Property and Privatization
Gregory Gleason
University of New Mexico

The balance between the public and private sectors in societies is often determined less by theoretical principles than be contingencies of politics and circumstance. For instance, in some societies the inability of private sector enterprises to satisfy wide public demand has motivated nationalization of the industries. Critics of the private sector, claiming “failure” of the market, have urged that the state assume direct ownership and responsibility for operating the enterprises. Conversely, in some societies the inability of the government to satisfy public demand has led to denationalization and privatization of industries, services, and utilities to increase their efficiency of operation.

In western countries, the proponents of privatization have identified a broad range of institutional arrangements for “load shedding,” that is for the divestiture of state-owned enterprises. The idea of privatization is to transfer the load of management from government to private or quasi- private public corporations that are, at once, closer to the contributors and beneficiaries and that function to produce more efficient and equitable outcomes. This transfer may be “pro-active,” that is, involving a deliberate intention of the government to reassign the activity. It also may take place due to “default.” Default is when a government supplied service deteriorates to such an extent that the users naturally seek out alternative suppliers.

Governments can control all of the goods and services available in a society. But the record is that governments do some things well and some things not so well. Many of the developing countries of the Third World in the 1940s and 1950s adopted the goal of increasing the capacity of government to manage change.(note 1) Often what happened was the public sector increased in size and capacity only at the expense of the private sector. Because the fusion of economic and political decision making replaces entrepreneurial interest with bureaucratic incentives, the expansion in the public sector often gave rise to corruption and an increase in bureaucratic impediments to prosperity. Key industries were taken over by the state, and governments controlled and managed wealth “in the public interest” through the control of licenses, franchises, and concessions. The belief in the capacity of state central economic planning and economic self-sufficiency led many countries to excessive and bloated state bureaucracies and a self-imposed isolation in the international arena. But eventually, inefficiency in production, state budget deficits and a lack of competitiveness in foreign trade forced many of these countries to abandon such state paternalism.

Realizing that the state sector was expanding at the expense of the private sector, many international organizations began to focus their efforts on persuading states to seek more balanced relations between the public and private sector. By the early 1980s, pressured by the multinational lending institutions such as the World Bank, many developing countries moved away from state management of resources. Strengthening private property conventions and programs of privatization became a central feature of international technical assistance.

The establishment of private property rights encourages rational and sustainable use of the resources of the society. Theorists of property conventions argue a well known proposition first articulated by Aristotle, that “property that belongs to everyone belongs to no one.”(note 2) Property conventions have had an important role in the development of the theory of liberal democracy because private property separates the land from the sovereign and limits the power of the sovereign in the process. The English liberal political theorist, John Locke, for instance, argued that John Locke “the great and chief end...of men’s uniting into commonwealths, and putting themselves under government, is the preservation of their property.”(note 3) Private property, in the expression of a distinguished legal tradition, serves as the “guardian of all other rights.”(note 4)

Property rights have their origins in the labor theory of value. Long before the Marxist labor theory of value was developed, property rights in England were justified on the ground that they object of property was a product of a person’s labor. The right to ownership was viewed as following from the fact that value of labor was stored and transferred in return for some other person’s labor in the form of a right to enjoy a continuing benefit from some physical thing, namely property.

Property rights may be enforced in a variety of ways, through self-help, through vigilante groups, through mercenaries. But in most cases, the lease expensive and most feasible way is to have the state provide this service. The state, with its sole monopoly on the legitimate use of ultimate sanctions, can most cheaply do this. But the state may find that the protection of revenues or the privilege of a hereditary bureaucracy for instance is critical to its own well-being. At the same time, the state mitigates property rights in the public interest through rights of appropriation, eminent domain,(note 5) and through the exercise of police powers. In the United states the fifth amendment has been interpreted as the clause which protects private property.(note 6)

Property rights are a legal construct. The theory of private property is based upon the idea that “property is the right, and not the object over which the right extends.”(note 7) There are four basic types of ownership: 1) private ownership; 2) communal ownership; 3) common ownership (or open access); and 4) state ownership. Private ownership of an asset implies the right to use the asset, the right to earn income from the asset, and the right of alienation, that is, the right to transfer all the other rights associated with the property (including the right of alienation) to another party.(note 8)

The goal of privatization is to establish ownership rights. Privatization involves identifying a specific set of property rights that were exercised previously by the state and transferring these as ownership rights to individuals or entities in the private sector. In the circumstances of the former Soviet countries, privatization is basically de-nationalization. It is the reversal of the process of nationalization that took place several decades ago.

Privatization is the transfer of property rights from the public to the private sector. Privatization has far-reaching normative implications because it effects the transfer of enormous amounts wealth. Moreover, privatization has wider social and political consequences. Privatization encourages the growth of the non-state sector by undergirding operational autonomy of non-governmental organizations. In the view of some democratic theorists, the right to private property is the “guardian” of all other rights, a pillar of civil society, and a fundamental element of every modern democracy.

According to one view, “pure privatization” takes place when government turns a function over to the private sector without maintaining any continuing control relationship. As economical and appealing as this definition is, it is often problematic in practice since private and public are not dichotomous variables. As many analysts agree, privatization can refer to a range of activities. Privatization can include variations ranging from pure privatization to “Corporatization,” a situation where an enterprise is two steps removed from private, yet out of the full control of the state.(note 9). In some cases “the state has retreated in name only.”

Privatization involves: 1) delineation of different categories of enterprises as the subjects of privatization; 2) creation and distribution of negotiable instruments (shares, vouchers, or certificates of title); 3) swift and publicly visible transfer of property rights from the state to private citizens through public auction or through financial intermediaries such as investment funds; 4) and establishment of public oversight and regulatory mechanisms to prevent monopolization, fraud, or other distortions of the newly created markets.

Privatization has only one point of departure, namely the divestiture of state-owned enterprises, but it has many possible destinations. The property rights that are reassigned may be transferred to groups, to firms, to conglomerates, to foreign entities, or to the broad citizenry. Accordingly, there are many possible ways to privatize a centralized economy. Moreover, no market in the real world is perfect. Individual markets have many asymmetries and peculiarities. Privatizers work toward the ideal— establishing the conditions for a perfect competition market. But, since many state enterprises are monopolies, privatizing them and simply walking away will only result in privately owned monopolies. Privatizers recognize that individual markets have idiosyncrasies and that, while standardization and simplicity of approach are critically necessary, it is important not to let pre-established formulas, off-the-shelf solutions, or convenient but meaningless slogans distort the creation of real, functioning markets. In other words, the desired outcome is a functioning market, not some target figure of “successfully privatized factories.”

Notes

1. Douglass C. North, Institutions, Institutional Change and Economic Performance (New York: Cambridge University Press, 1990).
2. Aristotle, The Politics Book III..
3. John Locke, An Essay Concerning the True Original Extent and End of Civil Government (New York: Hasner, 1690), chap 9, sec 124.
4. See James W. Ely, Jr., The Guardian of Every Other Right (New York: Oxford University Press, 1992).
5. The doctrine of eminent domain refers to the right of the government to take private property for public use by virtue of the superior dominion of the sovereign power over all lands within its jurisdiction.
6. The Fifth Amendment in the US Constitution “No person shall be deprived of life, liberty or property without due process of law; nor shall private property be taken for public use, without just compensation.”
7. Richard T. Ely, Property and Contract (New York: Macmillan. 1914), p. 108.
8. See Thrainn Eggertsson, Economic Behavior and Institutions (Cambridge: Cambridge University Press, 1990), pp. 33-57.
9. Van de Ven, T.T.L.M., ‘“The Changing Role of Government in Public Enterprise: Dutch Experiences,” International Review of Administrative Sciences 60, 3 (1994), p. 372.