Cato recently kicked off an essay series they’re calling “What Can’t Private Governance Do?”. The series questions how far we can take private governance in replacing public institutions. The most recent essay by Mark Lutter questions where to draw the line between private and public in territorial governance. And, more importantly, whether drawing that line even makes sense. Mr. Lutter concludes that it does, but I’ll politely disagree. We should instead abandon the public vs private dichotomy. It doesn’t accurately describe reality. It’s not useful for understanding policy problems. And it distracts us from the more interesting lines of inquiry we could otherwise be pursuing.
A Tale of Two Cities
Imagine two different cities, one proprietary and the other public. The former is run as a private, for-profit firm. It has an executive team, board of directors, and shareholders. The latter is a traditional municipal corporation. It’s run partially by elected officials and partially by appointees. It’s what we would call non-profit. No one “owns” the government as a legal entity.
Now imagine that both cities raise revenue through land values. Greater demand to live in either city translates into a higher price for land. And the more that either city does to make their jurisdictions attractive, the more revenue that either stands to collect. In this scenario, price signals in the form of land valuations give both cities an incentive to make positive sum investments. Those same price signals also provide both cities with the ability to understand what those positive sum investments might be.
Each city is responding to price information and making positive sum investments. So what difference does it make to call one public and the other proprietary?
In all fairness, there’s still one place we could draw a line. We could make the choice of institutional structure* the defining characteristic. We could say a city with a one-person, one-vote electoral system is public. And a city with shareholders calling the shots is private. But if we imagine a resident owned, for-profit municipal corporation, the institutional distinction quickly breaks down.
Thought experiments are good, but real world examples are better. And my favorite one of those is the Hong Kong Metro Transit Railway Corporation Limited (MTRCL). The MTRCL was created as a statutory corporation in 1975 by the City of Hong Kong. And although the City was once the sole shareholder, it sold off 24% of its stake in 2000. Shares of the MTRCL now trade on the Hang Sang index and pay a regular dividend to investors.
The MTRCL is a mass transit provider created by a government entity. But it has residual claimants and returns a portion of it’s profits to shareholders. The hard question is whether it’s a private enterprise or public agency. The easy question is whether we should care (the answer is we shouldn’t).
The MTRCL has created good incentives, confronted knowledge problems, and internalized transaction costs. And that’s what makes it an interesting case study. Both from the standpoint of pure scholarship and for purposes of reform. What’s not interesting is trying to ascribe it a strictly public or private identity. Such an exercise serves no purpose.
Perverse incentives? Let’s make them better. Knowledge problems? Let’s confront our limitations. Transaction costs? Let’s organize to keep social coordination from breaking down. But let’s not become stuck in tired language that does no service to our inquires, our debates, or our efforts to make the world a better place. We can do better.
*Decision making process in Mr. Lutter’s preferred terminology