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Brooks Wilson's Economics Blog: Shleifer: State versus Private Ownership

Monday, November 16, 2009

Shleifer: State versus Private Ownership

Chavez styles Venezuela as having a socialist economy and himself as the representative of the people. Simon Romero describes current problems with state production of electricity and water in a resource rich country (The New York Times, "Blackouts Plague Energy-Rich Venezuela."
CARACAS, Venezuela — This country may be an energy colossus, with the largest conventional oil reserves outside the Middle East and one of the world’s mightiest hydroelectric systems, but that has not prevented it from enduring serious electricity and water shortages that seem only to be getting worse.

President Hugo Chávez has been facing a public outcry in recent weeks over power failures that, after six nationwide blackouts in the last two years, are cutting electricity for hours each day in rural areas and in industrial cities like Valencia and Ciudad Guayana. Now, water rationing has been introduced here in the capital.

The deterioration of services is perplexing to many here, especially because the country had grown used to cheap, plentiful electricity and water in recent decades. But even as the oil boom was enriching his government and Mr. Chávez asserted greater control over utilities and other industries in this decade, public services seemed only to decay, adding to residents’ frustrations.
The bolded emphasis added to the quote is mine. Economists are not among the confused or perplexed. Andrei Shleifer concludes his Journal of Economic Perspectives article, "State versus Private Ownership (Vol. 12, No. 4, Fall 1998, Pgs. 133-150) as follows.
Private ownership should generally be preferred to public ownership when the incentives to innovate and to contain costs must be strong. In essence, this is the case for capitalism over socialism, explaining the "dynamic vitality" of free enterprise. The great economists of the 1930s and 1940s failed to see the dangers of socialism in part because they focused on the role of prices under socialism and capitalism, and ignored the enormous importance of ownership as the source of capitalist incentives to innovate. Moreover, many of the concerns that private firms fail to address "social goals" can be addressed through government contracting and regulation, without resort to government ownership. The case for private provision only becomes stronger when competition between suppliers, reputational mechanisms, and the possibility of provision by not-for-profit firms are brought into play. Last but not least, the pursuit by government officials of political goals and personal income, as opposed to social welfare, further strengthens the case for private ownership, as the dismal record of state enterprises around the world and the tragedy of communism illustrate all too well.

The benefits of private delivery-regulated or not-of many goods and services are only beginning to be realized. Health, education, some incarceration, some military and police activities, and some of what now is presumed to be "social" insurance like Social Security, can probably be provided more cheaply and attractively by private firms. It is plausible that 50 years from now, today's support for public provision of these services will appear as dirigiste as the 1940s arguments for state ownership of industry appear now. A good government that wants to further "social goals" would rarely own producers to meet its objectives.

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