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Public Services: Excerpt from Economics in Two Lessons

December 28th, 2016

As we saw in Section …, Lesson 1 does not apply to public goods, which can be used all, without any diminution of their usefulness, and for which no price can be charged. Many of the core activities of government may be regarded as providing public goods. These include public health measures, the control of air pollution, urban planning, police services and national defense.

More abstract services such as the legal system, the definition and enforcement of property rights, systems of weights and measures and so on are also public goods. Less obviously, macroeconomic management is a kind of public good (or sometimes a public bad). The level of economic activity, the rate of inflation, exchange rates and interest rates affect everyone, though in different ways.

Most advocates of Lesson 1 recognise at least some of these forms of public good provision as essential. The big disputes arise over services such as health, education and welfare services, which have long been provided, or at least funded, by governments. These services are commonly referred to as ‘human services’, and typically involve a personal relationship (doctor-patient, teacher-student, caseworker client and so on) between the service provider and the recipient.

Although these services are sometimes referred to as public goods, they don’t, in general, meet the criteria economists use to define public goods. A hospital bed or school place provided to one person isn’t available to others, and prices can be charged for access to these services.

On the other hand, neither do these services the standard conditions of Lesson 1. There are two central problems that arise. First, these services are expensive and recipients are rarely in a position to pay for them directly. As a result, all of the problems of risk and insurance, discussed in Chapter 10 …, apply to the financing of these services.

The second problem is that the relationship between providers and recipients typically involves an imbalance of information, power or both. A student is not in a good position to judge whether the education she is receiving is good or bad. Similarly, a patient must rely on their doctor’s expertise and professional ethics to get the appropriate treatment. In other cases, such as that of police services, there is also an imbalance of power, which may be misused.

Advocates of Lesson 1, such as Milton Friedman in Free to Choose have generally accepted the need for public funding to overcome the problems of financing education and, at least in some instances, health care. However, Friedman and others have assumed that any other problems can be overcome by market competition and consumer choice. Indeed, they have argued that market competition will help to prevent corruption and abuses of power that arise when governments provide services directly.

As a result, market advocates have favoured policies based on concepts such as ‘contestability’ and ‘contracting out’, in which for-profit firms compete to provide publicly funded services. The archetypal example is the perennial proposal for school ‘vouchers’, that is, funds allocated to students or their parents which can be paid to whichever school they choose to attend.

This idea was elaborated into a complete ‘reinvention of government’ by writers like Osborne and Gaebler in the late 20th century and implemented, to a large extent, in the wave of market liberal reform led by the Thatcher government in the UK. As a result, we have accumulated plenty of experience of market contestability and for-profit provision.

Theoretical analysis doesn’t give any clear answer as to which model of provision is likely to be best for services like health and education. However, after several decades of experience with market-oriented contestability, the empirical evidence is stark. For-profit provision of such services is at best problematic, and at worst disastrous.

The only other model with success comparable to that of public service provision is not-for-profit provision by organisations with a charitable or activist mission. Church-run schools and hospitals, and activist-run services like women’s shelters and services for the unemployed and homeless, have complemented the public sector, meeting needs that have been unrecognised or underserved.

The issue is not, in the end, one of public versus private. Rather it is the fact that market competition and the profit motive inevitably associated with it is antithetical to the professional and service orientation that is central to human services of all kinds.

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  1. December 28th, 2016 at 16:03 | #1

    Hot off the Nation presses a story might be useful for a footnote …
    Karl Polanyi: Is the mid-20th-century economic theorist an example of the impracticality of left-wing thought? Or a guide for our times?
    https://www.thenation.com/article/karl-polanyi-in-our-times/

  2. December 28th, 2016 at 16:12 | #2

    Coda: ROBERT SKIDELSKY
    Economists versus the Economy

    Let’s be honest: no one knows what is happening in the world economy today. Recovery from the collapse of 2008 has been unexpectedly slow. Are we on the road to full health or mired in “secular stagnation”? Is globalization coming or going …
    https://www.project-syndicate.org/commentary/mathematical-economics-training-too-narrow-by-robert-skidelsky-2016-12

  3. hc
    December 28th, 2016 at 20:04 | #3

    Its good. A very small point. Non-excludability means you can’t price. Non-rivalry means you would not want to even if you could.

    You are not introducing different intermediate categories – club goods and common property. Also I strongly favour distinguishing between open access goods and common property.

  4. James Wimberley
    December 28th, 2016 at 22:24 | #4

    The paragraph on not-for-profit provision of human services gets the story the wrong way round. For most of human history, such organizations provided most of the schools and hospitals there were. The state gradually took over, less because of inefficiency but to secure universal coverage and minimum standards. It is still the case that charities survive and emerge to fill gaps in public provision. The Samaritans and AA are striking examples of successful gap-filling.

    A few anecdotes. Coastal lifeboats in the UK are still provided by a charity, the RNLI. In most countries it’s a public service. I suppose the anomaly survives because the amount of money is very small, and if the donations dried up the state would step in.

    Hospices are, also in the UK, still provided by charities. (There is some criticism that hospices cream off donations to other less striking causes.) Terminal care is plainly a core function of a health service, so why hasn’t it been taken over by the NHS? There my well be fear of the cultural costs of bureaucratisation, such as loss of volunteers. In one case known to me, the chief medical officer of the main Brighton hospice is an NHS consultant in palliative care, which amounts to a large subsidy.

    I once cut a finger with a tenon saw rushing to finish a parquet job. The specialist hand surgery unit in Strasbourg is based in a clinic run by Protestant nuns. It was the most efficient medical service I’ve ever dealt with.

  5. James Wimberley
    December 29th, 2016 at 06:30 | #5

    A comment that doesn’t fit into JQ’s frame, but is worth making. The modern corporation is an invention of the modern state, or better the product of a co-evolution, the state providing legal forms and contract and IP enforcement, legitimised capitalist greed the energy. The result is a highly stylised and narrow profit-maximising machine, as specialised as a T. rex. Tillerson would say that he has no choice but to maximise the value of Exxon to shareholders, whatever the consequences to employees, customers, the environment, or wider society. German “stakeholder” corporations modify this a little, but the extent is really only to include to some extent the interests of German employees in the objective set of say VW, not foreign employees or the other interests.

    Public corporations are not by nature bound to this Karmic wheel, and a much wider range of objectives have been seen in the wild. They can for instance have a much lower rate of time preference, since they can borrow at government bond rates, or respect the constraints of nature on the growth of trees. (I have seen a section of the management plan for the Vosges forests of the French regulator the Office National des Forêts, stretching a century or more into the future, the maturity of its pines and oaks.) The objectives of universities and research councils include the advancement of science, which is not really quantifiable, indefinite, and timeless. Museums aim at the public appreciation of art: the principle that London’s National Galley should be free to the public was IIRC laid down by the ultra-reactionary government of Lord Liverpool, which had no problem with sabring down protesters at Peterloo. Of course, public bodies are prey to the same pathologies as private ones, especially vanity and rent-seeking by officers, plus political misdirection. But if you want to do something wild, like sequence the human genome or send men to the moon, public bodies can get it done.

  6. Crocodile
    December 29th, 2016 at 21:55 | #6

    national defence.

  7. Peter T
    January 3rd, 2017 at 21:36 | #7

    You might note that the contractor state is not a new idea, but a revival of pre-19th century practice. The early modern state contracted out defence, tax-collection and much else. Even Britain, the most centralised and administratively advanced state in Europe, still contracted out many functions until the mid c19.

    Unless one can argue that we can write better contracts, or monitor performance more effectively, it is hard to see why the lessons that led to the progressive replacement of contracting with direct provision (continuity of supply, universality of provision, maintenance of standards) do not still apply. It is also the case that, unless the contracting party retains a core of expertise (that is, a capacity to do, and therefore understand, the business), it will be at the mercy of the provider – a lesson once again being expensively demonstrated in Australia with government IT.

  8. Ikonoclast
    January 4th, 2017 at 06:11 | #8

    @Peter T

    Exactly. ‘Those who cannot remember the past are condemned to repeat it.’ – George Santayana.

  9. Nick
    January 4th, 2017 at 14:54 | #9

    ‘Those who cannot remember the past are condemned to repeat it.’

    By the same token, those who cannot remember the past are often condemned not to be able to repeat it.

    Good things also happened in our past. It’s important to remember them too, and how they came about – otherwise they might never happen again.

    All the best for the new year, John and everyone.

  10. derrida derider
    January 4th, 2017 at 18:01 | #10

    Harry correctly makes the point that theory covers a range of intermediate cases between pure public and pure private goods. All true, and there is some really interesting theoretical analysis of these cases – Ronald Coase is indeed a great and original thinker.

    But I’ve never thought that approach quite as useful as it seems for most policy. I think the point John implies is correct – that virtually no human services are a good fit to models of pure private or pure public goods (and IMO probably not club goods either), and none of these models are terribly robust to relaxation of their principal assumptions (remembering asymmetric info, in particular, is damned pervasive), and so experience rather than pure economic theory should be our guide. If you agree its a point you might wish to make a bit more directly.

    Myself, I think experience clearly shows that the relative merits of private vs public service delivery revolves around political economy rather than market allocative efficiency. The first question we should ask when considering privatisation or nationalisation of human services is Lenin’s – “who whom”( ie who can do what to whom).

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