But unlike in the marketplace, the incentives for good management in government are very weak. For instance, even though lawmakers are expected to pursue the “public interest,” they make decisions that use other people’s money rather than their own. This means that their exposure to the risk of a bad decision is fairly limited, and there is little to no reward for spending taxpayers’ money wisely or providing a service effectively or efficiently
This is standard public choice theory, and it is not wrong. But it is not persuasive to those who believe that moral authority is or ought to be sufficient to overcome such problems.
I think that many commentators contrast the market and government as mechanisms for making decisions. In this contrast, the market sometimes has an efficiency advantage, but government is presumed to have a moral-authority advantage.
Instead, think of the market as a process for testing hypotheses. The process is brutally empirical, winnowing out losing strategies and poor execution. In contrast, elections are a much weaker testing mechanism. Elections are unable to winnow out sugar subsidies, improvident loan guarantees, schools that produce bad outcomes, etc.
It is a lack of understanding of this dynamic that leads some people to surprised that healthcare.gov does not work as well as one of the leading commercial web sites. I keep trying to reiterate, as I do on this podcast, that something like Amazon is a rare survivor of a tournament. The private sector produced plenty of business ideas and software systems that were as bad as Obamacare and healthcare.gov, but those get winnowed out.
I see your point, but I’m not quite convinced. The commercial world and government are different places, doing different things in different ways. Let’s suppose, making up an example, that Jeff Bezos decides Amazon.com ought to become the world leader in selling adult diapers. Maybe a group of his managers suggest the idea to him, maybe he comes up with it on his own — doesn’t matter. He can look at his rivals and try to buy them out; he can start his own manufacturing plant; he can sell diapers and make a 50% profit; he can sell diapers and swallow a 30% loss for a year or two and buy up his rivals after bankrupting them; so on. The choices are his, and he can always look at the sales data and change his mind about what he’s doing. As long as Amazon as a whole is profitable, he’s not going to be second guessed. And he can make decisions virtually on a moment’s notice and begin implementing them within days.
Now suppose, Joseph Blow, a GS-15 in the Social Security Administration, has the bright idea that just as SS pays towards Medicare premiums, it ought to subsidize the cost of adult diapers for SS recipients. It’d be a real benefit for maybe millions of people; it probably wouldn’t cost all that much, and it’d be a wonderful example of innovation and new thinking in an all-too-often stodgy government agency. He’s really proud of this notion. How fast do you suppose he gets this splendid notion working? How easily?
You KNOW damned well this isn’t going to happen, at least not because Mr Blow thinks it would be nice. He’s a frigging GS-15. He’s at least 7 levels under the bureaucrats who actually make such decisions — more like 10 or 11 levels if you consider this will wind up being approved by the President. He’s surrounded by thousands of other SSA workers who just know supplying diapers isn’t something SS has done before, so it shouldn’t start now. There are 15 other government agencies who will start arguing that they should be the organizations which supply diapers. There are another 15 agencies which will argue that supplying diapers is part of their mandate, but for one reason or another they aren’t going to do it — the Post Office for instance. There are half a dozen Congressional committees to convince that the government should provide old folks with diapers — this is even before the Appropriations committees have gotten involved. There will be 200 lobbyists working full time to convince Congressmen that subsidized diapers are the greatest thing since sliced bread, or that the idea is terrible because cheap diapers will drive the reputable diaper manufactures out of business. There will be six million bloggers taking a stand on diapers. And finally, after everyone has weighed in and the big decisions are made and all of America’s incontinent elders have been alerted to this forthcoming improvement in their lives, Congress will decide that diaper subsidies won’t begin until January 1, 2017. Yielding crushing disappointments and an odor like — let’s not go there.
Which part of the Federal diaper purveying business looks like Amazon.com?
Wow, Mike. I’d say from your post that you are not only “convinced” of Arnold’s point, you actually made Arnold’s point almost better than he did!
Okay, you have a point, but you’re also missing Professor Kling’s central point.
You have a point in that markets and public policy are simultaneously intimately intertwined and yet almost functioning in different universes so to speak, operating under much different rules, etc. Your example actuallly doesn’t help you – if anything you help make Professor Kling’s point – because you’re showing a few of the reasons (among hundreds?) why governments/bureaucracies aren’t really able to test their “hypotheses” in robust ways – e.g., because it takes them years just to get an “experiment” underway and by that time it is a muddled mess, etc., whereas private entities are constantly testing different hypotheses.
Maybe what complicates Professor Kling’s analysis, though, is that many of the “services” provided by governments wouldn’t be in demand in private marketplaces to an extent that they’d ever be profitable enough (for any firms) to test hypotheses for these “products” in the first place. I don’t want to get bogged down with that complication, but just to say that analogies between market-tested products and government products are awkward. That’s partly why “privatizing” government services often doesn’t help create greater efficiency – it’s still not really a market transaction.
You miss Professor Kling’s key point, though, which is that what makes markets to powerful isn’t that entrepreneurs and CEOs are geniuses with otherworldly powers of foresight, and management skills that far surpass public sector managers (keep in mind that many execs bounce back and forth between “public” and “private” spheres. In reality, these entrepreneurs and CEOs make bad decisions/bets/hypotheses MOST OF THE TIME, which then get punished in the marketplace. The beauty of markets is that the consumer has the power to “exit” from these bad decisions/bets/hypotheses and select a better product the next time. In the process, whichever entrepreneur/CEO made the best decision/bet/hypothesis gets handsomely rewarded, even though their good fortunes were partly the result of good luck and usually not so much because they were more knowledgeable and/or expert than their peers, who went to the same MBA programs with the same high grades, etc. (many entrepreneurs experience multiple epic failures before breaking through).
Unfortunately, when it comes to government experiments, the “consumer” has much fewer options for exiting from bad hypotheses. One reason why “big government” Social Democracy is not conducive to general prosperity and happiness.
Thanks for posting this! IMO, you and (political theorist) Jeffrey Friedman are offering some of the most important insights.