVoting (1984) 27 J.L. & ECON.
181 (concluding that the more wealth distribution caused by an issue, the better economic
variables can explain the legislative outcome).
53 Mueller, supra note 6 at 329-30.
54 D.A. Farber & P.P. Frickey, LAW Am PUBLIC CHOICE: A CRITICAL INTRODUCTION
(Chicago: University of Chicago Press, 1991) at 22-24. This theory is based on the collective
action work of Mancur Olson: see supra note 25.
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"ordinary persons"; however, the result of this characterization is that the liberalpluralistpolicy structure "crumbles". 5 The individualistic model ofbehaviourused
to assess legislators is also directed towards bureaucrats, who engage in budget
maximization as a means of attempting to ensure that they maintain or increase their
status within government, since their status is roughlyproportional to the importance
of the budget they oversee, which is generally measured by its size.-6 The result of
this behaviour by legislators and bureaucrats is greater government growth and
57
excessive budgets.
In the context of analyzing particular policies and government ventures, the
"capture" claim can be applied to perceived market failures, where public choice
theory concludes that the analysis must also address the comparable failures in the
proposed state correctives. In other words, if the market has failed specifically
because of the narrow self-interest on which it is based, then the inference should
be that this behaviour will also occur in other non-market settings, particularly in
government, and may in fact lead to greater inefficiencies. For those who disagree
with this characterization, public choice theorists suggest that they bear the burden
of rebutting the presumption of self-interest, and of demonstrating that58a "dramatic
widening of personal horizons" will occur in the non-market setting.
These claims have led (or are led by) a general antipathy toward public
ownership and the public sector in general, with the result that state intervention is
considered problematic. Public choice suggests that market failures, which provide
one ofthe main arguments forpublic enterprises,59 have given rise to a corresponding
government failure. 60 From an organizationalp oint of view, public choice concludes
that the functions carried out by the public sector should be privatized, that is,
returned to the market, where self-interested behaviour is not only tolerated, but in
fact is recognized as rational. It is important to emphasize the use of the term
"returned" to the market, forpublic choice theorists believe that many if not all state
economic functions originally formed part of the private market.6' Public choice
theorists further conclude that since social consensus in government is impossible,
5 J.M. Buchanan, ESSAYS ON THE POLncAL EcoNoMY (Honolulu: University of Hawaii
Press, 1989) at 78.
56 See Fiorina, supra note 48 at 40; see also W.A. Niskanen, BuREAucRAcY AND
REPRESENTATvE GovERN mEN (Chicago: Aldine-Atherton, 1971).
57 For a review of this argument, see P. Starr, The Meaning of Privatization in S.B.
Kamerman & A.J. Kahn, eds., PRIVATIZATION AND THE WELFARE STATE (Princeton, N.J.: Princeton
University Press, 1989) 15 at 30-3 1; and A.H. Meltzer & S.F. Richard, Why Government Grows
(and Grows) in A Democracy (1978) 52 PuB. INTEREST 111 (suggesting that increased inequality
of income and increased suffrage are primarily responsible for the growth of government,
assuming government activity consists of redistribution).
51 Buchanan, supra note 50 at 22.
-9 See discussion at supra notes 28-30, and in accompanying text.
60 See C. Wolf, A Theory of Non-Market Failures(1979) 55 PuB. INTEREST 114 (arguing
that there can be no pre-conceived answers as to whether the market or non-market system will
be better or worse).
61 In this sense there is some overlap with the "natural state" of private, autonomous
decision-making which forms the basis for libertarian thought, in that both find the greatest liberty
in the market because both schools of thought believe it allows the best opportunity for
unimpinged individualism to flourish.
1993]
Privatization:Rhetoric and Reality
the only public purpose that can be isolated seems to be the elimination of the public
sector itself.62
The rationale for state enterprises is thatthey shouldbe controlledby the public,
a political relationship that is rooted in the legitimacy of the state in reflecting the
public interest.63 Without a concept of public interest to bind the state, the legitimacy
ofthese enterprises is undermined, andprivatizationb ecomes apreferablepolicy for
public choice. Moreover, since there is little reason to believe that the private
interests that have "captured" legislators will reflect the interests of the poorer
members of society, public choice theorists have suggested that privatization might
even have a progressive effect by reducing such exploitative activity in the public
64
sector.
V. A CRIIQUE OF THE PUBLIC CHOICE CASE
A number of explanations might be offered for the increasing popularity of
public choice theory and the general resurgence of economic liberalism in the last
decade or two: the relatively more difficult times since the early 1970s which has
increased public concern for greater economic productivity, the increasingly
technical bias of economic research, 6 or, simply the bias of economists themselves
who on questions of economic efficiency can speak with authority but who on
questions of equity have no comparative advantage. Yet these suggestions shed little
light on the question of how economics has come to dominate the political sphere,
and why traditional liberal-pluralist political scientists have been relegated to a
supporting role at best. Moreover, though these explanations hint at some of the
inadequacies of public choice theory, they do not address its basic premises. This is
problematic because, as noted above, arguments for privatization are oftenbased on
public choice precepts, 66 most notably, the view of all legislators, bureaucrats and
voters as purely self-interested, and a strong preference for and belief in the market
rather than social planning.
But in my view, public choice theory as a justification for privatization is
problematic in four distinct ways. First, the use of the self-interest preference model
of market behaviour in the public sector is integral to public choice theory, but it has
no necessary prevalence over any other model: the model has not been proven to be
62
See Mashaw, supra note 27 at 133. Mashaw refers in particular to J.R. Macey's,
Transaction Costs and the Normative Elements of the Public Choice Model: An Application to
ConstitutionalTheory (1988) 74 VA. L. REv. 471.
63
H.B. Feigenbaum, THE PoLrncs
OF PUBLIC ENTE iusE: OIL AND THE FRENCH STATE
(Princeton, N.J.: Princeton University Press, 1985) at 21-22.
E.Z. Brodkin & D. Young, Making Sense ofPrivatization:What Can We Learn from
64
Economic and PoliticalAnalysis? in Kamerman & Kahn, eds., supra note 57, 121 at 124.
65 Speaking about the tax system, Richard Musgrave has hypothesized that the change in
emphasis from equity to efficiency concerns "may reflect the fact that efficiency considerations
are more amenable to the exercise of technical tools, a practice that brings rewards to the young
professional but may not be the most helpful to a balanced view of reform": see Tax Reform or
Tax Deform? in W.R. Thirsk & J. Whalley, eds., TAx Poucy OpnoNs iN THE 1980s (Toronto:
Canadian Tax Foundation, 1982) at 25.
11 See Linowes, supra note 15.
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empirically correct. In fact, there is much evidence to suggest that it is incorrect.
Second, the assumption thatvoters will also vote according to individual, rather than
collective interests, remains a point of contention and has also not been empirically
proven. Third, the assertion that the private firm is more efficient than the public
enterprise is not at all clear, since public firms are involved in certain areas where
it will want to subsidize its efforts for particular social purposes. In other areas, the
criterion which appears to lead firms to greater efficiency is the level of competition,
rather than location in the private market. Fourth, public choice theorists seem
unable to specify how the act of privatizing state enterprises would avoid a
replication of the very behaviours that public choice theory suggests occur within
the state itself.Keep in mind that if you are persuaded by the arguments that follow,
what interests me is not so much whether any theory of human nature or economic
policy can be found to be empirically correct. Rather, I am interested in why, despite
evidence that public choice theory is empirically unsustainable (though it may
possibly have some normative significance), there is still an attempt to pass the
theory off as empirically foolproof rather than making a fully developed normative
argument.
A. The PublicSector Model Based on Self-Interest
The assumption that the self-interest model of behaviour employed in the
market is also appropriate in analyzing individual preferences in the public sector
can be challenged. Whereas most of those who defend the public interest model
agree that it is as much a goal as it is an analysis, public choice theory is not willing
to acknowledge similar limitations. The view of human nature on which public
choice theory is based is that the individual is an "egoistic, rational, utility
maximizer" in both the economic and political contexts.6 7 Even though it is
acknowledged by some theorists, such as James Buchanan, that the use of the homo
economicus (the wealth-maximizing egoist) construction is not appropriate for the
empirical exercise of predicting the likely outcomes of political interactions, the
model is still the apparently scientific basis for public choice theory. It is also
admitted by Buchanan that though self-interest is not the sole motive of politicians
and bureaucrats, and may not be as relevant in politics as in the market, it is still
68
believed to be "a significant motive."
These two slightly different views of human nature, representing two strands of
the economic approach, lead to two distinct responses. First, the conception of
individuals as entirely self-interested simply does not accord withthe preponderance
of empirical work that has been done both in the market setting and in the political
arena. 69The public choice empirical work has been surveyed by Farber and Frickey,
67 Mueller, supra note 6 at 2.
68 G. Brennan & J.M. Buchanan, Is Public ChoiceImmoral? The Casefor the "Nobel"
Lie (1988) 74 VA. L. REv. 179 at 181.
69 Though I do not propose to conduct a thorough review of this work, see, e.g., K.
Koford, On DimensionalizingRollCall Votes in the U.S. Congress (1991) 85 AM. PoL. SCl. REv.
955 at 960 (concluding thatmost econometric studies have found a significant ideology dimension
in legislators' voting patterns); J.P. Kalt & M.A. Zupan, CaptureandIdeology in the Economic
1993]
Privatization:Rhetoric and Reality
who describe two kinds of evidence generally used to support the economic theory
of legislation.70 The first group of studies attempt to show that some particular law
in fact benefits a discrete economic interest group. Farber and Frickey conclude that
these types of studies are inconclusive, as differential economic impact only points
toward a possible economic explanation, but ideology may be an equally plausible
basis for the passage of the law. 7' The second type of study attempts to meet this
criticism by fo cussing the economic model on the individual legislatorby tracing the
impact of a legislator's vote on her or his constituents or campaign contributors.
Farber and Frickey again find that public choice theory fails to account for noneconomic factors, such as the role of ideology, even in matters that appear to be
purely economic.
The second and more modified view of Buchanan, that self-interest is a
significant, but not the only component of human nature, suffers from an inability
to explain the theorizing that follows this admission. Put simply, ifself-interestis not
the only aspect of human nature that is important to understanding the public sector,
then it seems curious to base a theory of politics solely on the economic model. The
stock defence to this criticism is that it is the inherent role of theory to simplify, and
the spareness of the economic model is therefore not grounds for criticism. 72 This
response blindly refuses to engage the very real problems with the economic model
the way some past proponents of the approach have begun to realize is necessary. 73
For example, the most important feature to the public choice model is that
legislators are self-interested because they are fixated with re-election. Yet this
Theory ofPolitics(1984) 74 Am. EcoN. REv. 279 (finding that altruism or "pure" ideology is more
common in the political arena than in the market, and that it influences legislators' votes on
legislative matters); D.C. Kozak, Decision-Making on Roll Call Votes in the House of
Representatives(1982) 9 CoNcRass &THE PRESIDENCY 51 (concluding that voting is not a function
of a single determinant); and Rubin, supra note 42 at 4 & 38-45 (proposing comprehensive
rationality - the theory that legislators possess motivations including ideology, professional
standing, ambition, and self-interest, all of which they weigh in the course of decision-makingas an alternative to public choice). See also R.C. Ellickson, BringingCultureandHumanFrailty
to RationalActors: A Critique of ClassicalLaw andEconomics (1989) 65 Cm.-KNr L. REv. 23
at 48-50 (in a non-empirical but persuasive example, Ellickson considers the issue of tipping in
restaurants to suggest that the economic approach is less predictive of some behaviours than other
explanations).
70 Farber & Frickey, supra note 54 at 28-30.
71 SeealsoK.L.Schlozman&J.T.Tiemey, ORGAmZDINTERE ANDAmEicANDEMoCRACY
(Nev York: Harper &Row, 1986) at 395-96 (concluding that interest groups are more effective
in preventing action that they do not favour than in promoting action that they want).
72 The refusal to ameliorate the economic model in the face of evidence that it is severely
limited has been a consistent theme in the work of several of the model's proponents, including
Richard Posner: see The Economic Approach to Law (1975) 53 Tax. L. Rav. 757 at 774-75, and
more recently The Future ofLaw andEconomics:A Comment on Ellickson (1989) 65 Cm.-KEw
L. Rv. 57 at62 (arguing againstintegrating other disciplines into the approach because "too many
bells and whistles will stop the analytic engine in its tracks"). See alsoBuchanan &Tullock, supra
note 43 at 283-95; and G.J. Stigler, The Theory of Economic Regulation (1971) 2 BELL J. ECON.
& Mcarr. Sci. 3 at 15-18.
See, e.g., G.C. Calabresi, ThePointlessnessofPareto:CarryingCoaseFurther(1991)
7
100 YALE L.J. 1211 (arguing that the economic approach attempts to pass off interpersonal
comparisons as based on neutral criteria rather than moral judgments, and that adherents of the
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apparent fixation needs to be considered in light of the evidence that elections are
less competitive and that incumbents are overwhelminglyre-elected. 74 The difficulty
that public choice theory has inresponding to these different trends is that it attempts
to predict legislative behaviour, rather than understand the thinking processes of
legislators, bureaucrats, and, as I will argue in the next section, voters. The theory
is committed to focussing on predictions of individual legislator behaviour, rather
than interpretations. 75 The result is that public choice fails to shed any light on
motivations other than self-interest, and as such deprives attempts to develop more
democratic and responsive institutions in response to these other motivations.
Rather than confronting the problems within bureaucracy at an institutional level,
public choice theorists advocate the privatization of government-owned enterprises
based on their analysis of individuals; in short, only the market can properly respond
to the self-interested individual. When this view of individuals is made less clear,
then it cannot be assumed that the individuals involved in managing state enterprises
must be engaged in behaviours that are contrary to the public interest, and the basis
for privatizing state enterprises is similarly less clear.
B. The Voter Model
The narrow voter self-interest model suggested by public choice theorists has
also been questioned by recent research. There are two basic points here. First,
though the connection between the overall economic conditions of society and
electoral results remains apparent, the effect of voters' individual economic
circumstances on voting behaviour (the concern of public choice) does not appear
to correspond in a similar manner. As Steven Kelman notes: "The observed
connection between economic performance andthe electoral success of incumbents
economic approach should argue that the approach is normatively the best goal of society, rather
than simply asserting that this is so); and Ellickson, supra note 69 (arguing that the economic
model needs to be enriched by incorporating psychology and sociology).
74 J.A.Ferejohn,OntheDeclineofCompetitioninCongressionalElections(1977)71AM.
POL. Sci. REv. 166.
Though the public choice take on this research may well be that these developments simply
prove their point as they result from legislators successfully focussing on re-election, public
choice would equally have to be able to explain the apparent recent trend against incumbents. In
this vein, the recent focus in the United States on term limitations for legislators, which would
complement the already existing two term limit for the president, suggests that the re-election
fixation as an explanation for legislator behaviour is problematic for public choice theory in that
it challenges its basic assumptions. See T. Egan, "Speaker Campaigns to Save Political Life" The
New York Times (4 November 1991) A16; R.E. Cohen, Triple Witching Hour (1991) 23 NAT'L
J. 2688, and Term Limits, 17 NAT'L J. 32. After all, not only do legislators have an interest in being
re-elected, but "rent-seekers" have an interest in legislators, with whom they have an enduring
relationship, remaining in political office. Term limits would undermine the relationship between
legislators' re-election fixation and interest groups' role in aiding the process.
75 Rubin, supra note 42 at 3.
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Privatization:Rhetoric and Reality
does not result from voters' self-interest, but from theirjudgments about whether the
' 76
economy as a whole is doing well, independent of how they are doingpersonally.
Second, there is also much evidence to suggest that people vote against their
economic interest in order to supportpositions for ideological reasons. 77Though this
research would appear to be "embarrassing" to public choice theory since it
apparently refutes the rational, self-interest model as applied to voters, the response
has been that voters can afford to vote according to their ideology because it costs
them almost nothing to do so, since one's vote will almost certainly make no
difference to the outcome of an election, whereas in the market setting it is more
costly to base decisions on non-economic factors such as personal ideologybecause
real economic interests are at stake. 71 The difficulty with thepublic choice explanation
is that it still does not explain why - if one's vote is essentially meaningless would any economically rational person vote. After all, voting can cost money in
time away from work and it canbe inconvenient, yet the propensity to vote increases
the more education a voter has, and voters with more education are more likely to
be aware of the argument that voting is not rational.79 The economic response to this
is that voters must have a taste for voting for which they are willing to pay in order
to satisfy."0 This kind of behaviour is still considered to be rational by the public
choice theorists because in the extremely remote case that one's favoured candidate
lost by one vote and one did not vote, one would feel such deep regret that the cost
of voting is a reasonable price to pay to avoid this scenario. But this kind of argument
undermines the core of the public choice position on voting elaborated by Lee,
which is that voters can afford to take positions that are not economically rational
because to do so costs them almost nothing.
In the end, the public choice theorists are forced to argue that behaviour which
does not accordwith the self-maximizing model mustnothave costs associated with
See WhyPublicldeasMatterinR.B. Reich, ed., THE POWER OF PUBLIC IDEAS (Cambridge,
Mass.: Ballinger, 1988) 31 at43. See also D.R. Kinder& D.R. Kiewiet, EconomicDiscontentand
PoliticalBehavior: The Role of PersonalGrievances and Collective Economic Judgments in
CongressionalVoting (1979) 23 AM. J. POL. Sci. 495.
77 See, e.g., D.O. Sears & C. Funk, Self-Interest in Americans'PoliticalOpinionsin J.J.
Mansbridge, ed., BEYOND SELF-INTEREST (Chicago: University of Chicago Press, 1990) 147
(arguing that despite infrequent exceptions where there are "substantial and clear stakes", selfinterest ordinarily does not have much effect on the disinterested public's frame of mind); D.O.
Sears et al., Self-Interest vs. Symbolic Politicsin Policy Attitudes andPresidentialVoting (1980)
74 A. POL. Scl. REv. 670; and D.O. Sears, C.P. Hensler & L.K. Speer, Whites' Opposition to
"Busing": Self-Interest or Symbolic Politics? (1979) 73 AM. POL. SCl. REv. 369 (both studies
finding that symbolic attitudes - in the latter study it was racial intolerance and political
conservatism - had strong effects on voting, but voter self-interest had no significant effect, and
concluding that self-interestis often overestimated as a determinant ofvoting behaviour becauseit
is "too rarely directly assessed empirically": Sears, Hensler & Spears, ibid. at 369).
71 D.R. Lee, Politics,IdeologyandthePowerofPublicChoice(1988)
74 VA. L. REv. 191
at 194-95.
79 Farber & Frickey, supra note 45 at 893-94.
10 In fact, Richard Posnernotes: "Thewonder-to an economist-is why as many people
vote as do; one would think that it would never pay to vote until the electorate was down to a
hundred or fewer people.": see ECONOMic ANALYSIS OF LAW, 3d ed. (Boston: Little, Brown &
Co.,1986) at 498 n. 5.
76
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it, which by necessity also forces them to distinguish charitable giving, volunteer
efforts which clearly detract from income maximizing and other similar activities
which cost individuals in monetary terms. The public choice case for privatization
draws on its view of voters to argue that state enterprises will at least partially reflect
the economic self-interest of voters, the result being inefficiency due to money
simply being redistributed through government rather than individuals creating
their own wealth through market activity. But as the research referred to in this
section demonstrates, voters are more likely to be guided by overall economic
concerns or ideological preferences than narrow self-interest, which minimizes the
public choice argument for privatization.
C. The Efficiency ofPublic and PrivateEnterprises
Public choice theory discounts the possibility that the state should be exempt
from efficiency concerns in areas of provision and delivery of goods and services
where there are particular social concerns. Public choice suggests that though the
public sector may be important in ascertaining the appropriate level of demand, the
private sector is more efficient inproviding goods and services to meet this demand.
There are two themes which guide the discussion in this section. First, there may be
important social reasons why private market provision is not appropriate in certain
areas because of certain values or social goals we wish the state to represent. Second,
the empirical evidence relating to whether efficiency is greater in public or private
firms is much more complex than public choice theorists acknowledge.
The public choice argument that private firms will be more efficient than their
public counterparts is based on two mainpoints. First, the inability of owners to sell
their rights in public enterprises precludes the pressure on management which
comes from the share price capitalization of the expected gains and losses from
current management action. Second, the optimal cost control framework is that
designed and implemented by people with direct economic interest in such controls
(owners). The controlling frameworkforpublic enterprises is designed andmonitored
by politicians and bureaucrats, who are less interested in minimizing costs and
maximizing profits than they are in ensuring re-election to political office or
maximizing the size oftheirbudgets. 8' Both of these points will be evaluated, as well
as the fact that public choice theory concentrates much more on the public-private
distinction than on questions of competition, a concentration which seems to be
problematic for the public choice analysis.
1. The Importance of Competition as Opposed to Ownership
Though empirical studies have reached different results, it appears that there is
some consensus that the important issue in determining efficiency is not whether a
given enterprise is owned by the state or by a private entity, but the degree of
competition present. As noted above, some theorists argue that ownership is crucial
to the performance ofa firm and that privately owned assets are, all things otherwise
81 See discussion at supra notes 50-57, and in accompanying text.
1993]
Privatization:Rhetoric and Reality
equal, more economically efficient than publicly owned enterprises. The main
reason for the distinction is the beliefthat an individual will take more care in making
decisions where her or his own wealth is at stake than where one is only concerned
with the wealth of others.12 This view finds support in some surveys of the
comparative performance ofpublic and private industries, where it has been found
that in similar activities the private sector can show higher profits, lower costs and
greater efficiency. 83 Yet these comparisons are limited by the factors necessary to
make them possible, specifically, enterprises where only a purely commercial
objective is served (or there would not be private firms) and which are competitive
(or there would not be private and public firm involvement). The fact is that most
public enterprises have some non-commercial objectives and goods or services that
are not supplied in a competitive market.8
The shortcomings inthe studies onpublic andprivate performance has led some
economists to contendthatthe structure ofmarkets (i.e. the degree ofcompetitiveness)
and the structure of ownership (i.e. the ability or incentives of private shareholders
to monitor the performance of the firm and the degree to which management and
ownership are separated) are more important than the legal designation of the
property. 85 To the extent thatprivate ownership is an important feature ofefficiency,
82 See R.M. Spann, Public versus Private Provision of Governmental Services in T.E.
Borcherding, ed., BUDGETS AND BUREAUCRATS: THE SOURCES OF GOVERNMENT GROWTH (Durham,
N.C.: Duke University Press, 1977) 71 at 71; and S.H. Hanke, The Necessity ofPropertyRights
in S.H. Hanke, ed., PRIVATIZATION AND DEVELOPMENT (San Francisco: Institute for Contemporary
Studies, 1987) 47 at 49.
83 For a review of this literature, see A.E. Boardman & A.R. Vining, Ownership and
Performancein CompetitiveEnvironments:A Comparisonofthe PerformanceofPrivate,Mixed,
andState-Owned Enterprises(1989) 32 J.L. & ECON. 1; T.E. Borcherding, W.W. Pommerehne
& F. Schneider, COMPARING THE EFFICIENCY OF PRIVATE AND PUBLIC PRODUCTION: THE EVIDENCE
FROM FIVE COUNTRIES in D. B6s, R.A. Musgrave & J. Wiseman, eds., PUBLIC CHOICE (Wien:
Springer-Verlas, 1982) 127; R. Millward, The ComparativePerformanceofPublic andPrivate
Ownership in Lord Roll of Ipsden, ed., THE MIXED ECONOMY (London: Macmillan Press, 1982)
58; and R. Pryke, The ComparativePerformanceofPublicand PrivateEnterprisein J. Kay, C.
Mayer & D. Thompson, eds., PRIVATISATION AND REGULATION: THE UK EXPERIENCE (Oxford:
Clarendon Press, 1986) 101-18.
84 Kay, supra note 29 at 21.
85 See J.A. Kay& D.J.Thompson, Privatisation:A Policyin Search ofa Rationale(1986)
96 ECON. J. 18; D.E.M. Sappington & J.E. Stiglitz, Privatization,Information and Incentives
(1987) 6 J. POL'v ANALYSIS & MGMT. 567; and Spann, supra note 82 at 88.
But see E.N. Suleiman & J. Waterbury, Introduction:Analyzing Privatizationin Industrial
and DevelopingCountries in Suleiman & Waterbury, eds., supra note 40, 1 at 6. These authors
raise two objections. First, they suggest that despite the theoretical possibility, empirically public
enterprises "only rarely" operate as efficiently as private firms, though they give no examples and
cite no empirical studies. In fact, the empirical studies referred to above and at infranote 87, reach
the opposite conclusion. Second, the authors argue that taxpayers (in the public context) and
shareholders (in the private firm) "are not even remotely alike" in terms of monitoring ability and
control. This distinction rests on the ability of the shareholders to choose to invest or to sell,
whereas taxpayers are given no legal choice in the amount of risk they must bear. This difference,
they argue, can send a "very direct and compelling sigual that should lead to altered performance."
Of course taxpayers can and have sent "direct and compelling" signals to governments through
the election process. Though this may attribute too much power to the average taxpayer/voter,
Suleiman and Waterbury equally romanticize the notion that shareholders can effect change at a
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it appears to be based on a model in which private entrepreneurs manage their own
capital andthus there is a similarity in goals betweenthe ownership andmanagement
functions, a situation which is limited to sole proprietorships, small partnerships,
and a few close corporations - arrangements where there is substantial owneroperator overlap. In short, a diffuse and multi-layered management structure in a
large private enterprise may be less accountable to ownership and be more difficult
for ownership to control than a tighter structure in a public enterprise in which
employees may identify more closely with the goals the public firm is attempting to
attain. There remain difficulties'in monitoring the public sector fimns, particularly
the fact that unlike shareholders in private firms, voters need to integrate their
appraisal of whether government has effectively managed its firms with other
electoral issues so that the assessment may have a minor effect on a government's
election prospects. 6 Still, there seems to be no general ground for believing
7
managerial efficiency is less in public enterprises than in the private sector.
2. The Difficulties in CreatingCompetition
The difficulty with the importance of competition for privatization is that it is
easier to talk about than to create. In fact, the effect of privatization may be that it
leads to sharp increases in the level of regulation, which, according to public choice
theory, may nullify the expected efficiency gains of private industry. Based on
experience, some level ofregulation canbe assumedto accompanymostprivatization
efforts ifwe assume that the state is involved in an enterprise partly because of severe
market failures such as externalities and monopoly power."8 Given this assumption,
privatization without regulation (i.e. turning thepublic enterprise into an"unfettered
level any different than a private citizen can in the political process. Shareholders in large
corporations face huge costs in acquiring information and effecting changes which severely limit
their ability to fully participate: see B.S. Black, ShareholderPassivity Reexamined (1990) 89
MIcH. L. REv. 520 (acknowledging the efforts of shareholders to monitor corporate managers or
to communicate a desire for change in a company's management or policies are hampered by a
general state of passivity, though arguing that this need not be inevitable); R.M. Buxbaum, The
InternalDivisionofPowers in CorporateGovernance(1985) 73 CALIF.L. REv. 1671 (discussing
the combination ofarrangements thathave weakened an already tenuous conception ofshareholders'
rights); and R.C. Clark, CoiuoRATr LAw (Boston: Little, Brown & Co., 1986) at 389-400.
86 G. Yarrow, Privatizationin Theory and Practice(1986) 2 ECON. POL'Y 323 at 332.
87 See Millward, supra note 83 at 83; though Yarrow, ibid.at 332-33, has a slightly more
qualified view.
8 This prediction would appearto be supportedby the Canadian and American comparison.
Traditionally, the Canadian state has featured greater public ownership of assets and enterprises
than the United States, and comparatively less regulation of its businesses. Public ownership and
regulation are two differentways of addressing market failures, but the common pointis thatthere
is a failure that is being remedied. Privatization in Canadahas thus farbeen accompaniedby either
subsidies to private firms or monitoring programs, each of which has costs. This experience
suggests thatprivatization in the United States will notmean a deregulated private firm competing
freely in the market. See S. Ostry, Government Intervention: Canada and the United States
Compared in R.G. Landes, ed., CANADiAN PoLurrcs: A COmPARAnvE READER (Scarborough:
Prentice-Hall, 1985) 250; and Trebilcock & Prichard, supranote 12 at 74 &95. See also Yarrow,
ibid.note 86 at 325.
1993]
Privatization:Rhetoric and Reality
private company") may be inferior to public enterprise. 9 To avoid this situation,
government may impose regulation on the privatized firm or firms, with a view to
serving public interest goals. In effecting this regulation, however, the public choice
theorist will want to avoid giving too muchpowerto the regulators, for fear that they
will not actin the public interest, but will instead pursue theirprivate agendas or will
be subjected to short-term political pressures that diverge from the overall public
interest. 90 This concern is reflected in the public choice literature which concludes
that increased regulation of private property can lead to inefficiencies. 91Regulation
is also constrained by its costliness and the need to attract private firms which must
satisfy their goal ofprofit maximization. The public choice solution, then, would be
to either abandon regulation completely, which is problematic since an enterprise
that is in the public domain is likely to be rife with market failures, or, given the view
that public officials do not purely serve the public interest, their discretion can be
limited or eliminated by deliberately introducing an information or agencyproblem
between them and the privatized firm.
Limiting the public official's ability to affect the private firm's activities makes
it difficult to co-ordinate public and private information to achieve the socially
preferred outcome. In other words, privatization raises the costs to the government
of maintaining any level of control over an enterprise's activities. There is thus a
trade-off between the increased cost of fulfilling public interest goals and the
concern to limit the government official's self-interest.92 Public choice theory
assumes that the self-interest of government officials is intractable and uniform, an
89
C. Shapiro and R.D. Willig, Economic Rationalesfor the Scope of Privatizationin
Suleiman and Waterbury, supranote 40,55 at 58. Though competition may be effective in dense
markets, it is less able to keep prices down in thin markets. Take the case of deregulated airlines
in the United States. AlfredKahnnotes the existence of"outrageous geographieprice discriminations
against relatively thin routes.": See THE EcoNo, cS OFREGuLAaoN (Cambridge, Mass.: MIT Press,
1988) at xix. Pure economic theory is not able to advance our societal concerns any further here
because, for as Kahn points out, "the differences are not entirely discriminatory: it costs more per
passenger to provide service on thin routes, other things being equal.": ibid.In other words, the
market is reacting as it should: pricing reflects demand. While this may be acceptable to us for
some goods and services, there are many government enterprises where we may find it
unacceptable to simply turn matters over to the private sector without some form of regulation to
ensure a certain level of affordable goods and services to areas that would otherwise be underserviced, typically rural and small urban centres, as well as poor areas in large urban centres. See
discussion in the text accompanying infra note 105.
91 Shapiro & Willig, ibid. at 82.
91 D.J. Gayle&J.N. Goodrich, ExploringthelmplicationsofPrivatization
andDeregulation
in D.J. Gayle & J.N. Goodrich, eds., PRivAIZATION AD DEREGULATION IN GLOBAL PERSPECTIVE
(Westport, Conn.: Quorum Books, 1990) 1 at 1; and Stigler, supra note 72 at 3-5 (arguing that
faced with regulation, industries use it to control the entry of new rivals, thereby minimizing
competition and maximizing their ability to obtain a monopoly). Historical work has found that
the impetus forthe initial regulation oftheAmerican railroads came from therailroads themselves,
seeking regulatory insulation from aggressive competition: see G. Kolko, RAILROADS AN
REGULATION, 1877-1916 (Princeton, N.J.: Princeton University Press, 1965). This is important
because as stated, supra notes 86-87, and in the accompanying text, competition is considered by
many theorists to be the most important element of efficiency.
92 Shapiro & Willig, supra note 89 at 82.
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assumption which I have questioned. 93 Neoclassical economics, on the other hand,
analyzes the issue by factoring in different levels of self-interest on the part of the
government official according to context, and different sources ofprivate information
as between government officials and those who operate the enterprise. The decision
as to whether privatization is desirable is arrived at in part by analyzing the costs
involved in the distribution of this information. The conclusion reached by Shapiro
and Willig in such a study is that "there is no difference between the performance
ofapublic enterprise and that ofaprivate company subject to an optimally designed
regulatory and tax scheme."94
3. The Basis ofEfficiency Improvements
Improvements in efficiency can generally be traced to either technological
innovations or reduced labour costs. With respect to technology, there is generally
a presumption that technological advances are best accomplished through the
private sector.95 There are two difficulties with this presumption. First, there are
numerous counter-examples where the public sector has conducted technologically
innovative research which it has then made available free of charge to private firms
in the area. Agricultural research is one such area, where new processes are tested
on experimental farms and then offered to all farmers in organizations such as the
Agricultural Extension Service in the United States.9 6 Public sector research is able
to focus on new processes for old products, and allow firms to make the same
productivity gains without duplicating research and development expenditures.97
Second, technological innovation in the private sector depends on monetary
incentives, which is problematic for areas which can be considered public goods,
where it is difficult to exclude others from also reaping the benefits of a firm's
technological success. Creating an incentive for research in this area can be
accomplished either by compensating the private firm in money, which can be
enormously expensive for the state, or by creating a monopoly for the private firm
in the products it creates, 98 which decreases the level of competition and leads to
93 See discussion at supra notes 67-75, and in the accompanying text.
94 Shapiro & Willig, supra note 89 at 58 (considering the public enterprise examples of
a basic manufacturing operation, a hotel or tourist facility, postal service, production of military
equipment andprison management). See also J.J. Laffont& J. Tirole, Privatizationandlncentives
(1991) 7 J.L. EcoN. & ORGANIZATION 84 at 103.
95 For a typical restatement of the belief that only the hard-working private entrepreneurs
will be driven to seek out new technologies, see R.F. Poole, Objections to Privatization(1983)
24 POL'Y Rav. 105 at 106.
96 As Fred Block observes: "What is needed are high-technology equivalents to the role
historically played by public libraries.": see POSTINDUSTRIALPOSSIBILITIEs: A CRITIQUE OF ECONOMIC
DiscouRSE (Berkeley: University of California Press, 1990) at 212 n. 32. See also S.S. Cohen &
J. Zysman, MANUFACTIUriuO MATrERS: THE Mvm OF POsT-INDusmsAL ECONOMY (New York: Basic
Books, 1987) at 226-27 (describing the centralized manufacturing and machine-tool research in
Japan, and arguing that aManufacturing Extension Service in the United States patterned after the
Agricultural Extension Service would be able to provide small firms with new technology).
97 L.C. Thurow, THE ZERO-SUM SoCIrv (New York: Basic Books, 1980) at 92-95.
9s See L. Kaplow, The Patent-AntitrustIntersection:A Reappraisal(1984) 97 HAgv.L.
REv. 1813 at 1823-24.
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Privatization:Rhetoric and Reality
inefficient delivery of public goods. These increased rewards may encourage
inventive activity, but they also cause the inefficiencies which privatization seeks
to address.
Even if a plausible argument could be made that the private sector is better at
facilitating technological innovation, this would not seem to be a significant factor
in the enterprises which have been or could be privatized, since for the most part
these endeavours are highly labour-intensive. 99Privatizationin these circumstances
is reduced to lower wages and benefits for workers, which means that the efficiency
advantage of privatization is usually overstated: rather than increasing efficiency,
the cost difference is simply money that stays in taxpayer pockets instead of going
to public sector workers."'° In short, the Pareto frontier is not extended by reducing
labour costs alone: a corollary argument would have to be made that taking money
from public sector workers and effectively reassigning it to taxpayers means that the
money will be used more efficiently, and there would seem to be no basis to make
that argument, or that reducing the wages paid to public sector workers, which are
often higher than those in the private sector, eliminates the wasted labour power
resulting from queues for the better paying jobs.
Job queues and low quit-rates have been found for numerous public sectorjobs,
particularly those in postal services.' 0' Though the wages of postal workers are
relatively high compared to the private sector, in the United States it has been argued
that these wage "premiums" are directly related to the fact that the United States
Postal Service does not follow the private sector's discriminatory wage practices.
Demographic analysis shows that the wages the Postal Service pays its white male
workers fall in the middle range of wages paid to white men in other industries, and
that the higher average wage is accounted for by the higher wages paid to white
women and minority workers in the Postal Service. 2 To argue that postal wages
should be lowered to eliminate job queues and bring the quit-rate in line with the
99 See K. Ascher, THE POLITICS OF PRIvATISATnON: CONTRACrING OUT PUBLIC SERVICES
(London: MacMillan, 1987) at 105.
"I0 Donohue, supranote 2 at 146. Inthis sense, privatizationparallels and, as I arguebelow,
is an integral aspect of the attempt to restructure the economy which (while paying lip service to
technological advancement) essentially has meant lowering the "break-even point", primarily by
cutting labour costs: see J. Kolko, RESTRUCTURING THE WORLD ECONOMY (New York: Pantheon
Books, 1988) at 59.
101 S.P. Smith, ArePostalWorkers Over-or Underpaid?(1976)15 INDUs. REL. 168 at 176;
D.K. Adie, THE MAIL MONOPOLY: ANALYSING CANADIAN POSTAL SERVICE (Vancouver: The Fraser
Institute, 1990) at 17 n. 17; and D.K. Adie, AN EVALUATION OF POSTAL SERVICE WAGE RATES
(Washington: American Enterprise Institute for Public Policy Research, 1977) at 51-67.
102 M. Asher & J. Popkin, The Effect of GenderandRace Differentialson Public-Private
Wage Comparisons:A Study ofPostal Workers (1984) 38 INDUS. & LAB. REL. REV. 16 at 19-21.
The Asher and Popkin study was financed by the American postal unions in the context of their
1981 collective bargaining in response to a study financed by the Postal Service at the same time.
For the latter study, see J.M. Perloff& M.L. Wachter, Wage Comparabilityin the U.S. Postal
Service (1984) 38 INDUS. & LAB. REL. REv. 26 at 27-29. Perloff and Wachter found that postal
workers averaged 10.1 per cent higher wages than unionized, male workers in the private sector,
and that the Postal Service paid a wage premium of approximately 21.1 per cent over wages in
the private sector of the economy. A Canadian study considering a wider spectrum of public and
private sectorworkers found thatpublic sectormale workers werepaid 6.2 per centmore than their
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private sector implies that the Postal Service should lower the wages it pays to
women and minority workers to the point that it conforms with the acknowledged
discriminatory wage levels of the private sector.1°3
In addition, there is a strong argument to be made that higher wages result in a
higher quality of labour and thus a higher quality of good. The assumption by priceauction theorists is that wages simply compensate workers for their productivity,
and that the motivation of workers is not meaningful. Yet it has been argued that
wages do affect a worker's motivation, and that her motivation is especially
determined by relative rather than absolute income. In fact, there is substantial
evidence indicating the importance of "interdependent preferences": workers can
become unhappy and less productive if they do not feel fairly paid relative to other
workers.) 4 The neoclassical economist would want to know why if this is the case
do private firms not attempt to achieve equilibrium, and why does cutting labour
costs continue to be important. The answer seems to be that though the private
market will not pay for higher quality goods in many areas, in certain public goods
there are good reasons for higher quality because of the positive externalities that
occur as a result. For example, in areas such as postal services, transportation and
communications, public firms can ensure that remote and rural areas receive a high
quality of service that private firms would not be willing to provide because of
inadequate demand. This universality provides a dependable infrastructure for
businesses in the economy as a whole, and especially in these less populated areas,
which allows them to remain competitive with larger markets andprovide goods and
services on the local level. From the perspective of the small urban or rural
community, having access to these services at quality and costs roughly equivalent
to those in large urban centres is important to continuing existence. 10 5
Public sector employment has also providedthe "goodjobs" to visible minorities
and women that the market has been hesitant or unwilling to provide. These
male counterparts in private firms, and female workers were paid 8.6 per cent more. The
percentages were higher for low-wage sectors, though the fact that the gap is still smaller than in
the United States is likely attributable to the higher levels of unionization in the Canadian private
sector: see M. Gunderson, EarningsDifferentialsBetween the PublicandPrivateSectors (1979)
12 CAN. J. EcoN. 228.
103 Asher &Popkin, ibid.at 21-22. To the extent that postal service wages can be seen as
a subsidy to women and minority workers, it is important to question whether this form of subsidy
is the most efficient means of overcoming discrimination in the market. One alternative often
suggested would be to subsidize firms to ensure that women and minorities are hired in the private
sector, however, ithas been argued that this process yields more costs than benefits to the public
and rewards firms that otherwise would not hire these groups because of their discriminatory
behaviour, or would hire them only at a low wage, which the subsidy still enables them to pay.
On the costs of firm subsidization, see P. Peretz, Modelling the Provision of Industrial
Development Incentives in R.C. Hula, ed., MAKE-BASED PuBLic Poucy (London: Macmillan,
1984) at 158.
104
L.C. Thurow, DANGEcous CuaaNTs (New York: Random House, 1984) at 201-03.
1o The situation of community development is one of the clearest illustrations of the
paradox of the welfare state under capitalism. As Andre Gorz observes:
The efficiency of public systems and services cannot be measured by the cost of
what they produce. For what they produce is often less important than what they
1993]
Privatization:Rhetoric and Reality
positions are important if we want to satisfy the goal of economic equity so that in
the future, disadvantaged groups can compete on the same level as white males. 106
In the United States, government employed 23 percent of black Americans in 1987,
compared with 14 percent of employed whites. 0 7 Women have also found greater
employment opportunities in the public sector and in better positions than in the
private sector.10 8Privatizing state enterprises will have a disproportionate impact on
minorities and women, not only in numbers, but also in the quality oftheir jobs. The
result of privatization thus could be a deepening of social cleavages already in
existence. In the end, as Thurow notes, the question really becomes whether one
believes that government discriminates less than the private sector by raising the
earnings of women and minority workers above what they would receive in the
private sector, or one thinks that government simply overpays. 1 9
4. The IncreasedCosts of GreaterPrivateInvolvement
Finally, the argument that private firms lead to greater social utility than public
firms is undermined by the profit motive or accumulation function of privately
owned capital, which is part of the neoclassical economic analysis only as a general
imperative. The profit motive is problematic both in terms of the unequal wealth
consequences that result and in the social costs that are incurred. First, the need for
capital holders to be ensured profits is defended as necessary to compensate them
for their willingness to sacrifice immediate goods consumption in favour of
investment. The principle that risk assumption should be monetarily rewarded,
however, is central to private business arguments against redistributive tax policies,
with the result that society is characterizedby huge wealth and income inequalities.
One advantage of public enterprises is that the returns on investment can be more
prevent: shortages, overcrowding, epidemics, irreparable damage, unacceptable
side-effects, etc. The acceptability of the social effects of capitalist development
and the system's political stability depend on the state paying the social costs.
See PATHS To PARADisE: ON THE LIBERATION FROM WoRK, trans. M. Imrie (London: Pluto Press,
1985) at 14. If one follows Gorz's argument through to its conclusion (which he does not
explicitly do), failure to provide high quality public systems and services could render capitalist
development unacceptable and threaten the system's political stability. To those individuals who
find capitalist development to be unacceptable, this presents the classic choice between on the
one hand encouraging this level ofunacceptability to hasten the destabilization of the system, and
on the other hand working within the system to prevent the ill effects noted above in the shortrun (which cause working people real pain and suffering) and to eventually democratize the
investment and development process. To the extent that this article can be viewed as a defence
of active and responsive public services and enterprises, I adopt the latter position.
Mo See generally Thurow, supra note 97 at 200-11.
107
L. Uchitelle, "Public Services Found Better if Private Agencies Compete" The New
York Times (26 April 1988) Al.
-08See P. Armstrong, LABoUR PAmINs: WoMEN'S WoRK INCiusis (Toronto: Women's
Educational Press, 1984) at43; andM. Dantico &N. Jurik, Where HaveAllthe GoodJobsGone?
The Effect of GovernmentService Privatizationon Women Workers (1987) 10 CoNrMP. CiUsas
421 at 425.
,o9 Thurow, supra note 97 at 165.
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equally distributed, because public participation in investment offers the possibility
of more equal returns than does private investment." 0
Second, capital does not deny that profits are at the base of its association with
various endeavours; rather, it is the reason for going into and staying in business. In
their quest for greater profit levels - which public firms are insulated from private firms impose costs on society in addition to their own operating and
production costs, such as pollution, lost production time due to labour strife, and
excessive urban infrastructure due to concentration of capital. A high concentration
of ownership of firms in capitalist economies is also associated with negative
externalities because the political process can be disproportionately influenced,
whereas a more egalitarian distribution of profits can reduce these "public bads"."'
Though generally recognized, there remains strong disagreement over the treatment
of negative externalities in a cost-benefit analysis.1 2 One thing that can be said with
certainty is that the market system does impose enormous costs on society forwhich
private firms are not held accountable.1 3 These costs are not part of the firm's
calculus as long as they remain non-compensable costs due to the legal rules in
effect.11 4 If the responsibility for these costs were to be assigned to the private firms
that generate them, then it is likely that the actual social efficiency of private firms
would be severely reduced.
110 See generally Block, supra note 96 at 152-53 & 212-16.
" P. Bardhan & J.E. Roemer, Market Socialism: A CaseforRejuvenation(1992) 6:3 J.
ECON. PERSP. 101 at 104 (arguing that with an egalitarian distribution of profits there would be
less tolerance of negative externalities than with a smaller group of large shareholders).
112
For a review of this debate, see C.A. Nash, The Theory ofSocial Cost Measurement
in D.W. Pearce, ed., THE VALUATION OF SOCIAL COST (London: George Allen & Unwin, 1978) 8
(concluding that there is no single figure for the social cost of any item that can be proved to be
correct because the concept is grounded in ethical judgements); and J. Wiseman, Growing
Without Nationalisationin C. Veljanovski, ed., PRIVATISATION AND COMPImTION: A MApKxr
PROSPECTUS (London: Institute of Economic Affairs, 1989) at 3-14 (noting that there is no agreed
method of identifying which social costs are properly the subject of public policy and how they
should be valued).
113
See generally S. Bowles, D.M. Gordon & T.E. Weisskopf, BEYOND THE WASTE LAND:
A DEMOCRATIc ALTERNATIvE To ECONOMIC DECLINE (Garden City, N.Y.: Anchor Press, 1984) at
150-78 (demonstrating that corporate power wastes labour power in a variety of ways); A. Gorz,
FAREWELLTOTHEWORKNJG CLASS: AN ESSAY ONPOST-INDUSTRIAL SOCIALISM, trans. M. Sonenscher
(London: Pluto Press, 1980) at 106-07 (arguing that the concentration of capital creates
additional costs to the economic infrastructure, and a number of "invisible costs" such as
environmental degradation and increased ill-health among the population); K. W. Kapp, THE
SOCIAL COSTS OF PRIVATE ENTERPRISE (Nottingham: Russel Press Ltd., 1978) at 13-14; and
Kelman, supra note 15 at 447.
114
Ronald Coase's standard example considers the costs of ensuring the right to clean air
for residents living beside a factory which emits damaging smoke versus the right of the factory
to pollute. The assignment of these rights will not change the efficient outcome, namely, either
theresidents orthe factory will choose theleast expensive way ofdealingwith the smoke damage,
depending on the assignment of rights. Though the choice of the legal rule does not affect the
attainment of the efficient solution when there are zero transaction costs, it does affect the
distribution of income. However, Coasean analysis simply assumes that if the distribution that
results is not desirable then it can simply be corrected: see The Problem of Social Cost (1960)
3 J.L. & ECON. I; and A. M. Polinsky, AN INTRODUCION TO LAW AND ECONOMICS, 2d ed. (Boston:
Little, Brown & Co., 1989) at 11-14. Of course, correcting an undesirable distribution requires
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Privatization:Rhetoric and Reality
D. The Public Choice "Nightmare"Redux
Despite the fact that public choice theorists advocate a return to the market,
privatization as a means of achieving this objective raises a number of difficulties
for the theory of public choice. Specifically, one has to question how endeavours
such as asset sales and contracting out can be accomplished to the benefit of society
given the behavioural model on which public choice theory is based. If one accepts
the concept of rent-seeking (payments that exceed the minimal level an individual
requires in exchange for a given task) as a guide to understanding behaviour in the
public sector and thus equally applicable to the debate for or against privatization,
it leads to the conclusion that privatization presents simply another opportunity to
capture or preserve rents, rather than an argument over efficiency:
those activities with the greatest potential for rents....will be the ones that private
entrepreneurs and public servants alike will be most anxious to appropriate for
themselves. All entrepreneurs, public and private, prefer to operate with some degree
of 'market power' rather than be subject to the pressures ofpure competition. Thus we
expect the most active debates about privatization to be concentrated where there is the
largest potential for creating, dissipating, or redistributing rents, not necessarily on
areas with the greatest possible efficiency gains." 5
Conversely, in sectors where the potential for high rents would seem less likely (in
a more economically conventional market where no natural monopoly exists and
where the commodity is primarily a private good), public choice theory does not
appear on its face to be so self-contradictory.116 Yet these areas also must be further
examined, for it would seem that public choice theory still tends to have some
difficulties with privatizing these enterprises.
As noted above, there is no reason why contractors and firms cannot lobby for
privatization just like they would advocate for any other piece of rent-seeking
legislation. Private firms operate to make a profit, so it makes sense that as
contractors they would "push hardest for privatizing precisely the wrong functions
those where it is most difficult to write and to enforce contracts, to ensure
competition, and to bridle suppliers' pressures for increased spending. 11 7 Moreover,
according to public choice theory, legislators would likely try to use the letting of
state intervention, which is problematic for thepublic choice analysis, and as such an economically
efficient result which requires low income individuals to bear the burden of costs will not be
corrected and will lead to further hardship for the affected individuals and increase the costs on
society.
"I Chamberlin & Jackson, supranote 38 at 589-90.
116
It has also been noted that public choice theory would require a rule forbidding re-use
of the funding saved from asset sales or load-shedding initiatives. Privatization does little to meet
the budget restraint concerns of public choice theorists if the funds that are saved are simply put
back into new programs or existing programs are expanded. Privatization proposals, however,
do not contain such rules: see M.L. Marlow, Privatizationand GovernmentSize (1991) 68 PUn.
CHoicE 273 at 274.
117 Donohue, supra note 2 at 222.
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contracts and the sale of assets to further their own self-interest by ensuring
campaign contributions and other forms of support to increase their chances of reelection. 118 Similarly, bureaucrats would resist the restructuring of their enterprises
and so creating a competitive market wouldbe difficult. The result willbe reductions
in any efficiency gains that might have been thought possible.
The form of privatization most commonly pursued in the United States, and
increasingly in Canada, is contracting out, where government delegates the delivery
function to the private sector, while government retains its collective financing
role. 19 Yet contracting out gives no basis to think that government will shrink; in
fact, as I have suggested above, contracting out presents the possibility that private
firms will push hardest for a format in which it is easiest for them to make a buck,
that is, non-competitive arrangements which nullify possible efficiency gains.
Public choice theory suggests that it will be difficult to monitor these contractors,
however, for the same reason that it is problematic to regulate firms in the market
generally. Moreover, private firms will also attempt to stimulate demand for the
services or goods they deliver so as to further increase their profits. This is coupled
with little change in the bureaucratic structure from the public choice perspective,
out does nothing to alter the budget maximization goal that public
since contracting
20
posits.1
choice
In the end, only one form of privatization, load-shedding, appears to be an
internally consistent position for public choice theorists to advocate.' 2' A simple
decision by government to cease providing aparticular good or service and leave it
to the market avoids the public choice concerns with government's role in asset sales
and contracting out; concerns which range from government corruption to budget
maximization. 22 Yet the idea of simple load-shedding illustrates a final tension in
the public choice argument for privatization. First, it is clear that load-shedding fits
well with the market orientation ofpublic choice theory, and that this strategy would
depend on private capital being willing to invest in ventures to replace government
enterprises. This willingness is predicated on a legal environment which protects
private property and freedom of contract, and tax laws which do not "penalize"
investment. As one proponent of this approach suggests, privatization can provide
an impetus to make the legal system more suitable for private capital.I2
Il Chamberlin & Jackson, supra note 38 at 601.
"9 For a discussion ofthis form ofprivatization, seesupranotes 35-36 and accompanying
text.
120 The example of defence contracting in the United States is instructive here. See G.
Adams, THE POLITICS OF DEFENSE CONTRACTING: THE IRON TRIANGLE (New Brunswick, N.J.:
Transaction Books, 1982); and S. Melman, PENTAGON CAPITALISM: THE PoLTIcAL ECONOMY OF
WAR (New York: McGraw-Hill, 1970) at 6-7.
M For a description of this form of privatization, see supra note 37 and accompanying
text.
122 On the problem of corruption in contracting out, see R. Poole, The PoliticalObstacles
to Privatizationin Hanke, ed., supra,note 82, 33 at 41.
123 Ibid.at44. Ireturnto theimportance ofprivatization inimplementingneo-conservative
policies at infra notes 128-39.
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Privatization:Rhetoric and Reality
The strong bias in favour of the market and privatization is countered in public
choice theory by a residual belief in the nature of public goods. The arguments by
neoclassical economists for why there is a class of public goods are generally
accepted by public choice theorists, though they differ on whether these goods
should be publicly provided, viewing a much smaller number of goods as properly
public. Generally, thoughpublic choice does not view delivery of goods or services
by the state as necessary in these areas, it does believe in the necessity of some form
of government provision, such as subsidization. 24 Load-shedding would therefore
not be a realistic option in these areas. So while load-shedding may be the most
compatible political option for public choice, it does not make for as smooth an
economic fit. According to public choice theory, economics is determinative of
politics, but as the brief discussion in this section highlights, there is in fact a tension
between political ideology and economics, which I explore further in the following
section.
VI. THE PROBLEM WITH RELYING ONLY ON AN ECONOMIC MODEL
TO SUPPORT PRIVATIZATION
The difficulty with any economic model is its principal concern with efficiency,
so that it tells us little about the effects of organizational design on other values. 25
And as far as economic models go, there appear to be a number ofshortcomings and
gaps in the empirical claims made by public choice theory, especially in the context
ofprivatization. Given this state of affairs, it seems to me to be necessary to ask how
these claims came to be made. In other words, I think it is important to attempt to
decipher what led the individuals who developed public choice theory in the 1960s
to think that individual market behaviour is replicated in the public sector. It is also
importantto keep inmind that despite its prominence inAmericanpolitical and legal
analysis in recent years, public choice theory lab oured away largely in obscurity for
almost twenty years prior to its surgence. Though concern with the size of
government was a major issue in North American political campaigns in the 1970s
24 See J.M. Buchanan& W.C. Subblebine, Externality(1962)24 EcoNoMcA 371; and G.
Tullock, PRIVATE WANTS, PUBLIC MEANS: AN ECONOMIC ANALYSIS OF THE DESIRABLE SCOPE OF
GovRNMEr (New York: Basic Books, 1970) at 210-23 & 23 1.
125 Starr, supra note 57 at 33. See also Max Weber's commentary on social policy:
The distinctive characteristic of a problem of social policy is indeed the fact that
it cannot be resolved merely on the basis ofpurely technical considerations which
assume already settled ends. Normative standards of value can and must be the
objects of dispute in a discussion ofaproblem ofsocial policy because the problem
lies in the domain of general culturalvalues.
See Objectivity in Social Science in E.A. Shils and H.A. Finch, eds. & trans., ON THE
METHODOLOGY OF THE SOCIAL SCIENCES (Glencoe, Ill.: Free Press, 1949) 49 at 56.
Ofcourse economists such as Gary Becker dispute this, arguing thatthe economic approach
is "uniquely powerful because it can integrate a wide range of human behaviour.": see Becker,
supra note 51 at 4. Becker's argument has always struck me as a tautology, however, in that it
contends that the economic approach explains human behaviour simply by integrating human
behaviour and assigning it an economic value (in fact, I think it is highly debatable that the
approach even achieves this integration, let alone the explanation).
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and early 1980s, public choice theory did not achieve prominent status until more
recently, at a time of increasing conservatism and a more concentrated attack by
capital.
The public choice argument for privatization is based not only on the view that
free market economics leads to efficiency increases, but also that individual
consumers will be able to exercise previously unavailable private choice once the
domain of the market has been expanded. In a sense, the theory seeks to maximize
the choices that thepublic or society have available to them without state constriction.
To benefit the public, there thus must be an assumption that all members of society
are able to participate fully in the market and are able to do so at equal levels of
sophistication. At the same time, part of the neo-conservative political strategy
explicitly seeks to divert demands away from the state to avoid overload, and
towards the market.'26 Members of society no longer have the option to struggle for
change within the state, butmust concentrate their efforts on the market, despite their
inabilities to be full and active participants. Privatization can therefore be seen as
"one of several policies encouraging a counter-revolution of declining
127
expectations."'
In attempting to answer my question about how the economic model came to
be adopted by public choice theorists, the simple answer is that it is in the interest
of neo-conservatives to posit that political participants are economically selfinterested because they themaselves are economically self-interested; in short,
"economic man!' fits their world view. The resulting privatization policies suggest
that society should be structured around the market to allow this self-interest to fully
flourish. However, there is a need to unpack the assumptions which surround the
economic model. Moreover, as I shall argue in the article's final section, public
choice purports to be a value-neutral scientific endeavour,'2 but is in fact an
explicitly political and ideological school of thought. 129 Public choice's empirical
It has been widely suggested that the centrepiece of this political strategy in the United
States (and to a less dramatic extent in Canada) was a "political bet" that tax cuts would create,
via budget deficits, the political pressure to reduce government spending and support policies
such as privatization. However, some economists disagree, arguing that the "political bet" is
"revisionism that rationalizes the biggest fiscal policy mistake in the United States since World
War II. The Reagan policy was based on the theory that cutting tax rates would increase tax
revenue thereby creating a budget surplus. The Reagan budget projections of 1981 - the rosy
126
scenario - showed rapid growth and rising revenues.": see Reaganomics (1987) 5 ECON. POL'Y
15 at49 & 53-54.
127 Starr, supra note 57 at 35.
128 See above Section IV, at supra notes 42-64, and in accompanying text.
129 For a flavour of the kind of ideological extravagances that public choice theorists are
given to, and that I have avoided reciting until now, consider Gordon Tullock's claim that the
United States crop-restriction programs in the 1930s ranked "with the work of Stalin, Hitler, and
Mao among the major mass murder programs of our time.": See G. Tullock, THE ECONOMiCS OF
INcoME REDISfRInUTiON (Boston: Kluwer-Nijhoff Publishing, 1983) at 164. Considering this
accusation, a reviewer observed: "[E]ven slight damage, would be hard to prove. For Tullock's
unsupported claim ofmass murder (which also implies intent), the irresponsibility is enormous.":
EcoN. LImTxrTmn 117 at 119. Neil Brooks pointed
see 2.Rothenberg, BookReview (1987) 25 J.
out this exchange to me.
1993]
Privatization:Rhetoric and Reality
premises are, as I have discussed, tenuous at best, and as such it should be engaged
30
more on the level of normative theory.
On the normative level, public choice does raise some troubling points for
public institutions. Despite its problematic assumption of pure self-interest and the
concomitant belief that privatization will allow individuals (even the economically
disadvantaged) to achieve freedom because they will be able to participate in the
market, what public choice does show is that these same individuals will encounter
significant obstacles in attempting to achieve gains through the state. As such,
simply arguing againstprivatization does notresolve the problems and undemocratic
aspects of our public institutions. However, as I have argued, one of the largest
failings of public choice theory is inherent in the economic model it employs: it is
impossible to evaluate action in terms other than the norm of self-interest. This is
particularly problematic in the public sector, the existence of which represents an
attempt to preserve and cultivate a higher level of "public spirit", meaning the
evaluation of public policy options against a general standard of values.' Public
choice proponents reject this kind of state activity, arguing that in complex and
diverse nations there is little chance of achieving social consensus on basic beliefs
and values; rather, the privatization movement seeks to avoid fostering greater
social divisions along lines such as ideology and religion, and suggests that the
marketis thebestwayto aggregate oursocialpreferences in aneutral fashion. 3 2 This
claim rings false on two levels.
First, it is clear from the debate that privatization as a policy instrument is very
much an ideological battleground, and a decision to privatize can be interpreted as
sending a clear ideological signal to society. Myviewis not shared by othertheorists,
who argue that privatization cannot be explained ideologically or politically given
the activities of Labour governments in New Zealand and Australia, Socialists in
Spain, and other varied regimes. 133 However, the privatization schemes in countries
outside the Anglo-American states have distinguished between the welfare state and
the state's role in the economy. Unlike the United States, and to a lesser extent
Canada and Great Britain, European countries have been much more careful about
ensuring that the welfare state remains intact while pursuing their aims of deficit
reduction. 34 It is the coupling of privatization with more explicitly ideological
130 To further illustrate the small thread on which the empirical basis ofpublic choice hangs,
I again refer to Gordon Tullock, who, if nothing else, is certainly straightforward in his account
of the limited empirical claims of public choice. I reproduce this at some length as I feel it is
important to understand the point:
It is certainly true that social costs exist and are important and that the market in
general will not deal with them adequately. The problem is that the government
also deals with them badly. In essence the market has a systematic bias toward
producing certain kinds of "bads", and while the government has no such
calculable bias,it does have a systematic tendency to take ill-judged action.
See G. Tullock's, WEALTH, POVERTY AND POLrCS (New York: Basil Blackwell, 1988) at 102-03
(emphasis added).
1
See Kelman, supra note 76 at 31.
132
Linowes, supra note 15 at 250; and his PrivatizationandDeregulationin the United
States in Gayle & Goodrich, eds., supra note 91, 80 at 85.
'3
See, e.g., Starr, supra note 40 at 26.
'31 See Suleiman and Waterbury, supranote 85 at 9.
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policies such as deregulation, reducing the progressivity of the tax system,
"restructuring" the labour force, and the attempt to impose constitutional limits on
what government can do in the area of economic policy that defines the movement
in the Anglo-American context.'35 It is the apparent neutrality ofprivatization (who
would be opposed to the promised increases in efficiency?) that makes it such a
rhetorically powerful instrument. But privatization is more than just a technical
debate. Despite the veil of neutrality, even some neo-conservatives agree that
36
privatization "is more apoliticalthan an economic act."' The instrument choice
government makes in the delivery of goods and services is often attractive as a way
of "symbolizing and dramatizing a government's commitment to a particular cause
or set of values.'
37
The commitment to private enterprise which privatization represents, coupled
with the apparent decrease in government size it promises, is central to the neoconservative political vision.13 Moreover, shifts from public to private ownership
have not been accompanied by measures to promote competition, which, as I have
attempted to show, is a more important ingredient of economic efficiency in the
neoclassical economic context.' These measures do not seem to be a part of the
public choice analysis or of the neo-conservative approach, which insteadbase their
policies on the less sustainable preference of private over public firms.
The second and more serious problem with the apparent attempt to avoid
controversy over the values we wish the state to reflect by privatizing state functions
is the dramatic reconfiguration of our system of democracy that this represents.
Certainly we should not be naive regarding the enormous task of developing and
135 For example, note the following portion of President Reagan's budget message for the
1988 fiscal year: "Privatization is a natural counterpart to other administration initiatives- such
as federalism, deregulation, and an improved tax system - that seek to return the Federal
Government to its proper role.": see U.S. Office of Management and Budget, BuDGrET OF THE
GovmnmeT, FiscAL YEAR 1988 (Washington: U.S. Govt. Printing Office, 1987)
at 2-44. See also the argument made in H.J. Glasbeek, Labour Relations Policy and Law as
Mechanisms ofAdjustnent (1987) 25 OSCOODE HALL L.J. 179.
UNiTED STATEs
136 See Savas, supranote 7 at 233. In this vein, note also the following response of Agnar
Johanson, Director of Strategic Analysis, Privatization Branch of the Ministry of Finance,
Canada, as to why the Canadian government does not track the success or failure ofthe enterprises
it privatizes: "We do not actually measure after the fact whether it's a successful privatization or
not for a whole number of reasons, but the main problem is there are too many factors at
work....There are philosophical problems that hinder you measuring....and that's the key reason
why wejust don'tbother wasting our energies in trying to measure". Personal interview in Ottawa,
Ontario (March 24, 1992).
137 Trebilcock & Prichard, supranote 12 at 33.
I'l This ideological and symbolic fervour has at times taken on the elements of a farce. For
example, the Canadian Conservative government's plan in the late 1970s called for a reduction
in the number of federal employees by 60,000, in part by privatization. For statistical purposes,
employees of corporations in which the government holds 50 percent more of the equity are
considered federal employees. The government thus decided to reduce its equity in the Canadian
Development Corporation to below 50 percent to effect a statistical reduction of 10,000 federal
employees and "no other apparent objective." This privatization decision has been referred to as
"at best, an empty gesture and, at worst, a deliberate attempt to mislead the Canadian public": see
Trebilcock & Prichard, ibid.at 97.
139 See discussion at supra notes 85-94, and in accompanying text.
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Privatization:Rhetoric and Reality
elucidating a coherent public philosophy, or the difficulty involved in reconciling
abstract notions of value. However, far from its stated virtues of neutrality and
conflict avoidance, privatization is such an explicitly political decision that it
deserves closer attention in this context. For example, though oftenposited in terms
of apparently neutral market terminology, we should be attentive to the fact that, in
addition to users of goods and services, it is state workers who must respond to the
restructuring of the public sector by privatization. Workers' adjustments can be
cushioned by a variety of social welfare and retraining measures, or they can be
accelerated by limiting benefits and making retraining and higher education more
difficult to obtain. It is apparent that workers have been forced to respond quickly,
leaving them with little choice but to accept lower paying positions. 4 ' This is
accomplished in part by simultaneous changes in the welfare state which has
reorganized the way benefits are distributed and, in some cases, simply excludes
individuals from social welfare programs.' 4 ' The genuine hardship and suffering
that privatization can impose on groups ofpeople is not arbitrary. Its effect is felt by
the workers who provide goods and services and by the poorer members of society
who rely more heavily on government goods and services. Yet itis these individuals
who must compete in the market where public choice theorists suggest they will
finally be able to maximize their liberty.
VII. CONCLUSION
In responding to the public choice case for privatization, none of the schools of
thought that have been touched on in this paper - neoclassical economics,
pluralism, or Marxism - are of much help because they do not emphasize an
understanding of collective values and therefore do notpresenta suitable framework
for developing aresponsivepublic sector. 42 Thesepolitical theories cannot adequately
respond to the challenge presented by public choice because they do not have an
alternative vision of how collective values should be shaped. In a society in which
wealth inequalities are ever-increasing and the political power of individuals is
being undercut, public enterprises are importantbecausetheyrepresentthe continuing
possibility that members of society will be able to have a say in the ends of social
life. Public enterprises also serve to reinforce a sense of community and a more
universal approach to social policy. By sharing public goods and services, groups
that might not normally associate with each other are reminded that other
constituencies are human: universalism in public enterprises can form the basis of
a more egalitarian society. 143
,41
See S. Rosenberg, Restructuringthe LaborForce: The Role ofGovernment Policiesin
R. Cherry et al., eds., THE IMPERILED ECONOMY (BOOK II): THROUGH THE SAFETY NET (New York:
The Union for Radical Political Economics, 1988) 27.
I'l See C. Boyle, The 'Irrationality'ofthe State: The Nielson [sic]Report as a Challenge
to Left Analysis (1988) 27 STUD. POL. ECON. 53, and sources cited at supra note 10.
142
G.R. Orren, Beyond Self-Interest in Reich, supra note 76, 13 at 23-24.
43 See R. Kuttner, THE EcoNoMic ILLUSION: FALsE CHOIcEs BEIVEEN PROSPERITY AND SocIAL
JusncE (Boston: Houghton Mifflin, 1984) at 231.
Ottawa Law Review/Revue de droit d'Ottawa
[Vol. 25:1
I have attempted to critique the viability of the public choice assumptions that
legislators and voters are primarily self-interested utility-maximizers, and have also
questioned the efficiency claims which are part of the public choice preference for
private delivery ofpublic goods. I have also attempted to illustrate several internal
inconsistencies in the public choice case for privatization which seem to undermine
the cohesiveness of the theory. To this end, I have remained essentially on the
ground staked out by public choice theory. Yet I also believe that not only is the
economic analysis of political institutions insufficient as a means of developing
public policy, but the implications of the public choice case for privatization are so
anti-democratic and represent such a dramatic reduction in our ability to influence
social life that the public choice theory argument for privatization must be rejected.
Though the ability of individuals to meaningfully direct government is, needless
to say, extremely limited, it is crucial that there remain a possibility that the less
1
powerful canparticipateinimportant social decisions. 44 Certainlythere are instances
where public enterprises have worked well and examples where they have not, but
public choice theory has such a "uniformly bleak" view of these endeavours that it45
precludes further study of the reasons for success and failure in the public sector.1
Privatization removes from us the opportunity to understand our public enterprises
and to participate in the task of making them more responsive to society. Instead,
these social decisions are concentrated in the hands of a few members. In doing so,
privatization violates an essential requirement of democratic order.
Cohen & Rogers, supra note 21 at 146-83.
M. Kelman, On Democracy-Bashing: A Skeptical Look at the Theoretical and
"Empirical"Practiceof the Public Choice Movement (1988) 74 VA. L. Rrv. 199 at 268.
144
145