Thinking the unthinkable

Thirty odd years ago, Richard Cockett wrote a classic analysis of the role of UK think tanks, most notably the Institute of Economic Affairs, in the economic counter-revolution that ushered in the present era of market liberalism. The crucial “unthinkable” idea put forward by the thinktanks was that profit-driven firms might do a better job of providing a variety of services that were then part of the public sector. This contrasted with the dominant view that any failings of the public sector were the result of specific problems such as poor management that could be overcome by better oversight, organizational restructuring and so on.

The resulting policies of privatisation, corporatisation, competitive tendering and contracting, PPPs and so on have transformed the public sector. Their success has also transformed the public debate, rendering their own ideas as part of the common sense[1] of the political class, and making other ideas unthinkable.

The case of for-profit education provides an example. There is now overwhelming evidence that for-profit education has been a disastrous failure wherever it has been tried, and particularly where for-profit firms can gain access to public funds through policies designed to enhance “consumer choice”. Here are some recent examples:

* A New York Times report pointing out that for-profit universities are getting millions of dollars in public funds every month despite a sustained track record of fraud and failure

* One of many reports from Sweden, until recently the poster child for the for-profit sector, now in a state of crisis, with declining performance an growing inequality

* A Senate Committee report, describing “rampant abuse, accelerating costs, and doubling of bad debt” under the FEE-HELP scheme for vocational education

The common element is that the abuses are well known and long-standing, but the proposed remedy is more of the regulation that has failed in the past. The unthinkable option is to shut off the flow of public funds to the for-profit sector and return to the combination of public and non-profit provision that has worked so well in the past.

Of course, once this unthinkable thought is allowed into public debate, the entire premise of National Competition Policy, based on the idea that “contestable” markets are invariably good for the public, would be cast into question. That would open up a reassessment of reforms in electricity, telecommunications, water, health and many other services provided successfully by the public sector over the course of the 20th century.

A couple more observations on the Senate Committee report:

* I was happy to note the Committee’s judgement that ASQA is “not fit for purpose” and particularly its observation that

It is great concern to the committee that the regulator has been accused of being a “paper tiger”, or that one commentator has compared the performance of ASQA to that of the Queensland Greyhound Racing Board.

* As usual, there’s a majority (In this case, Labor and Greens) and minority (LNP) report. But there’s almost perfect consensus. The two reports agree on the following propositions
(a) The FEE-HELP policy is a catastrophic mess
(b) It’s the other side’s fault

fn1. As I regularly observe, ideology always looks like common sense from the inside.

24 thoughts on “Thinking the unthinkable

  1. National Competition Policy, based on the idea that “contestable” markets are invariably good for the public

    National Competition Policy was based on the idea that contestable markets are generally – not invariably – good for the public.

    According to the Old Testament (the Hilmer Report)

    Competition policy is not about the pursuit of competition per se.
    Rather, it seeks to facilitate effective competition to promote
    efficiency and economic growth while accommodating situations
    where competition does not achieve efficiency or conflicts with other
    social objectives

    And doubtless you can find a similar statement in the New Testament (the Harper Report).

    Of course in its application you can find examples where markets were created either where they shouldn’t have been in principle or where the application was OK in principle but botched in practice. But all revolutions are carried to excess by their most zealous supporters.

  2. @Uncle Milton

    You can certainly find abstract statements of this kind, with the function (as you illustrate) of insulating the authors of these documents against accusations of dogmatic refusal to think certain thoughts. What’s much harder is to find any acknowledgement that these statements apply in any specific case.

    Having worked in the field as a Member of the Queensland Competition Authority (probably the least dogmatic of the various NCP bodies), I concluded that the public interest exception was virtually a dead letter. But maybe I’ve missed some relevant examples.

  3. @John Quiggin

    Well, the Potato Marketing Corporation of Western Australia, “responsible for managing the supply of fresh table potatoes in Western Australia”, has survived the onslaught of NCP, though what the public interest is in its existence, I don’t know.

    A problem with NCP in general was that it was driven by Treasury officials and others with first or at best second year understanding of microeconomics. They remembered that competition is good for efficiency in a high level sense, but had forgotten or never knew the conditions under which this is true, and knew nothing at all about the pathological cases, mainly resulting from informational problems, when competition is likely to lead to bad outcomes, so we got the VET fiascos.

    But it wasn’t just that. Private sector competition for public services offered the (mostly illusory) promise of expenditure savings, and, for some governments, the never-to-be-passed-up opportunity to stick it to public sector unions.

  4. The problem with privatization in the US was that they created a system only with incentives to “get students in college”. In that narrow sense, it was a success – they got a ton more students to go to college (any college) and a lot of colleges created for them to go to. But there was nothing in the system of student loans and grants to actually make students cost-conscious or driven to get better returns for their money except insofar that they might balk at taking on too much student loan debt.

    That can happen in a public system as well, if the metrics are similarly poorly designed. Create a public electricity utility with an open financial guarantee and no mandate except “generate kilowatt-hours”, and you’ll get unneeded electricity production and a whole group of interest groups building up around the cheap excess power.

  5. I’m no fan of for profit education, but it seems to me that the problem in that sector is due to perverse incentives and lack of accountability.

    Firstly, the education provider gets the money for signing the student up. Surely they should get the money only if the student succeeds? After all, the outcome we want is an educated person. Surely we don’t just want them off the unemployment stats for a semester?

    Secondly, there needs to be external assessment. Where private education works is in the secondary school system. But this is assessed by external exams, so there is no option to provide a poor or non-existent education. Even in the secondary school system, I don’t think there are any for-profit providers. Which suggests to me that if they are held to account, they can’t compete.

    Of course, providing good external assessment is a really expensive business. A government which is privatising things to save money is hardly going to then spend a fortune making sure that the work is being done properly.

  6. @Uncle Milton
    Uncle Milton:

    I can’t think of too many cases where the reformers have publicly acknowledged the limits of competition. Time and time again they have applied competition for its own sake.

    The most egregious case that comes to mind is that of the privatisation of Telstra. Ignoring the fact (should have been obvious) that the national telecommunications backbone is a natural monopoly, the reformers pushed ahead and insisted on duplicating hardware over the second most sparsely populated continent on earth (after Antarctica). Now the natural monopoly is to be restored by NBN, at a cost of some $56 billion. Had Telstra not been privatised and Optus/Vodafone created, the upgrade to fibre would have happened incrementally in the normal course of Telstra’s business. There would have been scarcely any public debate, tantrums, regulatory stoushes, and mobile black spots everywhere.

    The National Energy Market is another case where the looming problem of carbon emissions ought to have been plainly obvious in 1995, but the reformers pushed ahead in pursuit of financial competition to the neglect of process efficiency.

    Of course, “the reformers” is a rubbery term but to this outsider, the economic policy elite in Canberra and all States seems to be monolithic and seems to have been undeterred by consideration of case-by-case subtleties.

    And it is not as though they have mellowed in time. Even today, they seem absolutely determined to destroy locally owned pharmacies and newsagents and deliver them to two big chains. The reform agenda is not even internally consistent.

  7. Douglas Adams:

    “What was the Sherlock Holmes principle? ‘Once you have discounted the impossible, then whatever remains, however improbable, must be the truth.’ ”

    “I reject that entirely,” said Dirk sharply. “The impossible often has a kind of integrity to it which the merely improbably lacks. How often have you been presented with an apparently rational explanation of something that works in all respects other than one, which is that it is hopelessly improbable?…The first idea merely supposes that there is something we don’t know about, and…there are enough of those. The second, however, runs contrary to something fundamental and human which we do know about. We should therefore be very suspicious of it and all its specious rationality.”

    In politics at least, it’s easier to do the impossible than the improbable: impossible things are typically blocked by a single factor, and changing that is easier than changing the nest of minor problems that obstruct the merely improbable.

  8. Brett and John Brookes: You’re illustrating the point of the OP. If the problem were badly designed incentives, we’d expect to see successes in some jurisdictions and sectors, failures in others. When you see consistent failures in very different jurisdictions, the obvious conclusion is that the failure is inherent in the for-profit system.

    That in turn reflects the fact that the failure here is in the whole concept of incentives. Like it or not, you can’t design good incentives for teaching, so you have to rely on concepts of professionalism, vocation and service antithetical to the culture of a for-profit business.

  9. Like it or not, you can’t design good incentives for teaching

    While I realize that this statement is in a economic context, I’d argue that it is possible to build in any number of intrinsic incentives for good teaching. Finland seems to be an example as is possibly Japan where freedom to innovate, societal respect and professionalism seem too work.

    The problem does not actually seem with the teaching but perverse financial incentives for stockholders and owners who may or may not have the slightest clue about teaching. Which would seem to indicate that most, if not all, for-profit educational institutions should be considered scams until proven otherwise.

    I have heard of one or two here in Canada which seem to be quite good but we regularly also hear of fly-by-night English schools, the occasional vocational school being slammed/closed by the provinicial Ministry of Education and so on.

    The American experiment with private prisons has been an even more lurid story.

  10. @John Quiggin

    It’s not a failure across every sector — the IT industry uses certification courses which are generally for profit but work (e.g., Microsoft certification).

  11. There’s plenty of for-profit education that operates successfully without any assistance from public funds: driving schools teaching people to drive, dance academies teaching people to dance, language academies teaching people languages, swimming teachers teaching people to swim, dive schools teaching people to dive, flying schools teaching people to fly (planes), acting classes teaching people to act, music schools teaching people to play music, and so on.

  12. @J-D

    I’d have spelt out this kind of exception if I had unbounded space and time. It’s the kind that proves (in the original sense of testing) the rule. Training in very simple, easily verifiable skills can be done on a for-profit basis. But if you go significantly beyond the basics, you rapidly leave the area that can be handled well by the for-profit sector.

    So, IT certification but not computer science, music teachers but not conservatoriums, acting classes but not drama school, basic language courses but not modern language degrees and so on.

  13. @John Quiggin

    There is a dividing line, but I think the biggest factor in creating that dividing line is credentialling. For-profit education (without government subsidy) works well at language schools, which students use and value entirely or almost entirely because of and for improvement in ability to use the language, even if no credentials are awarded. For students who study languages at universities, on the other hand, a major motive is the desire to receive university degrees, which are recognised as having market-related value (or why else would anybody ever forge them?).

    Cases like the ones I mentioned, where for-profit education works (and without public funding), are generally cases where no diplomas/certificates are awarded, or where any credentials have no effective backing from any provider-independent accreditation framework. University and TAFE-level credentials, on the other hand, are generally related to government-backed or other systemic quasi-official accreditation frameworks, and it’s generally in that context that the problems with for-profit models (and public funding of them) appear.

  14. I wish people would not get so worked-up and side tracked into worrying over National Competition Policy.

    There is no problem with National Competition Policy and there is no problem with the idea that contestable markets are good for the public.

    Is there any source for anyone claiming that markets are “invariably” good for the public?

    Under market socialism based on cooperatives there may well be a National Competition Policy and an expectation that contestable markets will produce benefits for the public. Markets and competition seem the only way a modern society can ever experience Marx’s eventual “withering away of the State”.

    Today’s issue with NCP and markets is simply the inhumane, exploitative, and corrupt outcomes that arise when competition and markets are based on bourgeois political economy such as capitalism.

    Markets and competition lead to catastrophe under capitalism … because of capitalism.

  15. The most notably successful private education providers are the private secondary schools. And they have a couple of things in their favour.

    Firstly, they are not for profit.

    Secondly, the quality of their product is externally verified, and this information is displayed publicly.

    Thirdly, the parents of the children who attend these schools can be extremely demanding customers. They probably went to such a school, and know how it should run. They are very well informed customers.

    The scam educators are for profit, have no real external assessment, and the kids who attend are older, so basically on their own, with no parental advocacy, and even if parents are involved, they are unlikely to have a good idea of how the provider should be doing their work.

    It really is a miracle that any private, for profit, education providers are not scammers. And the absence of for-profit educators in the secondary school system does suggest that it is impossible to provide a good education and make a profit.

    It is worth noting the universities are not immune to this sort of thing. I’ve heard anecdotally that Open Universities Australia takes students who have no chance of successfully completing a course, and that standards are so low that their graduates in some areas struggle to find work.

  16. @John Brookes In NSW using HSC results as a guide public education beats the pants off private.

    Supporters of private schools hope that their kid will learn social graces and make good connections. It’s a wank and they pay for it.

  17. @John Brookes

    Strictly speaking, there’s no such thing as a graduate of Open Universities Australia (OUA). There are graduates of Monash University who completed their degrees through OUA, graduates of the University of South Australia who completed their degrees through OUA, and so on. It’s the participating university, whichever one offered the relevant course through OUA, that is responsible for awarding the degrees.

  18. @John Brookes

    Open Universities take anyone (it’s also now a for profit organisation) — that’s the idea of it, so it’s not anecdotal at all. Swinburne Online also has this policy, and it’s also for profit. ACU accepts anyone into many courses (all?), like teaching, as do many other universities (I could be wrong about this, but I think Deakin also accepts anyone into teaching).

  19. @rog
    It’s more complicated than that. This is only true because of the selective schools. If you don’t get into one of these (and all other states have less — SA, for example, has none, and only one really “high flying” public school) then private schools are better. The public system also has the lions share of the worst schools. The stats for NSW are here:

  20. @John Quiggin
    The telecommunications counterexample actually confirms JQ’s point. By and large Europe got this right, with some differences between countries. The USA less well, and Australia bringing up the rear. Different designs of privatisation and unbundling produced different results. The profit motive is a reasonable driver for supplying these services. Education less so.

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