By Ryan McGreal
Published April 16, 2009
In response to my post earlier today about a new study by the Canadian Centre for Policy Alternatives on the "quiet bargain" that public services deliver, a few commenters have expressed skepticism based on the observed inefficiencies of many government operations.
I sympathize, but remain unconvinced that the inefficiencies of government are peculiar to their being government-managed and not more generally related to governments being essentially corporate in structure.
Ronald Coase was an economist from the early-to-mid 20th century who spent a lot of time studying transactions costs - the cost in time, money and opportunity that comes from having to negotiate a transaction between two parties. He concluded that hierarchical organizations exist because beyond a certain scale, the efficiencies that come from the top-down management of information and decision-making outperform the efficiencies that come from free and voluntary exchange.
Think of it this way (I'm borrowing this example shamelessly from Clay Shirky in his excellent book _Here Comes Everybody_). You and a group of friends want to watch a movie, and the group goes about deciding which movie everyone wants to see. The number of transactions involved grows much faster than the number of people involved:
and so on. Eventually, the sheer cost of all the transactions renders it effectively impossible to decide, affordably and within a reasonable time frame, on a movie.
This is why it's so difficult for communities to organize spontaneously, establish consensus on an issue and take action in their own interests. It requires someone or a small group to act as an organizing agent, set an agenda and then seek support.
In the analogy of the movie, you send a message to your friends saying, "I'm going tonight to see 'Hannah Montana: The Movie' at The Movie Palace on Concession. I hope you can meet me there!" People then meet you or not as they prefer.
Corporations persist because a management team decides on a business model and unilaterally instructs the workers to follow it, eliminating the transactions costs of all the employees trying to come up with a consensus on a business model.
The downside to this is that the management team's information is never perfect, its analysis is never ideal and its business model is often not optimal. It's merely less wasteful and inefficient than the alternative.
It's been said that companies-as-entities rarely know even a fraction of what their employees know in the aggregate, but the transactions costs of all that information sharing end up being higher than the additional value that comes from the shared information. (Think of Brooks' Law: Adding more people to a late project makes it later.)
What we end up with are organizations that make bad decisions, mis-allocate resources, misjudge customer reactions to their policies, waste resources on unproductive efforts, spend lots of money on consultants' reports of dubious quality, and the like.
Since the only competition companies face is with other companies that face the same organizational constraints, even the most efficient, most competitive companies still produce high levels of aggravation for both customers and employees.
In many cases, those companies that seem to catch the drift of markets more effectively and enjoy big successes in exploiting new opportunities are really just lucky - in the right place, at the right time, trying out the right guess.
Where markets as such produce efficiency is in allowing the opportunity for many different companies to try out different ideas and business models. Those companies that are most effective at attracting customers, selling at a profit and expanding their market share become successful.
But the case can be made - and often is - that market-driven organizations are inherently more efficient than government organizations because they face market competition and governments don't. There are a few problems with this hypothesis.
First, competitive corporations are better at allocative efficiency, or getting resources to where they can produce the highest return, but that's not always the efficiency that public services are looking for.
For example, universal health care is demonstrably far superior to market-based health care at getting resources to where they can be used most effectively to treat illness. Whereas a market-based health care provider's primary goal is to mazimize income and minimize expenditures (leading to risk selection, dis-allowing coverage for pre-existing conditions, etc.), a public health care provider's primary goal is to treat illnes, and to treat the most serious illness first.
By just about any measure you can imagine, health care in every country with universal coverage is far more efficient than health care in the US, where it is delivered for profit: life expectancy, infant mortality, overall morbidity, level of coverage, administrative costs as a share of total costs, total costs per capita, total costs as a share of GDP, and so on. Even overall wait times in Canada compare favourably with the US (though it's possible for wealthy Americans to buy their way to the front of the line).
This leads to the second exception: many public goods more than pay for themselves in increased overall economic productivity but cannot be produced by market forces at any price.
For example, education is a classic positive externality, meaning that some of the benefits of education accrue to society as a whole rather than the individual receiving the education. Positive externalities create an incentive to consume less of a product because part of the benefit is borne by others.
If people had to pay out of pocket for their own education, the overall education level would be lower than it is today, and the total productive capacity of the economy would be far lower. Employers would have fewer skilled workers to draw upon, research departments would have fewer students, leading to lower rates of innovation, and so on. The net drag on economic growth would be enormous.
Finally, governments have mechanisms of accountability that differ in form but not in legitimacy from market forces. There's always room for improvement in the transparency and accountability of both elected officials and government staff, but in general, governments eventually pay the price for secrecy, wastefulness and corruption - often on a scale much smaller than what corporations get away with on a daily basis.
For example, the AdScam scandal that brought down the Liberal government amounted to a misallocation of $100 million to Liberal-friendly companies (much of it illegally) over eight years. That works out to be $0.42 per capita, per year in misdirected funds.
What brought the Liberals down was the principle of the thing: the violation of a profound trust between voters and the government they elect to act openly, responsibly, and ethically on the public's behalf and in the public interest.
That is a powerful mechanism of accountability, one we shouldn't discount because it's not as easy to quantify as EBITDA and market share.
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