Markets, markets, who needs markets?


By Leslee Kulba –

Lying is a sin, but to accuse another of lying is to participate in the sin of gossip. Lying to pretend somebody is not lying is what political reporters do.

One big lie is that we need more big government, and anybody who doesn’t think so is a Libertarian pot smoker living in a Tea Party bunker. It is politically correct to believe in the perfect bureaucrat, the perfect planner. The concept of two parties coming to an agreement about their relative values is considered absurd, when in fact urban planners dismiss tons of data relevant to consumer interest by ignoring, discouraging, distorting, or otherwise tampering with or dismissing free-market transactions.

When economic decisions are handed over to government, it is assumed they will be made by dispassionate, incorruptible scientists using perfect information. Anthony Fisher, an economist heavily invested in libertarian think tanks, noted, “We have abandoned the assumption of a complete set of competitive markets, but not that of the perfect planner.”

Terry L. Anderson has written a couple books explaining why the politicization of water treatment and distribution has increased price distortions, scarcity, and environmental destruction. The public sector has enjoyed, until recently, a false sense of unlimited taxing capacity. At the federal level, government has invested in ludicrous public works that would never have passed cost-benefit muster in the marketplace.

Anderson points out, “Traditional economics approach calls for better cost-benefit analyses and better bureaucrats, [but] bureaucratization does not eliminate perverse incentives.” Furthermore, “while there is no consensus in the economic literature on what is maximized by bureaucrats, most agree that efficiency is not the decision-maker’s main goal.”

One of the main problems Anderson has with public administration of economic activities is summed up in the concept of rent. In economics, rent is the difference between opportunity costs and returns, and there are two types of rent. In the idyllic scenario, investors add value by improving resources in “pie-enlarging” activities. In scenarios more common in today’s business climate, investors merely look for ways to turn a profit through the transfer of wealth.

Anderson is a public choice economist. He and his peers enjoy great success in modeling outcomes because they treat political influences, like votes, poll results, legislative appointments, and lobbying pressures, like commodities subject to supply and demand. When people decide to use the power of pull to transfer wealth to their own interests, resources must be expended in pie-splitting activities like wooing politicians for favor. When entrepreneurs invest time, resources, and capital in shopping for subsidies, grants, and regulatory burdens on the competition, “rent creation – a positive-sum game, is replaced with rent seeking – a negative-sum game.”

In public choice theory, interest groups demand rent from politicians who govern the supply. One reason the practice is so pervasive is politicians get to concentrate benefits on supporters while distributing costs ever so slightly amongst entire constituencies. “Essentially,” wrote Anderson, “collective action allows those who bear the costs to be separated from those who receive the benefits.” A nickel here and a dime there is usually not enough to get the opposition to any given special perk organized.

The absurdity of the practice, and its toll on the economy, is clarified by the realization that politicians do not pay opportunity costs.

Another reason government administration is doomed to fail in economic activities is politicians’ preference for results visible before the next election cycle, over sound long-term investments.

Yet, wise politicians executing justice with computerized accuracy are in these enlightened days far preferable to personal choice. Those who trust government more than individuals assume all peculiar knowledge from ears-to-the-ground personal experience is better concentrated in elected officials than diffused amongst real-time data gatherers making decisions with a vested interest. Advocates for big government are quick to point out that individuals operate amidst uncertainty and make mistakes, as if government never has.

Another fear is that without government interference, evil monopolies will arise. The fact of the matter is, monopolies seldom, perhaps never, grow in the absence of crony capitalism. It is government that enacts regulations that stifle lateral entry, price controls that exclude competition, and the host of tools familiar to students of industrial history. Water systems require huge infrastructure that would be difficult to rival, but that, in the absence of heavy government regulation, does not stop the hauling of bottled water, purchase from neighboring systems, well-drilling, or small startups.

Privatization is also considered synonymous with pollution. If property rights are, as Anderson demands, are well-defined, enforced, and transferable; polluting water downstream should be no less a crime than dumping a truckload of toxic waste in the neighbor’s yard. Judge Stephen Field in the California case Jennison v. Kirk ruled, “No system of law with which we are acquainted tolerates the use of one’s property in that way so as to destroy the property of another.”

Anderson observes that “property rights to resources that are ‘owned’ by the government are only informally defined and can be disputed at every legislative session.” Asheville’s relationship with the General Assembly is not unique.

An oversimplification of history declares all wars to be economic. In light of partial explanations, perpetually-recycling debunked arguments, and internally-inconsistent responses; there is sound reason to suspect the same is true of Asheville’s water war. The water system is a valuable asset capable of generating revenues for as long as humans will walk the earth.

Although it would be nice to eliminate the political problems, privatization, the worst fear of extreme progressives, is not the best answer at present. Admitting the absurdity of human objectivity, one of the more rational views on natural monopolies allows the public sector to compete against the private, and if greater efficiencies can be realized by the former, it is still considered in the public interest to allow the best bidder to get the contract.

A factor that cannot be overlooked is administrative turnover. Individuals enter into contracts with employers because it is easier to commit to good pay than to continually repeat what economist David Friedman has referred to as “costs of getting used to each other.” The Asheville water system has so many contracts and so much overhead, for better or worse, it is suing the state for trying to force a rapid turnover.

This is not to suggest the system is being run perfectly and is in no need of improvements that could be achieved through greater implementation of market principles. On a global scale, putting bureaucrats in charge of water distribution has resulted in subsiding water tables and increased pollution. As Asheville City Councilman Cecil Bothwell has frequently affirmed, governments usually structure water pricing schedules in ways that encourage waste.

It is not unusual for discussions of raising water rates to evoke pictures of children unable to obtain a glass of drinking water. This is not the case. Most water is used for irrigation, and farmers have a wide range of alternative crops they could choose to grow in a free market should prices go up. If it weren’t for “use it or lose it” laws, and disincentives to investing in conservation; water tables wouldn’t be subsiding so quickly, increasing pumping costs for neighbors, and sometimes investment in desalination treatments or location of new reservoirs.

Fredrik Segerfeldt, who performed a study on the privatization of global water markets, concluded a lot of the complaints against market principles are based on hype and fallacy. Segerfeldt acknowledges totally private water distribution systems are next to non-existent throughout the world, but a lot of problems could be solved by treating water more like a commodity.

Arguments used to insist on government control of water resources claim water is essential to life, but don’t extend principles governing personal acquisition of food, clothing, or shelter. Debunkers refer with hilarity to an excerpt from Iowa’s state water policy in which UCLA economist Jack Hirshleifer et al. replaced “water” with “land.”

Segerfeldt has observed market critics apply a double-standard, demanding perfection in private-sector decisions and using isolated incidents as justifications for overhauling all private-sector, individual decision-making in general. Segerfeldt looked at the world’s worst attempts at privatizing water. In Cochabamba, Bolivia, amidst pro-government media distortions, he found the water system had attempted to operate in a political climate described as “a mess of patronage, populism, and vanity projects.” He added, “The politicians deciding matters there seem to have been entirely devoid of fair-mindedness, impartiality, and common sense. That too, unfortunately, is pretty common.”

In other places, he found private corporations coming to the rescue, only to catch the blame for years of prior negligence. In Cochabamba, pricing structures catered to the well-to-do and politically invested, and an attempt to shake things up resulted in a media campaign falsely claiming the new rate structure was exploiting the poor.

In Buenos Aires, privatization cut the number of water-related jobs in half. By today’s standards, this is terrible, but Segerfeldt and others observed morale and attendance was very poor before privatization. He argued if job creation were the ultimate goal, “all the country’s taxpayers and water users will have to subsidize a number of people who are in the wrong place.” Admitting that sometimes makework is better than starving families, the author concedes, “It is obvious that the issue is not as clear-cut as the union would have it.”

At the conclusion of his book Water for Sale, Segerfeldt blasts the useful idiots who override logic to be the mouthpieces of large, corrupt machines at the expense of poor people who get trapped drinking disease-ridden water or never rising from poverty because of the daily work involved in hauling it. He asks “why anti-privatization activists do not expend as much energy on accusing governments of violating the rights of the 1.1 billion people who do not have access to water as they do on trying to stop its commercialization.”

Privatization is demonized as being undemocratic when some national decisions to treat water as a commodity have been made democratically, and “in countries where food has been produced ‘democratically’ – that is, by the government – there has often been neither sufficient food nor democracy.”

As an aside, this article is not about Asheville’s water war, so much as it is an allegory about corporate welfare and Project X.

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