Competition and human services don’t mix

According to today’s news, the government has estimated that for-profit vocational trainers are three times as expensive as TAFE. That’s no surprise to me, but it’s a striking contrast with the barely qualified enthusiasm (until very recently) of the Productivity Commission.

I’ve put in a submission to the PC inquiry into Competition in Human Services arguing that
(i) there’s no reason to expect that competition will deliver improved “consumer” (that is, student) choice or better outcomes
(ii) the failure of the PC to foresee, or recognise until much too late, the disastrous failure of for-profit vocational education means that its judgements about areas that might be opened to competition in future should not be relied on.

My submission is here

34 thoughts on “Competition and human services don’t mix

  1. This was a pretty good paper.

    However all capitalist economists:

    should engage in a comprehensive reassessment of its analytical framework

  2. I’m going to make a trivial, somewhat pedantic correction: the optimal position for the two icecream sellers in terms of mean welfare is 1/4 along and 3/4 along the beach. (When the icecream sellers are each located at 1/2, the mean walking distance is 1/4 of the beach length, at 1/3 and 2/3 the mean distance is 5/36, at 1/4 and 3/4 the mean distance is 1/8.)

    Otherwise, I think it’s a valuable contribution, hopefully the Productivity Commission engages with it in a serious way – best of luck.

  3. Congratulations John on your recent bit of soothsaying.

    The next trick needs to be to explain to them why all the brilliant economists/analysts at the Productivity Commission are getting it so wrong more generally. Why is public not for profit cheaper than private for profit other than the obvious reason embedded in the latter contrasting description?

    Political interference aside I suggest it could be the operating model – of a capitalism in the perfect world from Milton Freidman’s dream/delusion time – is now obsolete. In fact the real world of hegemonic neoliberalism employs that tried and tested way to make profits – classic feudal rent extraction based on obtaining a monopoly and then screwing the public while your powerful mates remain oblivious or complicit in their bubble worlds – like bulldog Scott Morrison who has just discovered housing unaffordability thanks to the modern equivalent of M. Antoinette’s “Let them eat Brioche”, the Australian’s Bernard Salt with his “Let them not eat avocado!”.

    I encountered another manifestation of this delightful rentier capitalism, at that centre of Macquarie Bank rent extraction and inefficiency, Sydney Airport, last Friday. Yet again their hedonic pricing modellers have pushed ‘free’ curb side pick up further away from the terminals into the impracticality/making it hard on tired friends zone….now 1/2 kilometre away from the terminal exits if you can find it, with the earlier arrangements being now charged a ‘nominal fee’ via yep Tollpass on the basis of rising costs – when anyone who has travelled overseas knows they are already grotesque rent gougers. Ka Ching. Here is the story.

    To complete the picture if you want to park properly because the flight or baggage handling is late/delayed, well that is an extra surcharge again.

    (I can just see the bank analysts who discovered Excel’s regression analysis feature applying Hedonic pricing and saying whoopee – good six months bonus….stuff the peasants as I have a company driver. They probably realized that the combination of mobile phones plus free parking at Krispy Kreme was ruining their old rent extraction model……and so).

    Elsewhere in Sydney of course the same thing is happenning with tolls being put back on motorways to subsidize the private motorway builders and their construction of more car base non solutions to transports under the oversight of Lucy Turnbull. And the state govenment levels the playing field to zero by wiping out the major centre of dissent, the old local councils, and installing their hand picked prodevelopment mates. Its a beautiful system.

    Meanwhile us aspiring retirees are complicit in this whole social mess too (housing unaffordability, bank shares, infrastructure ‘investment’, dog box high rise neighbourhood destroying condominium development) through our rent extracting superannuation schemes.

    On this topic here is a new nice recent article from my economics hero Michael Hudson on this favorite topic of rentier capitalism “Its not personal, its just good business”

  4. The advice from the PC doesn’t seem to represent decent value for money. Perhaps the government should get the PC to investigate. I’m sure there must be a cheaper option (shakes magic 8-ball)

  5. The Hotelling model, referenced in the submission, does not tell us anything about competition in human services or anything else. All it tells us (given its assumptions) is that duopolies lead to identical outcomes, which which already know from experience (Coles & Woolworths, Qantas and Virgin, etc).

    At the level of theory, the Hotelling model breaks down when you introduce a third seller. The outcome is that all three sellers don’t position themselves in the centre. One of them will have the incentive to move away from the other two. In practice, this is also what happens (Aldi is different from C & W, Tiger is different from Q & V).

    The experience of the Dawkins universities is telling but not conclusive, as the funding model for universities at the time (and still) provided powerful incentives for them to provide identical products. Attempts at changing the funding policy model to induce a bit of differentiation (such as that proposed by Christopher Pyne when minister) got shot down, for better or for worse.

    It’s a bit rich for people to argue against competition in human services because competition in higher education led to no differentiation while having previously argued against changes to competition in higher education because they would have led to differentiation.

  6. @Ken Debreu
    Pre-Dawkins, we had differentiation of product, for want of a better word. You did not need university as the only choice for post-secondary education. You could make use of the Colleges of Advanced Education, the TAFE system, apprenticing, the Institutes of Technology, etc. All capital cities had a university, and one or more of the other choices as well. To argue that the universities weren’t differentiated is not accurate in the first place, and further more, there were the other categories of further education that were available—without going into a lot of debt.

    We now have a situation where huge streams of money are poured into the top tier of management and executive function, yet the workforce is ever more casualised and utterly precarious. What improvement has this actually brought to the potential student?

  7. @Donald Oats

    I know they were differentiated pre-Dawkins, but not post. This was driven by the funding model, which encouraged them all to be copies of each other. It didn’t have to be this way.

  8. I think you’re right about the vocational training John Quiggin, but I think the NDIS might work pretty well once its implemented and fine-tuned, with providing more choice to people with disabilities.

  9. @ZM

    The NDIS might indeed work well, though it doees look like a case that John would think would not work well. Open ended subsidies? Check. Badly informed and vulnerable consumers? Check.
    Massive program too big to monitor properly? Check. Much will depend on whether the quality regulator (or regulators) are well-resourced, not captured and have the cojones to stop rorts when they see them.

  10. Great paper, John. You really nailed it down! Did you check out Fraser’s speech in Japan on
    Friday. I am still going through the details but it seems he is predicting Real GDP approaching 3.5 per cent for the calendar 2016. Must see what measure he is using for that bolt of insightfulness.
    Anyway just wanted to complement you on an exception submission.

  11. When I was knocked down by a car while crossing the road, somebody called 000 for an ambulance to take me to hospital. Nobody offered me a choice of differentiated emergency transport products. I didn’t need a choice, I needed an ambulance.

    I’ve called 000 myself for the fire brigade, once, when some oil on the stove caught fire. I have a fire blanket in the kitchen now, but I didn’t then. A fire blanket is not a complete substitute for the fire brigade. I didn’t need a choice then, I needed somebody to put the fire out.

    I’ve called the police, too, although not the emergency number (I was knocked down and robbed once, and I’ve walked into the family home to find it had been burgled). They weren’t actually able to do anything to help in those particular circumstances, but if I ever did actually need the police, I can’t imagine how it would improve things to have on offer a range of police forces offering differentiated services.

    Sometimes consumer choice improves outcomes. I experience a benefit from having a diversity of restaurants within walking distance of my home, with highly differentiated offerings, and I miss it when one I like closes down. But sometimes choice is not what I want and not what I need. Sometimes ‘how can we increase choice?’ is the wrong question.

  12. @J-D
    Your #14

    You have had a somewhat misadventurous life, J-D. I feel a just bit privileged to have had my own quite unexciting existence by comparison.

    However, multiple choice, like a supermarket aisle filled with rows and rows of cheeses (but never any cambozola 😦 ), as graphically illustrated by Borat.

    It used to be stated as an obvious truth that humans could only keep a maximum of 7+/-2 things in our minds at any one time, and hence that was the maximum number of choices we could effectively decide between. Not quite as true as once believed, of course, but still indicative.

  13. William Baumol’s 1980s contestable markets model for studying industry structures seems to be in vogue in the public sector for at least a 11 years. [1]

    I am not sure at all how Baumol’s and Hotelling’s work relates to the problem of seriously asymmetric information (specialist skills acquired and owned by individuals) in education, health, age care, childcare. Analytically, the providers of education are academics (teachers) and not corporate managers. Similarly, the providers of medical services are not corporate managers but medical practitioners. Hence the industry approach (Baumol as well as Hotelling) is wrong in line one of writing down the problem.

    The other day I met an ex-colleague (a full professor for some time) from a major Sydney university. He summarised the state of affairs of the corporatist-managerialist approach that has evolved during the past 10 years by saying: “They monitor that which is unimportant and don’t monitor that which is important.”

    I hope the empirical evidence in JQ’s submission will have an impact on the Productivity Commission.

    Incidentally, how is innovation and productivity increase supposed to work if those who have the skills and the motivation to innovate and be productive have to spend a lot of their time with the serious error generation process of those in charge?

    [1] It was used by the consultant hired by the NSW government and used by IPART in the context of the attempt to privatise water in NSW in 2005; I know this because I wrote a submission to the effect that this model is inappropriate for stated reasons (essential commodity; incomplete markets), supported by a reference list.

  14. @GrueBleen

    It didn’t occur to me that my life would seem like that when I was compiling my comment. To me my life feels, despite the occasional incident, mostly uneventful and mostly fortunate.

    Cheese is another example of something where increased choice is a significant benefit.

    But when it comes to things like schools, colleges, universities, childcare centres, public accommodation, parks, hospitals, counsellors, doctors, dentists, pharmacists, optometrists, and physiotherapists — as well as emergency services — although I wouldn’t go so far as to insist that there’s never any value in increased choice, it seems obvious that public policy should place a much higher priority on making sure that everybody has access to at least one good one than on encouraging increased availability of choice.

  15. The thing about conservatives is how inconsistent they are. When it comes to our institutions they (quite rightly in my opinion) recognise that they are dealing with things that have evolved over time to serve us well, and that they should not be tinkered with lightly, for fear of ruining them. Although this does tend to lead to the conservative position on everything – don’t change it.

    But when creating something new, like government funded for profit education, they are prepared to cobble something together and see how it goes. And they cobble it together based on a model that they know doesn’t work. Surely, even when creating a brave new world, they should have taken what they know about successful institutions and used that to guide their thinking. But there is no evidence of them doing this. Certainly there is no evidence of any deep thinking.

    Except perhaps in one way. They did make sure that the for profit education providers made a profit. If one were uncharitable, one might say that this was actually the only thing they *really* cared about. The only thing that they actually gave any real thought to.

  16. @Ken Debreu

    I think the NDIS is interesting since the healthcare remains the province of normal healthcare providers is my understanding, but the NDIS takes over providing other supports to people with disabilities. The change over is probably going to be the most difficult period I would guess. i have extended family who were involved in the Barwon early roll out, and they said it was mixed, some things were better under the NDIS and some things were not as good.

  17. @J-D

    Your #14

    Lovely examples of the irrelevancy of ‘choice’ in critical situations requiring human services.

  18. JQ, your policy threads provide a more or less continuous opportunity for me to practise analytical economics. And so it is with ‘human service provision’ – what is the fundamental problem which underlies the intuition that the ‘market model’ doesn’t work and why are the empirical results not surprising? Alternatively put, what is the assumption in precise theoretical models of competitive private ownership economies that is violated?

    My last contribution, if this is the right word, to this topic is: Human services are non-marketable commodities because these services lack the property of ‘measurability of a magnitude’. Measurability: A magnitude is said to be measurable if it is possible to define equality and it is possible to sum two quantities.

    It may be of interest to note that by 1988, when micro-economic reform (privatisation, competitiveness, etc) was progressing in many parts of the world, Yves Balasko found it necessary to write in chapter 1 of his book, Foundations of the Theory of General Equilibrium, something which Arrow, Debreu, Hahn, Radner and many others presumed to be self-evident during the preceding 30 years. Balasko wrote:

    “In sum, we shall assume that the commodities available in a market are measurable, a property we know is not necessarily satisfied by every economic commodity. Indeed, because we know that many economic commodities are not measurable, we can appreciate even at this early stage [in the book] how limited the market’s role is in allocating resources. This inherent limitation of the market readily explains why attempts to have the market mechanism perform the entire allocation of resources are futile.” [p5]

    Once again, I find math econ, specifically post 1950 G.E., to provide solid foundations for not believing the dogma you deal with under the heading neoliberalism.

  19. @J-D
    Your #17

    Well I’d say that compared with some people living in, for instance, East Aleppo, your life could indeed be rated as “mostly uneventful and mostly fortunate.” which is not a good thing to be able to say in either respect.

    However, choice and cheeses: to attempt a fully informed choice is just going to lead to ‘paralysis by analysis’ in a more or less classical sense of ‘too much uncertain information about inherently incomparable things’. How do you compare a camembert with a cheddar, and, if you do (arbitrarily ?) choose a camembert, how do you choose which camembert ?

    By the way, did you know that there is at least 56 different makes and brands of motor car available in Australia ? Not counting electrics, and with more coming from China in the near future.

    In short, how much choice is too much, and how little choice is too little ? (Ernestine to our rescue !).

  20. “How do you choose which camembert?” The one I buy when I’m in France is called Le Rustique. It tastes reliably good and claims to come from happy cows on small farms. I don’t know how much to credit this claim. But the chances of a cheesemaker who makes animal welfare a selling point actually doing something for animal welfare are much higher than with one that does not mention it.

  21. Meanwhile the failure of the privatised competitive market approach in the vocational education centre is being duplicated in an even greater privatisation of services to the most vulnerable. I refer to the National Disability Insurance Service (NDIS). This obsession with ‘public choice’ through market competition is justified by its proponents as being “empowering” but the reality is that what people with a disability need is consistency in terms of the people providing services or facilitating service provision. A market driven model with competitive tendering does the exact opposite and also has a tendency to drive down the quality of service provision and the quality of the people delivering it as the private providers attempt to boost profitability above all else.

    The appalling state of aged care is a good example of where this approach leads.

  22. @James Wimberley
    Your #23

    Ah well you probably also consumed Carnation Evaporated Milk then – you know, the one that came “from contented cows” – at least until Nestle flogged off the Carnation business. [According to Wikipedia, as an aside, “In 1911, Nestlé constructed the world’s largest condensed milk plant in Dennington, Victoria, Australia.” Fascinating. My father, a brickie, used to have condensed milk in his billy tea when he was working on site.]

    But come on, tell us the secret: of all the camemberts and bries made in France, how did you choose Le Rustique ? Did you actually investigate the range of choice available applying all the relevant principles and practices of data analysis (which professional cheese taster did the taste test ?), or did you just make a preemptive decision based on a single advertisement showing smiling cows ?

  23. @Ernestine Gross
    Your #21

    You’ve done it again, haven’t you.

    Ok, so I can see that any fungible ‘commodity’ must be measurable, and contrary to popular affectation, I can see that ‘love’ is a measurable commodity (it can be ‘measured’, and it can be added to and subtracted from), but is my annual checkup visit to my GP ‘measurable’ ? Is yhe path test that my GP sends me to ‘measurable’ ? Is a cheese a ‘measurable commodity’ (just so James Wimberley doesn’t feel left out) ?

  24. @John Turner

    “I refer to the National Disability Insurance Service (NDIS). This obsession with ‘public choice’ through market competition is justified by its proponents as being “empowering” but the reality is that what people with a disability need is consistency in terms of the people providing services or facilitating service provision.”

    I have a disability, and its actually good to have more choices I think. The various government services can have a lot of power over the lives of people with disabilities, and I think various approaches to reducing this power and giving people with disabilities more choice is good in the long, although I expect some problems in the change over. I think one of the most difficult things will be for people who have had a lot of time with the previous model getting used to the new model, and working out how to make it work for them.

  25. @GrueBleen

    On appropriate range of choices of camemberts. The then French President, General DeGaulle, is said to have exclaimed: ‘How can one govern a country that has about 450 different camemberts’!

  26. @GrueBleen

    Hey I don’t usually quibble and it’s not like you to get things wrong, but you seem to be confused about the difference between evaporated milk and condensed milk. Big difference you know.

    Way back in the late ’50’s or early ’60’s my uncle who was in the army and posted in Asia somewhere would bring us tubes of condensed milk from his army rations I think. Sucking on these tube of condensed milk was probably not good for our teeth.

    That uncle is now a raving right wing lunatic with guns buried in his back yard.

    And about choice; humans don’t all want the same level of choice. I hate making decisions especially waste of time decisions like which camembert is best. But some people really get off on sitting around waxing lyrical about cheeses. Takes all kinds and that’s the best thing about us humans. We are all different.

  27. @Julie Thomas
    Your #33

    the difference between evaporated milk and condensed milk. Big difference you know.

    Yep, I do know having consumed some amount of both in my younger years. Why would you think I didn’t ? Just because I mentioned an amusing aside about condensed – tucked behind brackets to separate it from the rest of the sentence – at the same time as mentioning evaporated ?

    We are all different.

    Yep, we are all unique in exactly the same way. Even the lactose intolerant can eat cheese.

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