Holte's corner: Privatization and Reprivatization

August 30, 2007

Privatization and Reprivatization

The original term for what is now called "privatization" was
"re-privatization." Re-privatization is the "returning" to private hands of something that had originally been private but acquired by the public. For example when a railroad fails such as the railroads that were made into Amtrak, or when a public utility fails and the State has to pick up the pieces. Privatization is the farming out of work to individuals.
(source: http://www.ub.es/graap/JEP.pdf
"The terms "privatize" and "reprivatize" appear in the 1961 edition of Webster's Third New International Dictionary of the English Language Unabridged. "Privatization" was defined (p. 1,805) as "to alter the status of (a business or industry) from public to private control or ownership." "Re-privatization" was
defined (p. 1,927) as "the act or action of privatizing again: restoration to private ownership or control (as after nationalization)."

Writers give credit to Peter Drucker and others for popularizing the term. and then try to trace its history. One writer, In an article in the "Journal of Economic
Perspectives" the author Germa Bel, writes about this history. He writes:

"Although the origin of the term is often attributed to a 1969 book by
Peter Drucker, I will show that this attribution is incorrect, and
that the terminology of privatization played an evolving role in
German economic policy from the 1930s through the 1950s."
He quotes Drucker:

"Government is a poor manager . . . It has no choice but to be `bureaucratic.'" Drucker's (p. 233) analysis of "how government works leads him to what he takes as "the main lesson of the last fifty years: the government is not a doer."

Anyone who works with the Government knows that when poorly organized and poorly managed (for example when managed by people who feel that "Gubbornment is the enemy") it can be stove-piped and waste time and energy without ever accomplishing mission or protecting the public interest.

"Drucker (p. 234) proposed adopting a "systematic policy of using the
other, the nongovernmental institutions of the society of
organizations, for the actual `doing,' i.e., for performance,
operations, execution. Such a policy might be called
`reprivatization.'" Drucker referred to "reprivatization" because he
proposed giving back to the private sector executive responsibilities
that had been private before the public sector took them over through
nationalization and municipalization starting in the last decades of
the nineteenth century."

So when Peter Drucker wrote about privatization he gained the ears of many people. Privatization became so popular it seemed a panacea for Governmental problems. The trouble was that people were neither cognizant of the history of the practice, nor aware of its darker side....

Some writers saw this darker side in recent events.
In this sense "privatization" has sometimes been successful. The author Bel writes the quotes I just gave us and then goes on to show how the term was used in 1930's to describe a policy for building up the power of the Nationalist Party:

"Sweezy stated that industrialists supported" [Natonal Socialist]
"accession to power and his economic policies: "In return for business
assistance, the" [National Socialists] "hastened to give evidence of
their good will by restoring to private capitalism a number of
monopolies held or controlled by the state" (p. 27). This policy
implied a large-scale program by which "the government transferred
ownership to private hands" (p. 28). One of the main objectives for
this policy was to stimulate the propensity to save, since a war
economy required low levels of private consumption."

"High levels of savings were thought to depend on inequality of
income, which would be increased by inequality of wealth. This,
according to Sweezy (p. 28), "was thus secured by `reprivatization'. .
. ."

The idea, is that increased savings can be funneled into war bonds,
which support war industries. And if all works as intended allow those
already wealthy to get still wealthier.

"The practical significance of the transference of government
enterprises into private hands was thus that the capitalist class
continued to serve as a vessel for the accumulation of income.
Profit-making and the return of property to private hands, moreover,
have assisted the consolidation of Nazi party power." Sweezy (p. 30)
again uses the concept when giving concrete examples of transference
of government ownership to private hands: "The United
Steel Trust is an outstanding example of `reprivatization.'"

Corporativism and privatization were indeed policies of the National
Socialists. But the articles out there on the web would make it seem
that they invented privatization, but the truth is it was invented in the Good old US of A and goes back to merry old England. The Germans were imitating us,
not the other way around.

http://www.fas.org/sgp/crs/misc/RL33777.pdf

"Privatization, however, is not a recent phenomenon. Since the
founding of the Republic, the federal government has hired or
contracted with private firms to provide public goods and services.
For example, Congress enacted a statute in 1789 that declared that
it shall be the duty of the Secretary of the Treasury to provide by
contracts, which shall be approved by the President, for building a
lighthouse near the entrance of the Chesapeake Bay, and for rebuilding
when necessary, and keeping in good repair, the lighthouses, beacons,
buoys, and public piers in the several states ...." (1 Stat. 54)"

The US has constantly practiced privatization and sometimes
"reprivatization" as part of a history of party politics and crony
Capitalism that dates back before the founding of the Union. This
should give us some small comfort. But the results are the same
whether it is National Socialists in Germany or in the United States.

Madison was fighting this when he sought to limit the power of the
Federal Government to "build roads, and canals" -- and he was using
the strategy of limited Constitution and States Rights to fight for
the common folks.

On the one hand privatization can be a common good:

"Economic arrangements play a dual role in the promotion of a free
society. On the one hand, freedom in economic arrangements is itself a
component of freedom broadly understood, so economic freedom is an end
in itself. In the second place, economic freedom is also an
indispensable means toward the achievement of political freedom."

But on the other hand, crony capitalism and insider "privatization"
(conversion of public property to private hands) can be a means to
systemic corruption, concentration of power, and the creation of
corrupt regimes. Whether one is talking about Teapot Dome, Tammany
Hall, the creation of the Railroad Barons, corruption at the State
House or at the Federal Level. Or one is talking about Chinese Crony
Capitalism or Nazi Crony Capitalism, the results are the same
atrocious effect.

If the Government moves with deliberative "mission oriented"
tortoise-like speed. Business moves at rapid, mind-dizzying and
sometimes self-destructive speed and can destroy an entire public
system faster than one can say the word "privatize." Putting public
assets in the hands of business is like granting titles of nobility to
the people so honored. And like those people, some will handle it
honorably, others will promptly convert it to swiss or Bahamian bank
accounts. Enron is one example of the result. If private companies
can manage a public asset better, if one gives it to them odds are it
will be withdrawn from public use and converted into a private asset.

That too has been a history of the subject. In reading on the History
of Railroads, Canals, and turnpikes, if one is not careful to give it
a full reading one will hear about how successful "privatization" was.
But that is never the full story. If private canals and roads were so
successful, why did every single one of the original ones end up in
public hands or returned to farmland? The reason is much debated, but
it comes down to what the economists and pseudo economist libertarians
call the "free rider issue." And that "free rider issue" means that a
privatized public asset is a free ride to extreme wealth.

That is why the Chinese made the transition to "Capitalism" so easily.
There is no accident that there is so much scandal. And that the
efforts to "clean up" after a scandal involve finding a scape-goat.
The State went from directly owning everything, to turning those
things over to the hands of the Party Elite. This is a page from the
National Socialists, or Republican Party Railroad Trusts.

And it is the common folks who are dispossessed by these forms of
hierarchical coercive socialism masquerading as "capitalism." These
common properties no longer serve the commons if they are managed and
owned by a few, whether that few is a Party, individuals running
hierarchies, or an incompetent collective. For the commons to be
managed right it has to be managed as a system with each element
managed by people who know what they are doing, and overseen by the
majority because nobody is perfect and the "experts" aren't always as
bright as they seem. Privatization of public assets, as a way to make
a lot of money and create a powerful upper class is a success. As a
short term remedy for stove-piping and poor management, maybe. But in
the long run its a bad deal for democracy or the middle class.