Chapter 10: The Public Sector, I: Government in Business

People tend to fall into habits and into unquestioned ruts, especially in the field of government. On the market, in society in general, we expect and accommodate rapidly to change, to the unending marvels and improvements of our civilization. New products, new life styles, new ideas are often embraced eagerly. But in the area of government we follow blindly in the path of centuries, content to believe that whatever has been must be right. In particular, government, in the United States and elsewhere, for centuries and seemingly from time immemorial has been supplying us with certain essential and necessary services, services which nearly everyone concedes are important: defense (including army, police, judicial, and legal), firefighting, streets and roads, water, sewage and garbage disposal, postal service, etc. So identified has the State become in the public mind with the provision of these services that an attack on State financing appears to many people as an attack on the service itself. Thus if one maintains that the State should not supply court services, and that private enterprise on the market could supply such service more efficiently as well as more morally, people tend to think of this as denying the importance of courts themselves.

The libertarian who wants to replace government by private enterprises in the above areas is thus treated in the same way as he would be if the government had, for various reasons, been supplying shoes as a tax-financed monopoly from time immemorial. If the government [p. 195] and only the government had had a monopoly of the shoe manufacturing and retailing business, how would most of the public treat the libertarian who now came along to advocate that the government get out of the shoe business and throw it open to private enterprise? He would undoubtedly be treated as follows: people would cry, “How could you? You are opposed to the public, and to poor people, wearing shoes! And who would supply shoes to the public if the government got out of the business? Tell us that! Be constructive! It’s easy to be negative and smart-alecky about government; but tell us who would supply shoes? Which people? How many shoe stores would be available in each city and town? How would the shoe firms be capitalized? How many brands would there be? What material would they use? What lasts? What would be the pricing arrangements for shoes? Wouldn’t regulation of the shoe industry be needed to see to it that the product is sound? And who would supply the poor with shoes? Suppose a poor person didn’t have the money to buy a pair?”

These questions, ridiculous as they seem to be and are with regard to the shoe business, are just as absurd when applied to the libertarian who advocates a free market in fire, police, postal service, or any other government operation. The point is that the advocate of a free market in anything cannot provide a “constructive” blueprint of such a market in advance. The essence and the glory of the free market is that individual firms and businesses, competing on the market, provide an ever-changing orchestration of efficient and progressive goods and services: continually improving products and markets, advancing technology, cutting costs, and meeting changing consumer demands as swiftly and as efficiently as possible. The libertarian economist can try to offer a few guidelines on how markets might develop where they are now prevented or restricted from developing; but he can do little more than point the way toward freedom, to call for government to get out of the way of the productive and ever-inventive energies of the public as expressed in voluntary market activity. No one can predict the number of firms, the size of each firm, the pricing policies, etc., of any future market in any service or commodity. We just know — by economic theory and by historical insight — that such a free market will do the job infinitely better than the compulsory monopoly of bureaucratic government.

How will the poor pay for defense, fire protection, postal service, etc., can basically be answered by the counter-question: how do the poor pay for anything they now obtain on the market? The difference is that we know that the free private market will supply these goods and services far more cheaply, in greater abundance, and of far higher [p. 196] quality than monopoly government does today. Everyone in society would benefit, and especially the poor. And we also know that the mammoth tax burden to finance these and other activities would be lifted from the shoulders of everyone in society, including the poor.

We have seen above that the universally acknowledged pressing problems of our society are all wrapped up in government operations. We have also seen that the enormous social conflicts entwined in the public school system would all disappear when each group of parents was allowed to finance and support whichever education it preferred for their children. The grave inefficiencies and the intense conflicts are all inherent in government operation. If the government, for example, provides monopoly services (e.g., in education or in water supply), then whichever decisions the government makes are coercively imposed on the hapless minority — whether it is a question of educational policies for the schools (integration or segregation, progressive or traditional, religious or secular, etc.), or even for the kind of water to be sold (e.g., fluoridated or unfluoridated). It should be clear that no such fierce arguments occur where each group of consumers can purchase the goods or services they demand. There are no battles between consumers, for example, over what kind of newspapers should be printed, churches established, books printed, records marketed, or automobiles manufactured. Whatever is produced on the market reflects the diversity as well as the strength of consumer demand.

On the free market, in short, the consumer is king, and any business firm that wants to make profits and avoid losses tries its best to serve the consumer as efficiently and at as low a cost as possible. In a government operation, in contrast, everything changes. Inherent in all government operation is a grave and fatal split between service and payment, between the providing of a service and the payment for receiving it. The government bureau does not get its income as does the private firm, from serving the consumer well or from consumer purchases of its products exceeding its costs of operation. No, the government bureau acquires its income from mulcting the long-suffering taxpayer. Its operations therefore become inefficient, and costs zoom, since government bureaus need not worry about losses or bankruptcy; they can make up their losses by additional extractions from the public till. Furthermore, the consumer, instead of being courted and wooed for his favor, becomes a mere annoyance to the government, someone who is “wasting” the government’s scarce resources. In government operations, the consumer is treated like an unwelcome intruder, an interference in the quiet enjoyment by the bureaucrat of his steady income. [p. 197]

Thus, if consumer demand should increase for the goods or services of any private business, the private firm is delighted; it woos and welcomes the new business and expands its operations eagerly to fill the new orders. Government, in contrast, generally meets this situation by sourly urging or even ordering consumers to “buy” less, and allows shortages to develop, along with deterioration in the quality of its service. Thus, the increased consumer use of government streets in the cities is met by aggravated traffic congestion and by continuing denunciations and threats against people who drive their own cars. The New York City administration, for example, is continually threatening to outlaw the use of private cars in Manhattan, where congestion has been most troublesome. It is only government, of course, that would ever think of bludgeoning consumers in this way; it is only government that has the audacity to “solve” traffic congestion by forcing private cars (or trucks or taxis or whatever) off the road. According to this principle, of course, the “ideal” solution to traffic congestion is simply to outlaw all vehicles!

But this sort of attitude toward the consumer is not confined to traffic on the streets. New York City, for example, has suffered periodically from a water “shortage.” Here is a situation where, for many years, the city government has had a compulsory monopoly of the supply of water to its citizens. Failing to supply enough water, and failing to price that water in such a way as to clear the market, to equate supply and demand (which private enterprise does automatically), New York’s response to water shortages has always been to blame not itself, but the consumer, whose sin has been to use “too much” water. The city administration could only react by outlawing the sprinkling of lawns, restricting use of water, and demanding that people drink less water. In this way, government transfers its own failings to the scapegoat user, who is threatened and bludgeoned instead of being served well and efficiently.

There has been similar response by government to the ever-accelerating crime problem in New York City. Instead of providing efficient police protection, the city’s reaction has been to force the innocent citizen to stay out of crime-prone areas. Thus, after Central Park in Manhattan became a notorious center for muggings and other crime in the night hours, New York City’s “solution” to the problem was to impose a curfew, banning use of the park in those hours. In short, if an innocent citizen wants to stay in Central Park at night, it is he who is arrested for disobeying the curfew; it is, of course, easier to arrest him than to rid the park of crime. [p. 198]

In short, while the long-held motto of private enterprise is that “the customer is always right,” the implicit maxim of government operation is that the customer is always to be blamed.

Of course, the political bureaucrats have a standard response to the mounting complaints of poor and inefficient service: “The taxpayers must give us more money!” It is not enough that the “public sector,” and its corollary in taxation, has been growing far more rapidly in this century than the national income. It is not enough that the flaws and headaches of government operation have multiplied along with the increased burden of the government budget. We are supposed to pour still more money down the governmental rathole!

The proper counter-argument to the political demand for more tax money is the question: “How is it that private enterprise doesn’t have these problems?” How is it that hi-fi manufacturers or photocopy companies or computer firms or whatever do not have trouble finding capital to expand their output? Why don’t they issue manifestoes denouncing the investing public for not providing them with more money to serve consumer needs? The answer is that consumers pay for the hi-fi sets or the photocopy machines or the computers, and that investors, as a result, know that they can make money by investing in those businesses. On the private market, firms that successfully serve the public find it easy to obtain capital for expansion; inefficient, unsuccessful firms do not, and eventually have to go out of business. But there is no profit-and-loss mechanism in government to induce investment in efficient operations and to penalize and drive the inefficient or obsolete ones out of business. There are no profits or losses in government operations inducing either expansion or contraction of operations. In government, then, no one truly “invests,” and no one can insure that successful operations will expand and unsuccessful ones disappear. In contrast, government must raise its “capital” by literally conscripting it through the coercive mechanism of taxation.

Many people, including some government officials, think that these problems could be solved if only “government were run like a business.” The government then sets up a pseudocorporate monopoly, run by government, which is supposed to set affairs on a “business basis.” This has been done, for example, in the case of the Post Office — now the U.S. “Postal Service” — and in the case of the ever-crumbling and decaying New York City Transit Authority.1  The “corporations” are enjoined [p. 199] to end their chronic deficits and are allowed to float bonds on the bond market. It is true that direct users then would be taking some of the burden off the mass of taxpayers, which include users and nonusers alike. But there are fatal flaws inherent in any government operation which cannot be avoided by this pseudobusiness device. In the first place, government service is always a monopoly or semimonopoly. Often, as in the case of the Postal Service or the Transit Authority, it is a compulsory monopoly — all or nearly all private competition is outlawed. The monopoly means that government service will be far more costly, higher priced, and poorer in quality than would be the case in the free market. Private enterprise gains a profit by cutting costs as much as it can. Government, which cannot go bankrupt or suffer losses in any case, need not cut costs; protected from competition as well as losses, it need only cut its service or simply raise prices. A second fatal flaw is that, try as it may, a government corporation can never be run as a business because its capital continues to be conscripted from the taxpayer. There is no way of avoiding that; the fact that the government corporation may raise bonds on the market still rests on the ultimate power of taxation to redeem these bonds.

Finally, there is another critical problem inherent in any government operation of a business. One of the reasons that private firms are models of efficiency is because the free market establishes prices which permit them to calculate, to figure out what their costs are and therefore what they must do to make profits and avoid losses. It is through this price system, as well as through the motivation to increase profits and avoid losses, that goods and services are properly allocated in the market among all the intricate branches and areas of production that make up the modern industrial “capitalist” economy. It is economic calculation that makes this marvel possible; in contrast, central planning, such as is attempted under socialism, is deprived of accurate pricing, and therefore cannot calculate costs and prices. This is the major reason that central socialist planning has increasingly proved to be a failure as the communist countries have become industrialized. It is because central planning cannot determine prices and costs with any accuracy that the communist countries of Eastern Europe have been moving rapidly away from socialist planning and toward a free-market economy.

If central planning, then, thrusts the economy into hopeless calculational chaos, and into irrational allocations and production operations, the advance of government activities inexorably introduces ever greater islands of such chaos into the economy, and makes calculation of costs and rational allocation of production resources more and more difficult. [p. 200]

As government operations expand and the market economy withers, the calculational chaos becomes more and more disruptive and the economy increasingly unworkable.

The ultimate libertarian program may be summed up in one phrase: the abolition of the public sector, the conversion of all operations and services performed by the government into activities performed voluntarily by the private-enterprise economy. Let us now turn from general considerations of government as contrasted with private activity to some of the major areas of government operation and how they could be performed by the free-market economy.

• 1For a critique of the Post Office and the Postal Service, see John Haldi, Postal Monopoly (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1974). [p. 201]