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Worse than the Bourbons

September 23rd, 2016

I have a couple of pieces in The Guardian. The first, which came out a few days ago, points out the consistent failure of market competition and for-profit firms to deliver human services effectively and equitably. The second gives the mainstream economic analysis of the problem, in terms of market failure and the mixed economy, developed 40 to 50 years ago, and ignored by the policy class of today, which takes the assumptions of market liberalism (aka neoliberalism) for granted. My summary:

The problem is that the political class, along with much of the economics profession, have done worse than the Bourbons, of whom Talleyrand observed “they have learned nothing, and forgotten nothing”. … Our leaders, and the economists who advise them, have not only shown themselves incapable of learning from experience, they have forgotten much that we once knew.

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  1. Newtownian
    September 23rd, 2016 at 13:17 | #1

    Our leaders, and the economists who advise them, have not only shown themselves incapable of learning from experience, they have forgotten much that we once knew

    Interesting thesis. Funnily in the UK this is exactly what the right of the Labour Party seems to be accusing the left of e.g.

    http://www.newstatesman.com/politics/uk/2016/09/new-times-david-miliband-why-left-needs-move-forward-not-back

    Conversely its interesting that Mervyn King’s opus is quite replete with historical anecdotes, many of which I an outsider was oblivious too previously…..like the history of the development of central banks and the economic crisis at the start of WW1.

  2. Apocalypse
    September 23rd, 2016 at 13:50 | #2

    On competition in health care, the Productivity Commission report which you say ignores mainstream economic analysis, cites with approval a study that warns that

    “it will not necessarily lead to better patient outcomes because most of the assumptions of economic theory that are necessary for competition to work do not hold in the case of healthcare.”

    The Productivity Commission report then says

    “The available evidence, mostly from the United Kingdom and United States, shows mixed results from competition. Mixed evidence was also found in
    one of the few Australian studies — of cardiac patients in Victoria in the early 2000s — which showed that greater competition was associated with lower unplanned readmissions
    but also a slight increase in mortality. The mixed findings in the empirical literature indicate that good market design, including information provision and government oversight, is critical to achieving benefits.”

    This is taking the assumptions of market liberalism for granted?

    Nowhere does the Productivity Commission report say that public health should be privatised.

  3. John Quiggin
    September 23rd, 2016 at 14:29 | #3

    @Apocalypse

    Applying my long experience of decoding PC reports, it’s only the final sentence you quote that matters. I’d translate it as “Despite the evidence, we’re going to assume we can make it work this time”. That’s what’s reflected in the recommendations.

  4. Apocalypse
    September 23rd, 2016 at 14:50 | #4

    @John Quiggin

    You conclude your Guardian piece with “This is ultimately an empirical question” which is what the Productivity Commission says. It might be that your interpretation of the evidence is different from their interpretation, but you can’t fairly accuse them of working from dogma without regard to the evidence.

  5. John Quiggin
    September 23rd, 2016 at 15:56 | #5

    @Apocalypse

    “an empirical question” does not mean “a matter of opinion”. As I’ve argued, the evidence is clear across the human services sector. Lots of catastrophic failures, few if any unqualified successes.

  6. Jim Rose
    September 23rd, 2016 at 16:04 | #6

    Why do the top private universities outperform the top public universities such as the Ivy League universities in the USA?

    Why do people pay fees to go to private schools when their kids can go to the local public school for free?

    Why do people take out private insurance to go to private hospitals when they can rely on free public hospital care?

    Your case is strongest with prisons because of the problems in contracting over quality for services.

    You will note that nearly all of the examples above a nonprofit firms.

    Nonprofit firms survive in competition when there are questions over quality of service. The examples are mutually owned life insurance companies and building societies and credit unions.

  7. John Quiggin
    September 23rd, 2016 at 17:19 | #7

    @Jim Rose

    I suggest you re-read the articles, with careful attention to the word “non-profit”, then examine the status of the private institutions you cite.

  8. Ikonoclast
    September 23rd, 2016 at 18:45 | #8

    J.Q. that much is very true. I mean what you say of the political class. And it was this very political class which built the EU and EMU! So why do you fail to see the EMU failure for what it is and the fact that it is a quintessentially neoliberal project?

  9. James Wimberley
    September 23rd, 2016 at 19:22 | #9

    From the second Guardian article: “As it is, we need to rely on the judgment of our doctors to give us the right treatment and, equally importantly, to tell us when we will get better without treatment.”

    For almost all the history of medicine, it was also a major part of a doctor’s job to tell patients he (it was then a he) could not do anything for them. There was always the pressure from patients to “do something” that fuelled and fuels quack medicine, but the professional duty was clear. The medical revolution of the last century has changed things a lot, and “doing something” is the norm. But not always. A market system greatly increases the pressure to violate the Hippocratic oath to “do no harm” through pointless, painful and expensive treatments, and you end up with American end-of-life “care”.

  10. James Wimberley
    September 23rd, 2016 at 19:32 | #10

    The fifty-year old economic analysis by economists of market failure has been enormously buttressed recently by psychologists. Before, the corrective to the simplistic but enticing homo economicus model of human nature relied on commonsense observations: people have imperfect information and they often make mistakes in processing it. But this wasn’t enough to overcome a “beautiful theory”. Now, thanks to Daniel Kahneman and others, we do have an elegant Theory of the inevitability of systematic cognitive failure. The neoliberals sound now as if they are reading from a dog-eared Victorian textbook.

  11. Greg McKenzie
    September 24th, 2016 at 07:58 | #11

    It seems to be a problem of understanding what “liberalism” means. Everyone knows, from commonsense, that a market is where buyers and sellers interact, but few know the definition of liberalism. Commonsense would imply a free and easy approach to the exchange of services for money. Empirical evidence suggests otherwise. Welfare economists insist that greedy, grasping individualism will lead to high social costs where the provision of services meets the profit motive. Aged care facilities seem to be a case in point but so does the provision of all health care services. Transport services are often provided under taxpayer funded public principles to account for their social benefits to those taxpayers. Education services are jointly provided by the public/private dichotomy that sees taxpayers funds go to both sectors. Private schools, colleges and universities in this country would be less successful without this state funding. The principle of market liberalism is often applied without regard to social costs and diseconomies of scale. Few politicians, if any, could even begin to imagine the Pandora’s box they are opening by the privatisation of social services. Empirical evidence, however viewed, shows up the outcomes of failures to consider social costs involved in the way services are provided.

  12. Julie Thomas
    September 24th, 2016 at 08:27 | #12

    @Jim Rose

    My father said that people send their kids to private schools because their kids are not bright enough to do well at a proper school.

    You should ask yourself why some people who can afford it do not send their kids to private school?

  13. Jim Rose
    September 24th, 2016 at 09:53 | #13

    @John Quiggin
    yes, market competition in social services works as long as the governance structure of the firm is also decided by market competition.

    That case is based on the modern economics of industrial organisation and, in particular, the make or buy decision that any organisation, be they public or private, must face when deciding whether to make a particular production input in-house or source it externally.

    The case was state ownership, as well stated by Andrei Shleifer is no different than any other ownership decision taken by an organisation facing the inability to contract fully over hard to measure quality issues with the goods or services supplied to it.

    Shleifer in “State versus Private Ownership” argues that you make in-house rather than buy in the market under the following conditions:

    1. opportunities for cost reductions that lead to non-contractible deterioration of quality are significant;
    2. innovation is relatively unimportant;
    3. competition is weak and consumer choice is ineffective; and,
    4. reputational mechanisms are also weak.

    As Hart, Shleifer and Vishny say:

    Critics of private schools fear that such schools, even if paid for by the government (e.g., through vouchers), would find ways to reject expensive-to-educate children, who have learning or behavioural problems, without violating the letter of their contracts. Critics also worry that private schools would replace expensive teachers with cheaper teachers’ aides, thereby jeopardizing the quality of education.

    In the discussion of public versus private health care, the pervasive concern is that private hospitals would find ways to save money by shirking on the quality of care or rejecting the extremely sick and expensive-to-treat patients. In the case of prisons, concern that private providers hire unqualified guards to save costs, thereby undermining safety and security of prisoners, is a key objection to privatization.

    Our model tries to explain both why private contracting is generally cheaper, and why in some cases it may deliver a higher, while in others a lower, quality level than in-house provision by the government.

  14. Ernestine Gross
    September 24th, 2016 at 18:04 | #14

    “yes, market competition in social services works as long as the governance structure of the firm is also decided by market competition.”

    But then, one could also say: The market is a hyperplane with normal ‘p’, where ‘p’ is a vector of relative prices (normed to sum to 1). I am talking about a ‘competitive market’.

  15. Ernestine Gross
    September 24th, 2016 at 20:32 | #15

    @Jim Rose

    Regarding your “As Hart (which one?), Shleifer (Andrei) and Vishney (Robert?) say..”:

    What they say is a summary of alledged debating points to motivate their work you alluded to. These debating points are subject to empirical examination. What are the results?

    On empirical results I can offer the following.

    As is widely known, Andrei Shleifer was an adviser to Russia during the large scale privatisation program during the mid-1990s.

    1. “In August 2005, Harvard University, Shleifer and the Department of Justice reached an agreement under which the university paid $26.5 million to settle the five-year-old lawsuit. Shleifer was also responsible for paying $2 million worth of damages, though he did not admit any wrongdoing.[10][16]” [Source: wikipedia]

    2. In 1996 I taught an economics unit in an MBA program. Institutional changes in Eastern Europe was one of several alternative syndicate (group) assignment topics. One group took this topic. Being entrepreneurial, this group went to the Russian embassy to gather primary source qualitative data. The most memorable quote from a Russian senior official, stated in their report was: “These advisers can’t even theorise properly, they should go home.”

    Item 1 above follows item 2 in chronological order.

    Jean Tirole, Drew Feudenberg and Jean Tirole are commendable for those who are interested in the game theoretic approach to industrial economics. Corporate Finance is too narrow for the topic of this thread, even if it pays of very nicely for some people who write on topics who have broached.

  16. Ernestine Gross
    September 24th, 2016 at 20:35 | #16

    Last line: “who” should be replaced with you.

  17. September 25th, 2016 at 15:30 | #17

    One of my heroes Vaclav Havel used to say the the dangers in most societies seems to be the tendency of exchanging one brutalist for another … Like Havel, you have the head and heart at the right spot – as few of us can expose emperors wearing no clothes as you can
    Epidemics of political insanity are unique: Islamists are distinct from Maoists. But they’re united by an iconography and an attraction to dogmatism and violence…  http://www.tabletmag.com/jewish-news-and-politics/213767/euripides-mao-and-qutb

  18. Jim Rose
    September 25th, 2016 at 16:32 | #18

    @Ernestine Gross
    It is well-known that the value of the scientific contribution is determined by the quality of the critical discussion, not the autobiography of the scientist

  19. Ernestine Gross
    September 25th, 2016 at 18:46 | #19

    @Jim Rose

    “It is well-known that the value of the scientific contribution is determined by the quality of the critical discussion, not the autobiography of the scientist.”

    Hence my reference to Tirole and Freudenberg and Tirole.

  20. Historyintime
    September 26th, 2016 at 11:28 | #20

    Surely some elements of the health and education production processes are amenable to market provision and competition.

  21. Ernestine Gross
    September 26th, 2016 at 15:44 | #21

    @Historyintime

    Well, the term ‘market provision’ and the term ‘competition’ are not as clearly agreed upon concepts as what you may assume.

    The term ‘health and education production’ is even more vague. Health and education production processes is literally nonsense. Where can you buy 1 unit of ‘health’? Where can you buy 1 unit of ‘education’ in exchange for money?

    Suppose, we interpret ‘market provision and competition’ as profit motivated private enterprise. Then there is the distinction between unregulated and regulated private enterprise. Suppose we consider both and ignore the foregoing serious difficulties with terminology, then we can list a few examples where I believe there are no systematic issues of the kind JQ’s post is concerned with.

    For example regulated pharmacies (where a pharmacist has to have professional qualifications), which sell prescription and non-prescription medicine. The producers of say elastic support stockings, the producers of walking aids, walking sticks, hospital beds and associated equipment, sanitary items for incontinence, medical gloves, sterilisation equipment, are some further examples.

    In education, I should think the production of writing material, the building of class rooms, the printing of texbooks, the supply of heating equipment for universities (some are in dire need of such), computer equipment are examples where there is no obvious issue with the suppliers being profit motivated private enterprises (although the computing ‘industry’ is a bit of a problem.)

    All the examples I have given consist of ‘inputs’ of physical goods used in the provision of health services and education services.

    The question of this thread is: Can services (like health and education) be treated like physical goods? The answer is No in the first instance.

    It may help to introduce the concept of ‘a commodity’, used in post-1950 theoretical models of competitive private ownership economies. A commodity is defined by its physical characteristics, time of availability and location of availability.

    To make ‘services’ equivalent to a good, via the concept of a commodity, we would require very different technologies towhat we have. For example:

    To tell a good teacher from a bad one, all of them would have to enter the class room with some kind of electrodes attached to their heads and all students would have to wear the same equipment. Then one would need to have scientific knowledge and equipment to translate the neural activity measurements into some matrices, which allow a comparison of each of the students’ brain power and activity and the same for each teacher. Of course, managers would also have to wear such equipment. Bricklayers, on the other hand could work without it because it is not too difficult to count the number of brick layed per hour and the quality of this important work.

    Some economists have not forgotten and have learned something new.

  22. GrueBleen
    September 26th, 2016 at 16:22 | #22

    @Ernestine Gross
    Your #15 and #16

    Well, I think, since I’ll have great difficulty deciding on “the quality of the critical discussion” at this point in time, I think I’ll go instead for “the autobiography of the scientist”.

    So, in my never ending quest to drink in the core of the matter*, I’ll raise the question with your good self: how can “the governance structure of the firm” be “decided by market competition.” ?

    Is there some kind of race going on here with ‘market bookmakers’ betting on all the various feasible governance structures of the firm until a single winner emerges ? Sure I get the “price signal”, but as we know very well from the motor car industry, price is only one of many “signals” that are given and received. Because if price was dominant, we’d all drive Toyota Yarises, wouldn’t we.

    But also, we have this thing about “private hospitals would find ways to save money by shirking on the quality of care or rejecting the extremely sick”. But what about what they really do ?

    1. overcharge hugely for standard services
    2. over-diagnose and over treat.

    Doesn’t anybody ever consult lawyers and see these mechanisms in full flight ? Except in the legal aid community clinics where they always under-diagnose and under-represent because there’s too few trying to do too much. And possibly some public hospitals are like that too.

  23. GrueBleen
    September 26th, 2016 at 16:26 | #23

    @Ernestine Gross
    My #22

    PS
    * just fyi, ‘grok’ as Heinlein formulated it, was a Martian word meaning, in its simplest term, ‘drink’.

  24. GrueBleen
    September 26th, 2016 at 16:34 | #24

    @Ernestine Gross
    Your #21

    [sigh] You wouldn’t like to try to become Australia’s second female prime Minister, would you ? I’d vote for you, and I’m sure Ikono would too even if we had to move interstate to do so.

  25. paul walter
    September 26th, 2016 at 22:59 | #25

    AS most you know, I am not on top of the more esoteric elements of economics but find this:

    http://www.abc.net.au/news/2016-09-26/economic-leaders-falter-as-janet-yellen-shreds-credibility/7875978

    intriguing.

    What Iam hoping some might do, is explain where Ian Verrender’s article may fit in with Prof.Quiggin’s essays included above.

    Any help will be appreciated.

  26. Ernestine Gross
    September 26th, 2016 at 23:17 | #26

    @GrueBleen

    Your 22:

    You ask: How can “the governance structure of the firm” be “decided by market competition.” ?

    I don’t know.

    Perhaps the origin of the words in question are taken from creative writing where the meaning of words is determined by choice exercised in a ‘free market’? [1] Perhaps the word ‘market’ has acquired a similar role in some communication circles to that of a joker in some card games? Endless possibilities, none of which amenable to empirical verification.

    [1] This is not meant to be toung-in-cheek. I recall being given a questionnaire by a research manager. The questions could be interpreted in many ways. In reply to my inquiry about the meaning of particular words in questions, for which quantitative answer were sought, I was told the words mean whatever I want them to mean. This gave me the idea we are at a stage in civilisation where the quantification of nonsense is being practised, with averages and the distribution of the said quantities being calculted and compared across departments. Incompetence? If so on whose part? Or an instance of evidence of misallocation of resources?

  27. Jordan from Croatia
    September 27th, 2016 at 04:40 | #27

    @paul walter
    As far as i can see, only relation with those two articles are the actors, they are the same:”the political class, along with much of the economics profession, have done worse than the Bourbons, ”

    It is the political class that is encompassed by neoliberalism that keeps failing doing the same no matter outcome. Government is avoiding to enact stimulative fiscal policies that monetary policy is allowing them.

    Verender is prescribing correct solution: “Rather than rethink the balance between monetary and fiscal policy between central banks and Governments, the response has been to continue with the broken formula.”

    But, Verender is putting the blame in the wrong place, he is blaiming Central Banks which is wrong. CBs are doing their part and CB governors are consistently begging politicians to do their part with fiscal policy.
    “The balance between monetary and fiscal policy” is CBs keep low rates and save banks(prevent run on the banks) while governments borrow in low interest for stimulus spending. Balance is that they do not counter each others policies but act in expansionary policies. Low interest is expansionary, austerity is contractionary.

    It was never CBs role to enact fiscal policy, Verender is asking for exactly that, that “experts” in CB enact fiscal policy and coordinate that with government. Funny thing.

    Failing is with political class that is not responding to cry from populace to enact proper fiscal policies. Politicians are neoliberals, enacting neoliberal policies of helping rich become more rich on the expense of everyone else. And what is even worse, they are enacting stimulus that is destructive; they are enacting more spending on wars only. But that is the part of the neoliberal lore that wars are the reason that we got out of depression, not spending itself that stoped deleverage and solved private debt problem.

  28. September 27th, 2016 at 16:53 | #28

    @Jim Rose
    When looking at private education you need to realise that private schools in Australia are not profit making organisations.
    The end result of private education is a set of externally set university entry exams. This external assessment means that private schools have to do a good job.
    The students at private schools have parents who care about their children, and can (and do) move their kids away from schools they aren’t happy with.

    I private schooling, the parents are paying for a lot more than just education. They are paying for their kids to have great experiences in sport, music, drama, travel etc. They are paying for their kids to meet other kids who may later be useful contacts.

    All these things make private schools work reasonably well, although at a pretty high cost.

    The problem with most of the market failures in human service provision is that the factors that make private schooling reasonably successful just aren’t there.

  29. GrueBleen
    September 27th, 2016 at 17:00 | #29

    @Ernestine Gross
    Your #26

    Ah yes, that questionnaire is surely a lovely example of open-ended deconstruction. Which, of course, is just an example of “words mean whatever I want them to mean”.

    So, words have “connotations” (roughly synonymous with intension) and denotations (roughly synonymous with extensions). So, with the application of copious goodwill, your research manager might have been inviting you to search your mind for the connotations/intensions of the words and thus to apply a denotation/extension that is appropriate to you.

    It all sounds like an exercise in meaningless self-psychoanalysis to me. But maybe its just that our civilisation has fallen into the hands of mystics. Do you have any clear idea what was done with the “data” after it had been collected ? I’m assuming we don’t have a Sokal exercise here.

  30. Ernestine Gross
    September 28th, 2016 at 16:45 | #30

    @GrueBleen
    No Sokal exercise was involved. Can’t say more because otherwise people involved could potentially be identified, which would not necessarily be a good thing.

  31. GrueBleen
    September 28th, 2016 at 17:15 | #31

    @Ernestine Gross
    Your #30

    No, if I were them, I wouldn’t want to be identified either 🙂

  32. Ernestine Gross
    September 28th, 2016 at 18:43 | #32

    @paul walter

    Please don’t expect a comprehensive answer to your question from me. I’ll try.

    The link of the content of the abc article to JQ’s thread is not straightforward, although it exists.

    JQ’s thread deals with:
    a) the provision of services (are services like marketable ‘goods’ that can be provided by profit motivated private enterprises. (I commented on question in my post #21).
    b) the change from the ‘mixed economy’, the kind of institutional environment people older than about 40 years grew up with and considered to be normal, to an institutional environment where the underlying assumption is ‘privatise and regulate’.
    The 2 points are linked via the notion of ‘market failure’.

    The article you linked to is primarily concerned with the deregulation of the financial system and the policy reactions (monetary policy only).
    In a sense, the deregulation of the financial system, compared to the system during the Keynesian era, is also based on the assumption that financial securities are just like marketable goods. This resulted in the GFC, which some economists consider a prime example of market failure. (I say, yes, it is a market failure but for different reasons – my repetitive reference to Radner’s mid-1970s work on a competitive private ownership economy with a sequence of commodity and financial securities markets.)

    Let me know further questions, if any.

    b)

  33. paul walter
    September 29th, 2016 at 01:06 | #33

    Ernestine Gross, you are a magical person, never not an effort to offer constructive advice.

    I understand you are an academic and you would be the vocational sort, you love exploring and finding out things, have the cognitive horsepower to find things out, understand what you have discovered, even complex examples and somehow the character to want to share your knowledge and efficiently, with others for the enjoyment of it, rather than hoarding it in a brown paper bag like Ralph Nickleby. Your spiritual ancestors would include Socrates and Epicurus and people like yourself restore my faith in human nature

  34. paul walter
    September 29th, 2016 at 13:13 | #34

    Also thanks to Jordan from Croatia.

  35. paul walter
    September 30th, 2016 at 10:47 | #35

    Just picked up on article by Dr. Catherine Lumby at the Grauniad that offers an emphatic endorsement of Prof. Quiggin’s viewpoint.

    https://www.theguardian.com/commentisfree/2016/sep/26/some-services-cant-be-measured-by-accounting-firms-prison-education-is-one-of-them#comments

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