Prof. Bryan Caplan

Econ 370


Week 14:  Freeing Markets

I.                     The Rebirth of the Ideal of Laissez-Faire

A.                 Most of the economic debates of the 20th-century were between interventionists and socialists. 

B.                 The third alternative of laissez-faire has been extremely unpopular throughout the world for most of the century, especially since the Great Depression.  (N.B.  Different responses to Great Depression and e.g. Ukrainian famine).

C.                A cluster of events gradually shifted the terms of debate:

1.                  The economic "miracles" of West Germany, South Korea, Japan, Taiwan, Hong Kong, contrasted with increasing poverty in socialist counterparts.

2.                  Regulatory capture in the U.S.

3.                  Mainland China's moves to the market in late '70's and early '80's.

4.                  Permanent high unemployment in Western Europe.

D.                Collapse of Communism (Eastern Europe - 1989; USSR - 1991) largely ends the interventionist-socialist debate.

E.                 The debate between laissez-faire and intervention was becoming more vigorous (from '60's on) as the debate between intervention and socialism died down.  Collapse of Communism basically means that the debate between intervention and laissez-faire is the only one left.

F.                 The meaning of laissez-faire:

1.                  Individual, not government planning

2.                  Property rights and law

G.                If regulation and government ownership are bad, why simply refrain from expanding them?  Why not roll them back?

1.                  Deregulation

2.                  Privatization

II.                   De-regulation

A.                 Widespread realization that regulation mainly protects producers, not consumers, leads to deregulation of some industries.

1.                  Airlines

2.                  Trucking and railroads

3.                  Telecom

B.                 The perils of incomplete deregulation: S&Ls and banking

C.                Main benefits: Large decline in prices due to large increase in productive efficiency.

III.                  Weak Privatization: Sub-Contracting

A.                 Just because the government pays for a service doesn't mean that the government has to produce it.  Government can take competitive bids from private suppliers.

1.                  Garbage collection

2.                  University food service

B.                 This may increase productive efficiency (reduce costs), but it still has most of the problems of government ownership.

C.                Or the government could issue "vouchers" - the government pays, but the recipient chooses how to spend the voucher.

1.                  Food stamps

2.                  G.I. bill

3.                  Friedman's voucher proposal

D.                Voucher plan has many of the advantages of private production, but retains some problems of government ownership:

1.                  Restriction of choice and variety.

2.                  Political determination of spending.

3.                  People buy services valued at below MC.

IV.               Strong Privatization: Turning Industry Over to the Market

A.                 More radical solution: Sell off government industries, allow free competition, and let consumers buy what they want.

B.                 British example: British Petroleum (government share-holdings allowed to fall below 50%); British Aerospace; National Freight Co. (trucking); British Telecom

C.                Privatization under Communism:  China and Vietnam largely re-privatize agriculture in late 70's and early '80's.

V.                 Privatization in Ex-Communist Countries

A.                 Diverse experiences: Some (Czech republic, Poland, Hungary, Baltics) privatize a great deal; others (Ukraine, Belarus, Kazakhstan) privatize little.

B.                 Easier to privatize retailing and agriculture than manufacturing.

C.                Transition problems:

1.                  How to privatize fairly?  Vouchers?  Foreign investors?  Former Party members?

2.                  Saving jobs and paying pensions.

3.                  Welfare state without high taxes yields high inflation.

4.                  Designing new and stable legal framework.

D.                Overall assessment:

1.                  The worst of all worlds: the permanent "transition."

2.                  Government spending paid for with high inflation; a better alternative route would have been to welcome foreign bidders for privatized resources (and to have sold a lot more resources).

3.                  Privatization has worked well where implemented in earnest.  Many of the gains come quickly (queues end); others take more time (prosperity).  Press tends to over-report losers and under-report winners.