Economic Production - Government vs private industry

I've been discussing the issue of government vs private industry over at Craig's blog and I posted some stuff that I thought might be good to share here.

Basically, goods and services can be produced in three ways:

1. Government
2. Private Industry
3. A combination of both Government and Private
   

Moreover, the funding for producing these goods and services is likewise broken up into three sources:

1. Government spending (raised through taxes)
2. User-pays (the market decides)
3. A combination of government spending and user-pays
   

In essence, there are nine possible variations:

i) Government owned and funded (planned)
ii) Government owned and funded by the market. (user pays)
iii) Government owned and funded by both government and the market.
iv) Privately owned and funded by the government.
v) Privately owned and funded (user pays).
vi) Privately owned and funded by both the market and government.
vii) Government and Privately owned, but funded entirely by government.
viii) Government and Privately owned, but funded entirely by the market.
ix) Government and Privately owned, and funded by both government and the market.

Ideology plays a big part in determining which sectors of the economy fit into the areas I have proposed above. Hardline Communism, espoused by Marx and Lenin, would have the entire economy fit into variation i). Conversely, free market loving, laissez-faire "drown government in the bathtub" small government types would have the entire economy fit into variation v).

Even when faced with inefficiency and clear evidence that a certain way of doing things may result in bad outcomes, adherents to these extreme ideologies will nevertheless argue that the price that must be paid for being ideologically pure is worth it.

This was the problem in the Soviet Union when it became clear that a centrally planned industrial sector did not provide a high enough quality of life for Soviet citizens. One of the debates that ensued in the late 1970s and early 1980s within the Soviet Communist party was whether it was better to, say, relax some communist rules and allow some private property or private businesses, or to keep the entire system ideologically pure. After all, if you allow the formation of a profit-making class, wouldn't that reverse the worker's revolution that they had fought for so long ago?

This is also the problem amongst "drown the government" types. One of the debates in the US at the moment is the state of the health care system which is dominated by the profit-making private sector, which gobbles up around 15% of GDP and results in health outcomes inferior to nations with universal health care. Would it be appropriate to, say, nationalise hospitals and health care in order to provide a taxpayer-funded universal health care system, or would it be better to have these inferior outcomes while remaining ideologically pure? After all, if you allowed universal health care, surely you are allowing the government more power, which is one step away from a descent into fascism and an Orwellian state?

Fortunately in a modern society such ideological purists are small in number, both on the left and on the right. My political position is simply one of pragmatism - whichever is the most efficient variation for a particular economic sector, that should be the variation chosen.

The reason why I italicised "for a particular economic sector" is that ideologues - even centrists - tend to lump the entire economy into one of the variations I have listed. Communists would argue for variation i) in everything, government drowners would argue for variation v) for everything, while ill-informed centrists might argue for variation ix) in everything.

The reality is that there are sectors of the economy which are best left alone by government, and there are sectors that are best left alone by private industry, and there are sectors of the economy which exist in between.

Rather than engaging in ideological battles, governments must seriously consider adjusting every single part of the economy to find out which variation is the most efficient and is the best for the majority of people.

Take public transport. In May 2006 I wrote two articles (here and here) that put the case forward for making public transport free. In other words, rather than charging people fares for walking into buses and trains, they travel for free, and the cost incurred in running public transport is borne through increased taxes. Why do this? Well, the argument I use is that there is a good chance that the total cost to the economy will be less if if it is completely funded by taxes, rather than having it funded by a user-pays system (as it is now). This needs to be explored.

No area of the economy should be untouched in this analysis. Food, clothing, housing, health care - all assumptions need to be questioned and all previous practices need to be critically examined. Moreover, objective, empirically-based testing needs to be done by government in order to make its final decision - rather than remaining ideologically pure.

I'm on record at this blog in arguing the case for public schooling. If it can be proven beyond reasonable doubt that the best outcomes would be met by having all schools privatised and charging parents full fees and having no government intervention at any level, then I'm all for it. But, then again, if the best way to produce more food at a high quality is for the entire agricultural industry to be nationalised and production determined by government planning, then I'd be all for that too. The key is not whether one or the other fits into my ideological stance, but whether the best and most efficient outcomes are met.

© 2008 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/

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