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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guleblanc said...

While this is vaguely true, it leaves a big unanswered question. While it's easy to say "Do the best thing" it's hard to say "X will be the best thing" for any specific X. Defining the word "best" here, or even "better", and then verifying that one state is better than another is complex and murky.

As an engineer, my preference is for experimentation. So, we try five years of no fare public transportation, see how much it costs, and see how much ridership increases. We may find that ridership increases so much that the buses and trains are overmatched by the demand, the service's quality degrades and everyone is unhappy, even if the cost is not overwhelming. It may be that people don't value it because it's free, and that ridership actually decreases. It's hard to predict.

The problem with this kind of experimental approach is that sometimes experiments don't work out the way you expect, and that sometimes you don't actually know what to expect. The public is not very patient with failed experiments, and it's very easy to say "Any idiot could have told that making public transportation free would mean nobody would use it," or whatever the result would be. Politicians don't get reelected for supporting failed experiments, even if the results show a path to better services.

Anonymous said...

Yes, it's hard to do these experiments, especially when one also needs a control group! I sympathise with Neil's objectives, but to really scientifically study this we'd need to copy the USA and then build one that's got free public transport, and one that's the same, and let them both run side by side for 20 years with all other factors the same.

It's difficult, because when something happens people will always debate that if ONLY they tweaked XYZ correctly, MY coffee-break idea for running the world would have worked! Rinse and repeat and publish a few books on it, and you're an author!

Neil Cameron (One Salient Oversight) said...

I don't think you guys understand.

"Experimentation" does not require huge changes, but simply a change of a small part of that market sector to the proposed model. After some time has passed, and data has been gathered, the sector can be changed accordingly.

For example, if the theory is that the best educational outcome can be achieved by all schools being privatised but entirely funded by government revenue, then a number of schools in an area can go through with that change, and then data gathered.


1st: Saying that Healthcare in the US is mostly profit driven is not quite accurate. Maybe 30 years ago it was. I'd say between mixed economy and socialist.

2nd: It is easy to experiment without long waits- DECENTRALISE!

BLBeamer said...

There's too many choices here. The list could be consolidated. All funding must come from the market. Either the government extracts funds from the market via taxation or bond selling to fund something, or the market funds something directly.

If the government uses the printing press to generate "funds" for spending, then ultimately that is extracted from the market, too, in the effects of debased currency and inflation.

Don't forget, also, that the subjects of your experimentation are humans. If the result of your experimentation results in harm, should they be recompensed?

Anonymous said...

HI Beamer,
I actually think Neil did a good job. These individual scenarios are important and real world in their application. Our NSW government has had all sorts of enquiries or university studies into various "Public-Private-Partnerships" (was that what they were called Neil?) where the government funds private companies to build infrastructure eg: roads, and I heard one study concluded the government should have just built the thing itself because all the extra legalities and middlemen in the PPP meant the whole thing cost an extra 15%.

Neil, which scenario is the "Cross city tunnel?" Who OWNS it? Is it owned by the company until the "lease" expires if 50 years or something?

Anonymous said...

Also, ABC radio on the public transport example Neil gave...

Citizens are saying, we want to pay for increased public transport. We see that in research by the Warren Centre where 70% of the citizens who were surveyed said yes, move my tax out of the roads budget and into public transport. Now that's a resounding response


Robyn Williams: The cost of road crashes in Australia is $17 billion a year. The cost of traffic jams in America, according to The Economist is $100 billion a year, and that was in 1999. The cost of traffic jams in Australia was $12.8 billion in 1995. By 2015, long before 2024, it'll cost us $30 billion a year - that's six times what the Commonwealth spends on all scientific research. Can you afford it? Whatever the energy source, hydrogen, wind or whatever, we can't, says Dave Rand, just hope to go greener and keep our vehicles.


Sally Campbell: Public transport systems cost less as a percentage of GDP than transport systems based mainly on roads. And we see that when they start to compare Europe's current systems to the current systems in Australia and the US and it's almost a third less in terms of percentage of GDP to operate a system mainly based on public transport. So there are massive cost savings to be had.

Robyn Williams: You're talking about billions.

Sally Campbell: Yeah, we're talking about billions of dollars, we're talking about two, or three, or four a percent of GDP that we could be saving. This is huge amounts of money.

Anonymous said...

Sorry, link here.