It is interesting to ask if Obama ever took a history or economics course, as he certainly shows a remarkable blindness to several historical examples in making his arguments. For example, his thesis that private and public can coexist in terms of medical insurance is certainly short sighted, if for no other reason than we currently have a public-private hybrid (Medicare/Medicaid) and, according tot he left, our system is in crisis. If public-private hybrids got us here, then shouldn't we reexamine whether public and private really can coexist? Then again, he attended Ivy League schools, rather notorious for doctrinaire professors in both history and economics, so maybe it isn't a lack of schooling, but an excess, which is creating his blindness. Though how the rest of America can remain so blind is another question.

What brought this to mind was an article by Horace Cooper which touched very briefly on the public-private coexistence among universities. Of course he focused on public universities and their comparison to private universities, which I think is an unfair example. After all, the private universities are hardly private any longer, thanks to the massive amount of government meddling in education. In fact, starting from his example, one could make an even more forceful argument about the impossibility of private coexisting with public, using the very same facts, and I will do just that, but first, let me offer another example.

In my post  "Killing the Railroads" I spoke rather briefly about the way the railroads were "helped" out of existence by the government. However, it was a short discussion, and failed to touch all the relevant topics. So let me take a moment to discuss here how public-private coexistence gave us our current dysfunctional passenger rail system.

Thanks to the confused state of politics at the time of the birth of rail travel in the US, railways were never free. Perhaps that first mile and a half of the B&O, maybe even when it just ran from Ellicott City to Baltimore, but after that the mercantilist Whigs, and many local politicians of both parties looking to make a buck or appease a constituency, began to jump into the fray. Whether it involved shaking down railways for money before issuing permits, or protecting canal, maritime and cartage interests, the rails were subject to constant interference. However, they quickly grew in wealth and learned how to buy protection from political pressure, and they remained largely free. There was some regulation, mainly fare controls on passenger lines or rate caps on freight, but for the most part the individual railroads were largely independent.

And then came the push for a transcontinental railway. Backed by claims that it was necessary for "national prestige" as well as as opening up the west, the major rail lines west (Central pacific and Union Pacific) were the prototype of all future "public-private cooperative ventures". They were privately held companies, but with government funding in terms of both loans and land grants, with government influence felt largely through indirect pressures rather than explicit oversight, mainly through the requests made by politicians when the owners sought additional government assistance.

In parallel with these government ventures there existed a private venture. Some time after the Union Pacific and Central Pacific connected the two coasts, the Great Northern also ran a line form the Ohio Valley tot he Pacific, this time privately funded, without government assistance.

What is interesting is the outcome of this series of rail ventures. The government funded railways (including the lines for which the Gadsden purchase was made by the government), all failed during a financial downturn in the late 19th century. The single private railway did not. However, that did not prevent the government from taking over the surviving rail along with the failed ones.

And that is the outcome of this tale. The government subsidized railways, having been built without financial constraints, funded without thought of financial viability, failed. And the government, unwilling to admit their fund had gone to waste, effectively nationalized all railways, failed or successful. In short, when the public ventures stumbled, the government stepped in and took over the whole lot, using the failure of the public ventures to justify nationalization of the private as well.

The universities followed a different course, but they also show the way that public funding corrupts both public and private ventures.

The article I cited earlier looked at the public universities, so I will not bother mentioning those. Instead I will look at financial assistance. As I described in "The State Versus Universities", "The Endless Cycle of Intervention" and "When Help Hurts", the introduction of student loans had a dramatic, and deleterious effect on the quality of education, but the problems don't end there. When combined with government funding of research, we end up with both public and private universities largely dependent on the government for a large part of their income. And, as I mentioned in "The Failure of Peer Review", this means that government beliefs, government policies, have an inordinate influence on the direction research takes.

And that illustrates the other route government can take over the private enterprises. In the case of the railways, the failure of the public part of the market was used to justify takeover of the private. In the case of the universities, funding of public universities, as well as research was then "offered" to private universities as well, allowing the government to effectively make public the private ventures.

And that is the problem with public enterprises trying to coexist along with private. Should they fail, then that failure will be sued to justify complete nationalization, effectively ending private ventures. But even if they are propped up with tax revenues and allowed to continue to run, that will be used to slowly intervene in the private firms.  For example, problems found in the public enterprises will be used to justify new regulations, regulations controlling both private and public firms, giving the government additional control.

But that is not the only possibility. There is also the route taken with universities. The public firms will find they need "services" or "support", and various secondary enterprises (such as research grants) will spring up. These will initialy give some competitive advantage to public firms and so will be offered to private firms., And, while apparently leveling the playing field, will, in reality, simply give the government more control over the nominally private firms.

And there is one other way the coexistence of public and private fails. As we have seen with medicare and medicaid, when the government becomes one of the largest players in an area of commerce the policies they establish will become the standard, as those who provide them with various services will adjust their practices to their single largest customer.  Just as Walmart and other huge firms set the policies followed by their suppliers in the private market, so the government will come to set the policies. However, this means, effectively, that the other firms int he same field will be following government policies, as their suppliers will insist upon it. And so, without even explicitly establishing regulations, or offering any incentives, the government can, through their public ventures, control some aspects of the private firms with which they compete.

And that ignores the subtle ways in which government can use its position. Thanks to the ability to threaten nationalization, or regulation, or some other detrimental action, the government can cause many things to happen without officially doing anything. Just look at the way many industries respond to the suggestion of congressional hearings or reports of a bill being introduced in committee. The threat of government action often is all that is required. And so, without officially doing anything the government can often give competitive advantage to the public firms by controlling the actions of the private firms. In fact, private firms may not even need that much incentive. Should they think their actions may drive the public firm into bankruptcy, many private firms will hold back, for fear of the consequences of doing so, and so they will act against their own interests to preserve the public ventures.

There are probably a dozen other reasons public and private firms cannot coexist, but the basic reason they cannot is that the state does not want them to. Once the state has decided an area of the economy is important enough to merit a government run firm, odds are good that there are a significant number who want to control that field outright.  Which means, one the public firm exists, it is just a matter of time before the government begins to expand its involvement. And, as I wrote in "Inescapable Logic"and  "Smaller Government , Fair Weather Friends and Special Cases", the logic of such expansion cannot be resisted. Just look at how tax breaks for home mortgages expanded to Fannie, Freddie, FHA, and then to the outright government takeover of lenders we have today. Does anyone think that the government is ever going to become less involved in mortgages?

No, once the government enters an area of the economy, there is only one direction things an take, and that is total control. There have been a few rare exceptions, but I would not want to count on them happening again. So long as we accept that the state can involve itself in the economy, we are living on borrowed time, and total state control of the economy is all but inevitable.

POSTSCRIPT

For those interested in my writing on the medical debate, the best place to start is  "Medical Reform, An Overview", which includes links to all of my earlier writings on the subject. Since then I have written a few additional posts ("The Absurdity of Mandatory Insurance",  ""Compassion"? Well, For Some","ObamaCare's Achilles Heel"), which elaborate upon points I made or cover topics I forgot in my summary. There are also a few recent posts relevant specifically to the regulatory aspects rather than the medical ones, such as "Symmetry and Asymmetry in Government", "The Inherent Disappointment of Authoritarianism", "The Government Versus Innovation", "Humor and Nightmare" and "The Inevitable Spread of Regulation", which I would also recommend. I would also recommend "The Inevitability of Bureaucratic Management in Government Enterprises", as it explains why public ventures are inevitably so much less efficient than private ventures. Finally, I would suggest  "Planning For Imperfection", "The Importance of Error",  "Fairness and the Free Market",  "The Limits of "Scientific" Management" and "Greed Versus Evil" as good summaries of my arguments for the free market, as opposed to government intervention.