The Obsolete State 21:23

Might there be private alternatives to government products? Some people say we need government to provide public goods. Boaz argues that very often governments don’t do a very good job of that, and that the private sector very often can do better.


David Boaz: So fact is, the State doesn’t work very well. And people everywhere look for ways to get out from under the way it doesn’t work very well. Some people emigrate. Some people try to go into hiding. Some people try to work off the books. Others do perfectly legal ways of trying to turn to private provision of services that are actually valuable that the State wants to provide or even to monopolize. A lot of the reason for having the State involved in a lot of things is the economic concept of market failure. This is the idea that if markets were perfect, they would be providing something that the commenter believes is not being provided. You have to think it’s about the failure to supply something people would pay for. After all, there are many, infinite things that are not provided in the marketplace. Often, that’s because there’s no market for them, or there’s a market but not at the price that would be required in order to pay to have them produce. So we have to say market failure means that something is not being provided that people would pay for. In my view, it is very difficult to assume that you, the economist, much less you, the politician, actually can identify something that the market would be providing if it was working better than it is, and therefore, that the State should step in to supply. So one of the issues you ought to consider there is even if you believe there is market failure, is there more market failure than government failure? And I would argue, no, there’s not. There’s more government failure. And therefore, we should rely on markets, even when we know they’re not perfect. 

Related to the idea of market failure is the idea of public goods, that there are things that ought to be provided publicly, i.e. through the coercive state because they have aspects of publicness. The usual definition of a public good… In people’s minds, anything that’s good is a public good. More children should read Shakespeare, so that’s a public good. More people should go to college. That’s a public good. Economists don’t think those things are public goods. They do think things that meet two tests are public goods. One, that it’s impossible to exclude other people from the enjoyment of them. And second, that having more people consuming them doesn’t diminish the service. The problem is as you look at specific examples of public good, you can often find that, well, if they were just provided in a different way, then they wouldn’t be public goods in that sense. If the government provides them in a certain way, then yes, it’ll be impossible to exclude people. And having more people doesn’t diminish the service, but there are ways you could do it. 

Over the years, there have been various things cited. One was lighthouses. How does a lighthouse collect money? And yet its light is up there. If you can see it, so can I. So if you pay for it and I don’t, then I’m getting a freebie. I’m free riding, as economists say. Then a scholar, Ronald Coase, who later went on to win the Nobel Prize, actually looked at how light houses were provided in 19th-century England and discovered, oh, not by the government. They were, in fact, provided privately, in some cases, with nonprofit or charitable contributions involved, not just pure profit-seeking, but not with government. One of the lessons of that is don’t just listen to the theoretical economists. Talk to people in the business and see if they’ve already solved the problem that the economists are debating on the blackboard.

Another issue to keep in mind with government provision of public goods is that a lot of times, government rarely creates things. Government didn’t create antibiotics or the cotton gin or the automobile or the smartphone. It steps in to regulate or provide the service once it’s been created and people don’t feel like paying for it. Usually, it is a service that’s already been developed in the market, and suddenly, people are saying, “Gee, I wish I didn’t have to pay so much for that.” And government steps in and says, “We’ll provide it.” But it wouldn’t have been created if you didn’t have a functioning market in the first place. So because government provision isn’t very good, it tends to lead to poor-quality services provided politically, not provided efficiently. It leads to stagnant services. People look for alternatives. I want to talk about some of the ways they do that. Let’s look at communications. 

Every form of communications technology in our world has been revolutionized in a generation, except two that I can think of: the postal service, which still looks exactly the same as it did 40 years ago, 80 years ago, 120 years ago. The postal service still plodding along. Mostly, people don’t send letters now because they send emails or texts or whatever. So it’s not delivering letters. It’s delivering bills. It’s delivering advertising circulars, but it’s still there. Hundreds of thousands of people still working for the post office, stodgy, backward, union-run, overpaid, for low-skill work. 

And the other thing besides postal service is education. Schools still look the same as they did 40 years ago, 80 years ago, maybe 120 years ago. The schools aren’t very good. They’re especially not good for the poor. The whole purpose of having public education right is for the poor because nobody doubts that the rich would be able to pay for schooling. And even the middle class. I mean after all, the money is coming from the middle class, so the middle class could pay for it on its own. So the argument is that we need it for the poor. But the poor are getting poor schooling. The poor get better groceries, they get better cigarettes, they get better cars than they do schools. Why is that? Because they get to exercise consumer choice in all those other areas, but the schools, not very good, and they’re being provided by the government. And if schools are tied to your neighborhood, to your residents, poor people find it harder to move to a better school district because they don’t have much money. They also have less political clout, so they can’t go put pressure on the schools. They can’t pressure to change the line so that they can be over in a better school district. And they don’t have the political clout to push the school to be more responsive to parent. So they tend to get worse education.

In a lot of other areas, there are ways that people are seeking to escape poor-quality government services. For a minimal government libertarian like me, the fundamental thing that the government should do, along with national defense, is police and courts. And yet, it doesn’t even do those things all that well. So what do we see? We see lots of companies going to arbitration instead of government courts. One estimate is that three times as many cases are settled through arbitration as through the government courts. Why is that? Because government courts are slow, they’re clogged, they’re expensive, they’re bureaucratic. People find that they can get quicker answers and move on through arbitration or mediation. So that’s one of the ways people get around it. 

There may also be more private police in the United States than public police. Think about security guards at companies, at shopping malls, at festivals and things like that, private investigators, lots of private companies providing security services. I told a story many years ago about how I had been shopping one evening after work. And after shopping, I went to a restaurant to eat. And when I came out of the restaurant, it was by then quite late. And the streets were deserted, and I had to walk back to my car. And I realized as I did that I didn’t feel unsafe, and the reason was because I was in a shopping mall. I was in a private space that provided private security. So it’s not that it wasn’t open to the public, it was. But private places have an incentive to provide better security. And so I just knew I wasn’t subject to being mugged while I walked through the shopping mall. Now again, that’s not a perfect 100 percent correlation. There’s a very good chance that on the public street, I wouldn’t have been mugged that night. And there is a very small chance of actually encountering crime in a shopping mall. But the difference is pretty substantial, and it is because in those places, the arbitration agencies, the mediation agencies, the private security agencies are responding to real customers. And if they do a bad job, the customers will leave, and that is not really the incentive system that public sector organizations face.

There have been a lot of industries affected by technology in the past generation or so: newspapers suffering a lot from the Internet; bookstores being run out of business by online retailers; travel agents discovering if people can deal directly with airlines, they don’t need travel agents; the music industry has been upended by technology. But industries run by government are less vulnerable than that because they have legal monopolies, and that includes the post office, the schools, money, currency. 

And yet, even there people see a need for a better solution. People know that government money doesn’t hold its value very well. The Swiss economist Peter Bernholz wrote a few years ago, “A study of about 30 currencies shows that there has not been a single case of a currency freely manipulated by its government or central bank since 1700, which enjoyed price stability for at least 30 years running.” Think about that. Not a single case of a central bank providing price stability for at least 30 years. That suggests that surely, somebody could do a better job than that. That would not be the Federal Reserve. The Federal Reserve is about 100 years old, and during that time the dollar has lost 95 percent of its value. Federal Reserve was created to avoid panics and bank runs and depressions. 20 years after it was created, we got the Great Depression. Another 50 years later, we got the Great Recession. Had a lot of recessions in between, but what we had steadily was inflation until the value of the dollar 95 percent less than it was when the Fed started.

The euro, which is not nearly as old as the Federal Reserve Board, lost more than 60 percent of its value in a mere 40 years, so it’s running at a faster pace than the Federal Reserve. So what happens? Well, we try to get some innovation, and we’ve gotten some innovation within the system of the Federal Reserve currency. ATMs, automatic tellers, we didn’t have those a generation ago. Now that’s where people get their cash. Companies like PayPal, mobile payment systems, are ways of transferring money more easily than dealing with a bank. Banks, which used to have essentially a monopoly on all your monetary needs, were notorious for having very short hours of operation. They’re open 10:00 to 3:00, that sort of thing. Retailers, which know you could go somewhere else, were open for long hours. Banks, which know that everybody is part of the cartel and you’ve got to go to somebody in the cartel, were not so customer-friendly. But all of these innovations were within the dollar system, the Federal Reserve System. 

So what about real denationalization? Is there any reason American Express couldn’t provide money that would be at least as reliable as Federal Reserve money? Is there any reason Google couldn’t provide money or some online payment system that wouldn’t be more stable and reliable than the Federal Reserve? I don’t think there’s any reason they couldn’t. There would be some difficulty getting people to trust things that weren’t U.S. government money, but the bigger problem is the government does not like competition. And when people have tried it, there was innovation called the Liberty Dollar. Government cracked down on it. There was an innovation called e-gold. Government did not like that. More recently, there was bitcoin, and there’s been a lot of complaining and investigation by the government of whether bitcoin is an acceptable kind of currency. I’m hopeful that we will see some denationalization in money. Government money is so bad – whether it’s the euro or the dollar or God forbid, any of the other competitors in the world – that there ought to be room for a non-government organization to provide stable money that people would rather make contracts in. Of course, people used to make contracts in gold, and then the Supreme Court said, “Oh, you don’t have to honor those contracts,” which was a way of really screwing over the people who had made these contracts, at least on one side of the contract. So people have to feel that whatever contracts they make in an alternative currency would be upheld by the courts. That would be one of the challenges there. In a whole lot of ways, from bitcoin to private communities to Uber and Lyft providing taxi services, people are looking for a way to get an alternative to poor-quality government or government-protected services. But governments and protected businesses won’t give up easily. People don’t like to give up their monopolies. The monopolies mean power for the government. They mean protected streams of income. So the USPS, postal service, fights hard to keep its monopoly. You try getting a couple of teenage kids to start offering to deliver letters in your neighborhood for 25 cents; the government will come after them. They’ve done it before. FedEx had to fight for the right to be able to deliver what the government regarded as letters. FedEx decided that if it got enough business, it could deliver mail for 50 cents or a dollar and do it more reliably than the government. They would find themselves in court challenge with, in fact, charged with challenging the government statutory monopoly on letter delivery. Teachers unions and other parts of the educational establishment fight tooth and nail to keep choice out of the education business. The Federal Reserve is very protective of its monopoly on money. Even at a little bitty local level, the taxi cartels, which are protected. You can’t get a taxi license in many cities without paying a lot of money. They don’t want that system broken up by new competitors like Uber and Lyft, and so they have fought hard to impose regulations or simply bans on new competitors. It’s a fight all the time, whether it’s the schools or the postal service or the taxi cartel or the Federal Reserve monopoly. But because none of these things work very well, there are always going to be entrepreneurs thinking of ways to deliver a service better. And there are always going to be consumers looking for ways to get those services delivered better. So it would be continuing battle between consumers, entrepreneurs, and the protected industries.

Question: If our government decides to get rid of its monopolies and privatize, how can they ensure or we ensure as voters that the monopolies will enter the free market and not simply pass from a government monopoly to a private monopoly?

David Boaz: I don’t think that’s really likely to happen in the United States. I think competitive providers are generally going to assume that they would be entering a competitive market. Now I do remember talking to a businessman once like 20 years ago who said, “I think you could put together a consortium to buy the postal service for $5 billion or whatever it was. Take it off the government’s hand.” And when I just happened to sort of idly mention, of course, that would mean an end to the postal monopoly. No, it comes with the monopoly. Otherwise, it’s completely worthless. Why would you want to get all these inefficient employees without the monopoly? So yes, it’s absolutely a good idea to transfer government services into a competitive market, and indeed, far more important to create a competitive market than to actually privatize the services. If we had a fully competitive market, then let the government schools stay around. Some people would continue to go to them for sentimental reasons. I mean I went to Mayfield High School and so did my father, so maybe my kids would also go to Mayfield High School. But if other alternatives started being created, then everybody who’s thinking about sticking with the old high school will start to see those alternatives. That’s better than simply privatizing Mayfield High School but still requiring everybody to pay the tax to go to it.

Question: Where do you currently stand on the future of the United States in terms of government size? Do you think it’ll be moving in a more libertarian, limited government direction? Or do you think the size of the federal government is going to continue to grow?

David Boaz: There’s been a lot of talk lately about a libertarian moment in America. You can point to some specific examples politically. We’re finally rethinking, at least the marijuana laws, if not the rest of the drug laws. We’re moving in libertarian direction on marriage equality. We have had pushback against the growth of government like the Tea Party. Even like some elements of Occupy Wall Street, when the government pushes to get too big, too fast, Americans tend not to like that. They push back against it. There’s also a lot of cultural things going on. There are businesses, from international trade to the technology businesses to the companies challenging the taxi cab monopolies and the established hotels, everything like that, and maybe even challenging currency and so on. All of those things might be part of a libertarian moment. But it’s still true that the welfare state in most modern developed nations, including the United States, doesn’t seem to be diminishing. It still seems to be getting bigger. In the long run, we’re not going to be able to afford all of the welfare state that people want, and that will force a rethinking – not necessarily abolition of the welfare state, but at least some trimming back. And we have seen that in some developed countries. In the really long run, the fact is freedom works and big government doesn’t work very well, and that will mean that, number one, people, I do believe, will increasingly see that markets and individualism and tolerance and freedom work better and will move broadly in that direction. And number two, that new businesses will constantly spring up to satisfy human needs that either the government hasn’t thought of getting involved in or that can do enough better job that people will actually want to patronize them that way. So in the long run, I’m very optimistic that freedom in the market are more resilient and serve human needs better than stodgy, bureaucratic government agencies. But it could be a pretty long run. We’ve had a lot of back and forth in the 20th and early 21st century, and we’re going to continue to see that. There’s never going to be a golden age of liberty. But I would bet that 100 years from now, we have more freedom because freedom works.