Privatization May Result in Poorer Service, and That's Good
If you’re looking for adventures, for the extra thrill, then visit Germany and travel with Deutsche Bahn. The German railway service is always a great adventure. You never know whether your train will actually depart and whether you will catch your connecting train or, instead, find yourself lost in some small German village in the middle of nowhere. The service has become so bad that you become increasingly suspicious when there is no delay on your trip and everything seems to go well.
In numbers, in June 2023, only 63.5% of the long-distance trains of the Deutsche Bahn were on schedule, which is taken to mean that they are on time or have at most a delay of 5 minutes and 59 seconds. In comparison, the Swiss Federal Railways can proudly point to 91.4% of long-distance services being on schedule until now in 2023.
The Deutsche Bahn, or DB, is a state-owned enterprise. While in principle a private company, the German state owns 100% of it. Naturally, the current disastrous state of the German railway services has prompted calls for privatisation. The advantages of privatisation will be familiar to EconLog readers. As a private company, operating under the threat of losses and with the lure of profits, there are incentives to improve the product and cut costs. Moreover, there can be genuine competition with new entrants innovating and developing yet unknown, but superior, ways to deliver the goods. The market process and competition work wonders. But in this article, I don’t want to examine the advantages of privatisation.
Instead, I want to look at an objection that sceptics of the market economy often raise. Perhaps the most prominent fear is that privatisation will lead to services being poorer. Thus, the argument goes, some places may no longer be served, trains may be less comfy, the infrastructure may deteriorate, and trains may go less often. As private companies want to make profits, they may well save money by compromising on the quality of the service!
There is some truth to such views. Privatising industries can mean that the services provided will become worse, purely in terms of quality. This is, for instance, one of the big fears with privatising the health sector, as can be witnessed in the UK with the NHS. And it is also an oft-voiced critique of past privatisations, such as the privatisation of the British railway system.
But this is a poor argument against the privatisation of the industry. At its core is a confusion of quality with desirability. While higher quality of a good is, by definition, preferable, it is not unconditionally preferable – because it is costly. That higher quality comes at a price, and this means that we have to forgo something else if we want to have our trains to be very comfy and run frequently. A train with spacious legroom will be more expensive, as will a good infrastructure. Perhaps we then must forgo our trip to the cinema to watch Barbie and Oppenheimer.
Living in a world of scarcity, we need to make sacrifices. Whenever we act, we implicitly concede this need to make compromises. I suspect that privatisation reveals people’s true preferences. Once an industry is privatised, it becomes evident that the citizens are not willing to pay for higher quality, for comfy trains, for high frequency. As such, the privatisation may indeed result in services of a lower quality in the specified industry. But this is apparently what people want; after all, there is no free lunch, and they can spend the money saved on the quality of the services or goods on things they value higher.
Often, the dissatisfaction with the way things are after privatisation as well as the fear of future privatisation betrays the classical disapproval that some people have of the choices of others. But, as Mises said: “A free man must be able to endure it when his fellow men act and live otherwise than he considers proper. He must free himself from the habit, just as soon as something does not please him, of calling for the police.” And if some people still felt justified, by justice or whatever else, to ensure the higher quality of service, or something similar, the much more efficient way to ensure this would be the tax-based buying of the corresponding services, not the nationalisation of the industry.
Max Molden is a PhD student at the University of Hamburg. He has worked with European Students for Liberty and Prometheus – Das Freiheitsinstitut. He regularly publishes at Der Freydenker.