In the event, the real challenge to the mixed economy came from market liberals, who dominated the policy debate from the mid-1970s onwards. Milton Friedman’s success in macroeconomic debates attracted new attention to the market liberal position he presented in works such as Free to Choose where he (along with his wife and co-author Rose) argued that even core areas of state activity such as education could be left to private provision, funded through voucher schemes.
Meanwhile, the economic performance of public enterprises deteriorated sharply in the 1970s. In an inflationary environment, public enterprises found it hard to resist demands for increased wages, but equally hard to pass on the resulting costs in the form of higher prices. Weak economic growth and rising unemployment pushed government budgets into deficit. A common short-term response was to cut investment spending, including that of public enterprises. Although this response made little economic sense, it was enshrined in policy by rules limiting aggregate public borrowing, whether this was used to finance current expenditure or income generating investment. The most famous policy target of this kind was the Public Sector Borrowing Requirement.
Over time, these problems were mostly overcome, and public enterprises returned to profitability. But, in the general atmosphere of disillusionment with government common in the 1970s, there was a receptive audience for claims that public enterprises were inherently inefficient, and represented a fiscal burden on governments.
The strength of public sector unions, at a time when unions in the private sector were being pushed onto the defensive by mass unemployment, also contributed to the push for privatization. Governments keen to weaken the power of unions, but unwilling to confront their own employees, could resolve the problem by handing public enterprises over to private owners, keen to break unions and eliminate overstaffing and above-market pay and conditions (at the shopfloor level, if not for senior management).
Criticism of the mixed economy gained theoretical bite with the rise of public choice theory, which sought to model democratic political institutions as ‘markets for votes’. The typical conclusion, unsurprisingly given the theoretical starting point, was that real markets were to be preferred to political markets. A variety of arguments were used to show that most market failures were unimportant or self-correcting. Conversely, the rise of public choice theory of politics popularized the idea of ‘government failure’. It was argued that, because of the systematic distortion of the policy process by interest groups, the costs of government intervention were greater than the costs of the market imperfections that government policies were supposed to remedy.
The rise of ‘property rights’ theory in the late 1970s produced a theoretical critique of public ownership. It was argued that, since private corporations were responsible to their shareholders, their managers would always have stronger incentives to seek efficiency than would bureaucrats or managers of public enterprise. Although it contradicted decades of research showing that ordinary shareholders are virtually powerless, the property rights theory met the political needs of the time, and was widely embraced.
Theory turned to practice with the election of the Thatcher government in the United Kingdom in 1979. Following the failure of Keynesian macroeconomic management in the 1970s, the generally disappointing performance of the UK economy since 1945 (or earlier) and the full-blown crises of the late 1970s, the stage was set for a reaction against the mixed economy and public ownership.
Whereas previous conservative governments had denationalized some of the acquisitions of their immediate Labour predecessors, the Thatcher government began selling off enterprises, such as British Telecom, which had been in the public sector since their establishment. Starting with popular proposals such as the sale of council houses to the tenants who occupied them, Thatcher began a program under which publicly owned enterprises in telecommunications, electricity, water and transport were sold, usually through public floats. The idea of privatization, conceived as the systematic removal of the state from the production and provision of goods and services, was born.
Thatcher’s example was soon emulated by governments of all political persuasions in the English speaking world. Thatcher’s radical measures were much admired, and imitated, in Australia and New Zealand, which still tended to follow the British lead with respect to economic policy. Surprisingly, in both countries, the crucial steps were taken by governments associated with the labor movement 1. In Australia, the Hawke and Keating governments, in office from 1983 to 1996 moved slowly and cautiously, but eventually privatized the national airline, Qantas, and the main publicly-owned bank, outraging many of their traditional supporters.
In New Zealand, caution was thrown to the winds. Labour Finance Minister Roger Douglas rapidly gained a reputation as ‘more Thatcherite than Thatcher’. Among a series of radical free-market reforms, large-scale privatization began with the sale (by public float) of the Bank of New Zealand, and continued apace thereafter with the sale of assets such as Air New Zealand. New Zealanders had tired of the reforms by 1990, and replaced Labour with the conservative National Party, which promised a more moderate approach. In office, however, the Bolger National government continued to push radical free-market measures notably including the sale of New Zealand Rail(1993) and corporatization of the health system with a view to eventual privatization. The Labour party split in Opposition, with the radical free-market group leaving to form the Association of Consumers and Taxpayers (later the ACT Party). The era of radical reform finally ended when Labour regained government under Helen Clark in 1999.
The privatizations of the 1980s reversed the century-long trend towards greater state involvement in the capitalist economy. But it was the collapse of Soviet Communism that seemed to confirm that free-market reforms represented more than a swing of the political pendulum and constituted, in the words of the great triumphalist text of the age The End of History. It was inevitable, given the collapse of centrally planned economies, that large numbers of state-owned enterprises would be converted, one way or another, to private ownership. The ideology of privatization encouraged the adoption of a radical ‘shock treatment’ approach based on wholesale privatization.
In this context,it was inevitable that privatization should become part of the standard ‘Washington Consensus’, package of reforms advocated for less developed countries by the World Bank, International Monetary Fund (IMF and US Treasury. And by the 1990s, the privatization trend had spread to EU countries that were often dismissive of such ‘Anglo-Saxon’ notions.
By the 1990s, privatization was part of the standard policy agenda, referred to as the Washington consensus and promoted by the World Bank, IMF and US Treasury as essential to sound economic management in developing countries.
The large-scale privatization of publicly-owned enterprises in the 1980s and 1990s played a big role in promoting the triumphalist claims of market liberals. Commentators and thinktanks rushed to conflate the (real but manageable) financial difficulties of long-established public infrastructure services in countries like the UK, New Zealand and Australia with the collapse of Communism in Eastern Europe and the stagnation of North Korea.
Public ownership of infrastructure was seen as a relic of the past, doomed to vanish as governments rushed to sell off assets. Having claimed victory in the infrastructure sector, market liberals turned their attention to the core of the welfare state with proposals for privatization of health services, prisons and the school system. In the US, the most ambitious assault on the institutions of the New Deal era was the proposal, pushed hard by the Bush Administration, to privatize Social Security.
Few would have predicted that, a decade or so later, governments would be debating, and in some cases undertaking, the nationalization of such iconic capitalist enterprises as Citigroup, Bank of America and General Motors. Although these rescue operations mostly involve only temporary public ownership, they make the rhetoric of the 1990s look absurd. And they raise the question of whether some or all of the privatizations of past decades should be reversed.
But despite these failures and reversals, systematic privatization of public enterprises remains part of the standard package of policy reforms recommended by bodies like the IMF, and there has been little serious effort to reconsider the theoretical rationale for these policies, or to ask who gains and loses from their implementation.
1 For obscure historical reasons, the Australian party uses the American spelling, Labor, while its NZ cousin uses Labour