A) INTRODUCTION
To start where the last Bulletin left off, Capitalism and the free-market demand-led economic system is, as I argued there, far more efficient and far better than alternative supposedly more egalitarian, command-led economic systems. I will analyse that further here. Previously I focused on the virtues of the Capitalist system. Here I will examine the inherent and systemic failings of publicly run ventures. I also look at some comparisons, especially in relation to spheres where there are both privately run and publicly run operators. Accordingly I say it is only sensible and rational to expand the scope of the capitalist free-market system in the economy and diminish the publicly run sector. In Western countries we live in a ‘mixed economy’ but it only makes sense in the light of my analysis to maximise the private sector element.
When I say ‘maximise the private sector’ the meaning is unambiguous. However when I say ‘minimise the public sector’ I actually have two things in mind. One thing is to transfer some activities from the public to the private sector. That is sometimes straightforward. However I also advocate a technique that will enable such a transfer in spheres like school education where it may not otherwise seem feasible (due in education to many people not being able to afford to pay to educate their children). The second thing I have in mind in minimising the public sector is doing away with many unnecessary or inefficiently done or counter-productive activities (such as excessive regulation, excessive education etc.,) presently undertaken within the public sector. I have examined that in previous Articles but I emphasise that is a big part of what I actually mean when I say ‘minimise the public sector’.
B) A DEMAND OR A COMMAND ECONOMY?
The first and most basic political choice in economics is whether the economy is based on ‘demand’ or ‘command’ (I am not being original in making this distinction).
‘Demand’ is free-market and ‘command’ is based on central planning, generally government (or at least quasi-governmental agency) control. Demand is bottom up, dependent upon, what the customer (private sector) wants and will pay his money for. ‘Command’ is top down and dependent upon what the central planners (public sector) calculate will be required. In a ‘demand’ private sector economic activity suppliers will only supply the market with what is pre-ordered or what they think customers will want at a price they are prepared to pay in open competition with other suppliers. If the supplier makes mistakes in overestimating what will be sold the supplier will have to pay for such mistakes and if he undersupplies he will lose potential profits (and maybe credibility to his rivals). So with his own income on the line the supplier in a demand system is not likely to make too many mistakes and may soon change his product line when an item no longer sells well to another item that is likely to sell better. In contrast when a central planner makes mistakes over what is needed, it doesn’t generally make any personal difference to him – it merely reduces the organisation’s efficient running and wealth of the taxpayers and nation! Moreover as it can be more difficult to estimate overall requirements than more localised requirements, it is probably more difficult for people in a command system than in a demand system to get the quantity to be supplied right or indeed to offload even at a discount excess supplies.
So in a demand system the customer is supreme because it generally ultimately depends on what people are personally prepared to buy. In a command system the customer, that is ordinary people are practically inconsequential – all ordinary people in a command system do is suffer from the inadequacies such as product or service shortages of the system!
So ironically while ‘the command (public sector) system’ is operated in the name of the people, it is the ‘demand (private sector) system’ that actually puts the people in control and operates according to what people actually want to spend their money on.
The fundamental underlying choice in economic systems is between a free-market demand system that puts customers (at the bottom of the ‘food’ chain) in control or a public sector command system that puts governmental bureaucrats (at the top of the ‘food’ chain) in control. The demand system leads to free-market private sector Capitalism.
That choice is absolutely fundamental and lies at the root of politics and economics.
C) SYSTEMIC FAILURES WITHIN A COMMAND ECONOMY
Not only is the private sector ‘demand-led’ whereas the public sector is ‘command-led’ but there are also other vital differences between the private sector and the public sector. Most fundamentally there are two underlying differences. First, in the private sector there is the financial discipline of profit and loss and having in the long run to make a profit to survive. There is no such direct financial discipline in the public sector as the public sector’s losses and inefficiencies are just paid for and underwritten by the country’s taxpayers and people. The other underlying difference between the two sectors is that in the private sector there is competition or at the very least potential competition which a private sector business must do well against (in pricing and value for money) to survive while there is generally monopoly and therefore no customer choice in the public sector. There is generally both financial discipline and also competition and efficiency and value for money in the private sector but that is absent in the public sector, leading usually to rampant inefficiency.
So let’s consider financial accountability first. The most basic thing in private sector businesses is the financial discipline of making an overall profit. If it makes a profit the business can generally survive but if it makes a loss, either that loss must in due course be replaced by a profit or the business will not survive. A business cannot even borrow to finance its losses if there is not at least a reasonable prospect of future profit. So the financial discipline of covering one’s costs and making a profit is the most fundamental financial discipline in private sector businesses. If a business continually does not or cannot make a profit that business is not (or is no longer) financially viable and will not long survive. If a business does make a profit, it is to that extent ‘efficient’ and viable. However even if it makes a profit and that profit is only small, it may not be worth continuing, especially if the people running the business can make more money in other ways. Yet if the business makes a substantial profit it will definitely be worth continuing and even if the owner no longer wants to devote his time to it then he can either sell it on or employ people to run it for him. However if word gets round the business is making a lot of money or it appears that it is, others are likely to see this and set up a business in competition with it. By contrast in public sector ventures (or businesses) there is no such critical cost control nor essential yardstick of efficiency. A public sector venture can waste money and resources without going out of business. It just becomes an ever greater drain on the resources of the public it supposedly serves.
So we come to the second underlying difference, ‘competition’, that happens in the private sector but not in the public sector. Competition does make life more difficult for businesses and means they have to be more efficient to compete and do well in business. The big beneficiary of competition is the customer because competition provides a choice for the customer and he can CHOOSE where to place his custom. Where there is competition between suppliers each supplier must offer something to attract customers that is better for some potential customers than what competitors are offering. For instance in the case of a restaurant, a restaurant may compete to beat some of its competition on any number of factors such as price, value for money, quality or quantity of food, friendliness of service, speed of service, ambience in the restaurant or facilities in the restaurant etc;. So there is enormous scope for a restaurant to attract customers based on some of these factors but another neighbouring restaurant may attract customers on other factors. Individual customers decide and any restaurant has to attract and satisfy sufficient customers to stay in business. In the free-market, capitalist, demand economy competition and customer choice will naturally arise if one enterprise is doing well and there is sufficient demand in the area, especially if somebody thinks they can serve customers better than the existing supplier. So the customer is King in free market competitive Capitalism. By contrast when government is in control of supply in nationalised industries in a ‘command’ economy, there is no real competition. There is therefore no incentive nor need to satisfy customers nor provide a good service – so customers, that is ordinary people, just don’t count for much. After a time when memories of a non-socialist, free enterprise system have become distant, the public may not even know what high standards or good value for money look like! So unsurprisingly in a command economy, customer service is generally far worse than in a demand economy.
So failure in a ‘command’ economy compared to a ‘demand’ economy is not just incidental but systemic or inherent. In contrast to a demand economy an enterprise in a command economy does not have the constraint and financial discipline of having to reach at least the level of efficiency to enable it to make a profit. That is inherent. Furthermore in contrast to a demand economy an enterprise in a command economy does not have the prospect of facing competition and so does not have to be better in at least some respects and anyhow get some customer satisfaction to survive in business. Customers count in a demand economy: customers hardly count in a command economy. That too is inherent.
So a government or quasi-government controlled organisation which does not need to make a profit nor to satisfy customers will practically inevitably both be inefficient and provide poor service. This is especially so because in such organisations people usually do not get personally financially rewarded (and seldom promoted) on the basis of financial efficiency. Rather if anything in the public sector managers are financially rewarded on the basis of financial inefficiency as it is just by supervising more staff, however wasteful those extra staff may be, that is the most common basis for a manager to get more pay. (So empire building is rewarded in personal pay but efficiency usually isn’t rewarded in public sector organisations.) That too is inherent.
In general ‘command’ systems inherently end up operating for the convenience and benefit of their employees, not of the public at large. They do so because losses don’t matter; overmanning doesn’t matter; inefficiencies don’t matter and customer service ultimately does not matter. The main thing that matters to their managers is a quiet and easy life from those nearest at hand, those most likely to disturb them and stop them living an easy life. For instance after the Covid 19 disruption, at least in Britain, managers in publicly run organisations (much more than in privately run organisations) have been unable to get their staff to even physically go into work much where they can be supervised. Instead they have allowed, mainly under employee pressure, them to ‘work from home’ unsupervised, distracted and able to short-change them over the hours actually worked for their pay. That is just one example, admittedly a critical example, of the public sector operating mainly for the benefit of its employees and at the cost of rather than to the benefit of the general public.
Worst of all another inherent feature of a ‘command economy’ is that to protect, even preserve it, especially within an ideologically driven system of rough equality of income, totalitarian controls are needed to curb ‘the black market’ it induces. It is a fact of human nature that realistically many people will want better goods or better or quicker service, in effect advantage for themselves or their family compared to others. So many people would arrange to pay somebody to independently provide such advantage to themselves or their family. That is the natural consequence of a system at odds with human nature trying to override human nature. That is inherent and systemic. The black market can only be curtailed and then only partially by inflicting terrible punishments and by creating a totalitarian police state to suppress it. Even then the ‘police’ supposedly policing it would themselves naturally be open to bribery and such advantages.
So all in all command systems (in contrast to demand driven Capitalism) are inherently going to fail, producing overmanning, losses that will impoverish the population, shortages and if rigidly adhered to, brutal repression of people.
D) SOME PRACTICAL COMPARATIVE EXAMPLES
Let us start with a detailed example I am particularly knowledgeable about. Compare the same activity, renting a house, a home to a family that may be and in many countries is done simultaneously by both private sector and public sector (or ‘social’) landlords. As I know about the situation in the United Kingdom I will describe it and compare it there though I suspect what happens in many other countries is not fundamentally different.
Admittedly I am here probably doing things the wrong way round. Like scientists, politicians and political thinkers should really carefully observe the reality of what actually happens first and thereafter seek to explain the reality in theoretical terms.
I should briefly state that in my opinion neither private sector nor public sector renting is much good compared to owner occupation. In owner occupied housing the houses (and neighbourhoods) are better looked after because they are the occupiers’ own possession and own asset. Even if a house is not well looked after, the occupier isn’t spending his time miserably complaining because he has nobody to complain about except himself! Furthermore rather than spending their money on rent for ever, the occupiers are spending their money (until their loan is paid off) on acquiring an asset for themselves and then when their home is paid for they will have that money to spend as they wish. Altogether superior (though it was not allowed by most Communist countries as though sensible, it is basically anti-egalitarian).
That said, let us compare the private rental sector with public (or ‘social’) rental housing. In both private and public letting the provider needs to cover the capital costs of buying or building the property, the costs of meeting regulations and maintaining the property, the costs of managing the tenancies and property taxes. In Britain such taxes for landlords fall mainly on properties when they are untenanted. In addition private landlords are in business to make money. to make a profit and preferably a substantial profit which is a cost consideration public sector housing does not have.
The main problems for landlords are bad tenants and non-existent tenants. The main problem for tenants is getting repairs done.
So far as repairs are concerned, it is worth pointing out that houses are not the same as manufactured goods which are only expected to work when newish. In contrast houses are expected to work when old though they were built long ago and are subject to varying degrees of decay. Some of the decay may be expensive to repair, some of the decay (often damp problems) may be impossible to repair. Furthermore building standards and building fashions and building requirements change as houses age. Landlords, especially private sector landlords, get forced to retrofit their properties to ‘standards’ that came in after the property was built. Public sector or social landlords who think of themselves as virtuous as they don’t seek a profit and in effect regulate themselves can usually talk their way out of or much delay upgradings in ways public sector landlords can’t. This retrofitting is not forced upon owner-occupiers as they form the majority of voters and cannot be told to ‘magic’ money they don’t have! Smaller landlords. especially private sector landlords face the problem that different types of repair (e.g. plumbing, electrical, joinery etc;) or maintenance need different contractors. Those contractors, especially if they are busy, are not much interested in doing one-off small or medium sized repairs unless they are grossly overpaid for it. Nevertheless in general for one-off, small or medium-sized repairs, private landlords are usually less bad than social or public landlords. That is mainly because social landlords tend to have complicated and very poorly functioning systems of administration and control. Despite their advantages when bulk buying with contractors (and in many cases employing their own workmen for repairs) when they are eventually done, repairs end up costing more in the not-for-profit public sector than in the private sector. However the specialisation of public sector housing is in doing very occasionally extensive modernisations or upgradings of whole blocks of properties, whether all the elements of the upgrading are required (which is seldom the case in every property) or not. These cost an absolute fortune, not least because the projects are so large scale that there are very few available contractors that are big enough to undertake the upgrading of so many properties simultaneously. So those contractors can practically set their own prices. While with few exceptions neither private nor public landlords are good at repairs, private landlords are not as bad in general as public landlords with essential repairs, or at least repairs deemed essential by the tenants in occupation. Public sector landlords are more interested in very occasional major upgrades (usually beyond what is actually needed) in whole blocks of property than in the ordinary basic maintenance of individual homes.
So far as tenant problems are concerned, the non-existent tenant problem (meaning no rental problem) relates more to the economic prosperity or otherwise and the number of people in the area than to anything a landlord, least of all an individual landlord, can do. As for the bad tenant problem, once again the public sector dealing with the public sector puts itself in a far more advantageous position than the private sector is in. State benefits for tenants’ rents are generally paid direct to the landlord in the public sector but in the private sector are usually paid to the tenant. A private sector tenant can usually with little adverse and no criminal consequence (unlike shoplifters) but immediate financial advantage to himself withhold rent from the landlord for many months at any rate. This means that rent arrears and unpaid rent problems are far worse for private landlords. As for the badly behaved tenant problem, that I would guess is about the same in the private and public sectors, although the main underlying causes may well be different as between sectors. However when it comes to evicting bad tenants, the social sector gets better treatment from the Courts when it comes before them. Judges (failing to understand the nature of the public sector) think of public or social landlords as virtuous and uninterested in profit whereas they usually view private landlords suspiciously as having the ulterior motive of just making a big profit (which Judges mostly abhor).
In terms of capital costs of their property public sector landlords have or should have a huge advantage. Unlike the private sector they can and do borrow very long, that is for maybe sixty years and at lower rates of interest compared to, say, twenty five years for a private landlord. So social landlords are mostly repaying loans over a longer period at capital costs set maybe fifty years ago when prices were very much lower.
However the big expense, indeed massive expense and inefficiency for the public sector compared to the private sector lies in its massive and extremely wasteful management costs where it is massively overmanned. Whereas in the private sector the average letting agency would charge about 12% of rent (which may include 2% of rent in Value Added Tax not payable by the public sector) most public sector management costs are in excess of 30% of rent. I even know of cases where public sector rental organisations have offered to manage private letting at a discount, loss making for them, 25% management fee and then wondered why they had no takers for their ‘services’! These costs are partly because there are usually layers of quite well paid Managers in the public sector who do little and numerous specialist functionaries who are too specialist and don’t coordinate with each other well. That causes tenant dissatisfaction. There are other employees who do politically fashionable monitoring roles absent from the private rental sector.
The result in public sector housing is gross inefficiency arising from too much inefficient management, high repair costs and excessively costly capital refurbishment programmes. So instead of a profit they have inordinate costs. By contrast while serving tenants marginally better in repairs and better in a more personal service than the big bureaucracies in social housing can generally offer, private sector landlords can often make a sizeable profit. (That does depend on loan repayments which might offset that.) However renting property is often a good long term investment for private landlords.
That large profit and investment element makes private landlords unpopular with much of the public and especially with the public sector. What is beyond dispute is even on similar rents private rental housing usually makes a sizeable profit while public sector rental housing has such expenditure that it makes no profit. So the public sector and general public should admire the efficiency of private sector housing. Social housing operators should examine how they might improve their operation to approach the usual level of efficiency of the private sector, especially given the financial advantages public sector housing enjoys. Of course because of the public sector mentality that does not happen. Rather they just complain about and maybe envy private sector landlords for making money out of people’s housing. They conspire to impose ever more regulations and even taxes upon private sector landlords which of course they look to avoid when it comes to public sector housing. A much better policy would be to transfer all or most social housing either into owner-occupation or into the private rental sector.
However for the purposes of this Article we are trying to be rational observers of the comparative workings of the private and public sectors. So people should respect the better cost control and value for money service of the private sector and accept that the private sector model in housing and elsewhere is the better path for societies to follow.
I have not got the same expertise about other things as about housing (I made my money from property) but I will give other examples. Hotels run swimming pools at a small fraction of the cost that local Councils do. The privately run prisons in Britain are also run substantially less expensively than the government run prisons. Local Councils in Britain have virtually stopped running children’s nurseries in part because they were so inefficiently run that they were costing about twice as much as privately run nurseries. Likewise residential homes for the elderly have been run much worse and hugely more expensively by local Councils than privately run residential homes – so much so that Councils have at last belatedly realised that it is far better for them to pay private operators for placements in residential homes than to operate them themselves.
Denationalisation of industries in Britain has also mostly (except for the bungled partial denationalisation of rail transport which is inherently rather monopolistic anyhow) relieved British taxpayers of the burden of subsidising inefficiently run loss-making industries. Indeed Britain went from being one of the poorest to one of the wealthiest (in per capita income) countries in Western Europe during the nineteen eighties largely because it was the first to undertake large scale denationalisation. The general pattern in denationalisations (such as British Telecommunications) has been great improvements in efficiency resulting in them being manned by a very much smaller workforce that is more responsive and better geared to their customers, the paying public. Nevertheless there has been much criticism because those now part owning or in senior management of previously nationalised industries (usually now facing real competition unlike before) are being paid large amounts of money or getting dividends. Yet that is in general because instead of providing poor service and costing the taxpayers fortunes they are now more efficient and financially more successful. The political problems they now face are because most people do not remember how bad and costly in tax the nationalised industries were and many people are now very envious of anybody being paid a lot of money, no matter how skilled (except at sport or pop music) that person may be.
E) THE MAIN EXCEPTION
Obviously there are some exceptions in terms of efficiency or value for money provided by private sector enterprises. Usually such exceptions are either sold to other, usually better run private sector businesses or go out of business entirely. However there are a few exceptions even to that, which though private sector businesses manage to stay in business while by objective measurements providing poor value for money to customers. The main and most important example I can think of in that situation is the privately operated health care system.
All large health care systems in Western countries in my opinion whether privately or publicly run are inefficient but the American system seems to be especially poor value for money. I understand the sensitivity most Americans have about ‘socialised’ health care systems (which they don’t seem to have about publicly run transportation systems that are liable to be privately run in some other countries). However I say that does not excuse the exceptionally poor value for money America’s privately run healthcare system provides. Put bluntly compared to other Western countries their healthcare system is costing Americans nearly twice as high a proportion of their income (about 15% compared to about 8% or 9% of most other Western countries’ national income). Yet average life expectancy is slightly lower in America than in most other Western countries. Most devastatingly there is also a statistic that the nearer one lives to a hospital in America, on average the more costly healthcare procedures one undergoes during one’s life. Sympathetic though I am to private enterprise and the free-market, there is surely market failure there. I ask why? Let us look at this more closely. The underlying problem seems to be that arrangements about one’s health do not fall within the scope of either a normal nor a relatively equal nor a fair buyer/seller relationship. For a start it is generally difficult for an individual or even a family to negotiate with a very large organisation such as hospitals, or even worse chains of hospitals, or at the very least large health insurance companies are. That is not like supermarket shopping where one chooses which supermarket to go to and which products within it to buy. This is much exacerbated because here it is one’s health one is talking about, certainly one’s quality of life and usually things have to be done at speed reducing any prospect of either negotiation or genuine choice. Furthermore the scope of treatment required is often indefinite, subject to opinion and subject to unexpected medical alterations and while an average person is not an expert, the doctors one is dealing with are or at least claim to be expert. Really that is a situation where some experienced person should be negotiating treatment and certainly price on the customer’s behalf. To some extent in the British private health sector B.U.P.A. as well as being an insurer do that on their members’ behalf – though in Britain there is less scope for private health providers to overcharge as their customers could always go back without charge to the state system. My view, as I explain later, is that health systems should become hybrid to improve upon both the privately based and the publicly based providers.
C) THE FASHION FOR ‘A MIXED ECONOMY’
Many people, while acknowledging the failures of a completely (or predominantly) state controlled system, think ‘a mixed economy’ with substantial parts of each is best. Admittedly that view, though still in effect the majority view, is less explicit and less popular than it once was. Nowadays privatisations have increasingly happened, especially when countries have run short of money. Generally speaking privatisations have worked better both for customers and for the economy of the country (in getting tax income rather than losing subsidy income) than nationalisations. Also where the public sector competes with the private sector over the same provision as with housing or indeed airlines, the private sector has generally performed much better than the public sector.
So nowadays people and politicians have mainly divided into two camps. In one camp are those who are so angry or jealous about anybody making much profit or becoming unequally wealthy that they demand public control of the economy. Such people are oblivious to the inherent economic inefficiencies of the public sector. They are probably in denial about that anyhow. They are ignorant of the main motivation (animalistic ‘dominance’ over others in the absence of financial incentive) of many with power (but not effective personal accountability) in the public sector. The other camp are those who at least pragmatically favour the wealth and opportunities the free-market provides. However those people tend to favour a mixed economy and usually roughly the present balance within that mix rather than more privatisation. Yet the actual mix between public and private operation is very different in different Western countries. For instance in the U.S.A. there is a predominantly private health system but many publicly operated buses whereas in Britain there is a predominantly public health system but overwhelmingly privately run bus services. The rational way is not to settle for the compromise of a rather static mixed economy, mixed system. Rather I ask, if as I submit and is apparent from observation and analysis, free market competitive private enterprise is better value for money than public ownership, why not have a system of as much private enterprise as one sensibly can? My view and the rational view is that rather than politicians and governments just settling for the present mixture in a mixed economy, the rational way is not to settle for the present compromise but to spread the better system, competitive private enterprise as far as one reasonably can. The main limitation on sensible private operation relates to what cannot reasonably be allowed to be competitive.
G) THE SCOPE OF ‘COMPETITIVE’
We reach the natural limit of the free-market when one reaches the barrier of what cannot properly nor sensibly be competitive with other operators. Without genuine potential competition the free market does not work well, only a little better than state run concerns because a private monopoly (though subject to regulation from the state) is only a little better than state run monopolies.
There are indeed several activities for which competitive private operators would not be appropriate because they would undermine the state, a democratically governed state, if they were openly competitive.
For a start the very essence of a country is that its government has a monopoly over the use of legitimate force and those who use force are directly subordinate to the democratic government of the state. That certainly applies to the country’s army, navy and airforce. There is always some risk to any government of a military coup. That is unavoidable and should be minimised but one should certainly not permit an independently run mercenary army to exist as it might do what it likes in policy and to government, including potentially take over the country. The Police should also be publicly and be democratically accountable though of course the wider security industry may legitimately be privately run and mostly it is already privately run.
Public running also applies to the Courts and judicial system though in some countries ‘independent mediation between disputing parties’ is privatised and there is no reason why it should not be. Public running also applies to what is essential to democracy which is the elected, representative legislative chamber of the country and the top Civil Service who advise upon and supervise the enactment of public policy.
However public operation should not extend much beyond the military, the Police, the Courts and the institutions and vehicles of democracy itself in terms of public sector activity. Granted public funding may necessarily go much further, such as in paying basic pensions and funding subsistence to the necessarily unemployed. Yet the public sector or even public funding should not extend to the operation of television channels, airlines, other transportation or other services that can reasonably and generally more efficiently be privately operated.
H) DIRECT TRANSFERS FROM PUBLIC TO PRIVATE SECTOR AND ACTIVITY CESSATIONS
In most cases the rational aim of maximising the private sector and minimising the public sector can easily be achieved. Where the public sector is running an essential or potentially economically viable service such as housing and many transportation networks or state airlines or airports or an electricity supply company, that can easily be sold off to private operators who trade competitively. Even where competition is not really a viable possibility or at any rate not an easily achieved possibility as with natural monopolies such as water supply, the business would still generally be somewhat more efficiently run in the private sector (where key managers would probably be personally financially rewarded for success) and should be transferred there. In a national emergency, as happened in wars when merchant ships or railway carriages were commandeered for military use, the state can take control of what it needs (and paying rental is much cheaper than operating it all the time). So I want this sort of privatisation to the maximum degree.
However there are some things the state operates that cannot be run with any or much prospect of making a profit and no private operator would buy them, at least not without a subsidy for operating them. Where there is too little demand to maintain a viable service such as with some railway lines, the state should generally just cease to operate them. If there is just too little demand at a commercially viable price for running a commercial operation, then in general the public sector should simply cease running that operation. In general I am against subsidising private operators as apart from supplying what there is relatively little demand for, that tends to greatly diminish efficiency. That happens in subsidised cultural events compared to free-market events. For instance unsubsidised theatres are commercially better run than subsidised theatres. That loss in efficiency due to subsidy is especially true with monopoly operators where there is no readily available local comparator for financial efficiency. Some people would advocate social need subsidies, such as subsidising bus services to remote villages. Though there is an argument for that (especially if one can get an operator who tenders for less subsidy than others) I am very wary of state subsidies for the private sector, though it may occasionally be necessary in an emergency (such as a major banking collapse).
Another category of operation states should simply cease to operate are bureaucratic agencies which cost more in overall human time than they save in overall human time and so are not worth the overall human time devoted to them. Most regulators fall within this category and should either be simply disbanded or at the very least downsized and compelled to only do ‘work’ that saves more in human time than it costs in overall human time.
J) THE PROPOSED PUBLICLY FUNDED, PRIVATELY OPERATED MODEL
There are some ‘services’ that most people think need to be in the public sector because however inefficiently they may now be run, most people simply cannot afford to pay for them except through general taxation. School education is such a service and in most countries health is another such service to name the two biggest and most significant such services.
After all most people with children and all the extra expenditure that entails simply cannot afford to pay to educate their children out of their income, even apart from those parents who are unemployed or disabled. Surely it is the state that must therefore pay for the compulsory education of their children. That is more than a fair point; that is a compelling point. I agree most parents (let alone not every parent) simply cannot afford to educate their children privately nor even to pay for the usually lower cost of state education compared to the more luxurious (and I think unnecessarily luxurious) and costly set up of most private schools.
However though I agree most schools need to be publicly funded out of taxpayers’ money, they do not need to be publicly run or publicly operated. They can be run by private individuals or private organisations competing with each other over value for money even if they are publicly funded. Decades ago certain politicians in Britain suggested and argued for a different system that would facilitate that. They proposed a state ‘education voucher’ system. In that system parents of school age children would receive a termly voucher for a certain amount of money that could only be encashed by the school where they choose to send their child to. That would have many advantages over the predominant present system of publicly funded, publicly run schools. For a start that would mean parents would be far more likely to take a serious interest in how good or bad the local schools are at educating children. Second, as parents could choose to move their child along with the voucher money away from a failing or declining school and in any case schools would have to seriously compete with other schools, schools would be much more engaged in achieving a good standard of education, good examination results and the kind of education parents (and even older children) want. Third, in a privately run school that had to compete for its custom, unlike now, a private owner would stand to make money for himself if he could cut out wasteful or unnecessary expenditure while still retaining customer satisfaction over the quality of education in the school. So because there would be competition between schools and more focus on more value for less money even though educational standards would surely increase, the cost of the vouchers could soon be lower than present school costs.School owners would reduce wasteful expenditure so much that they could still make a profit and want to operate a school if the voucher value was appreciably lower than present school costs. Furthermore this system would be largely self-regulating in ways that a competitive free market is self-regulating and self-adjusting and generally based on the reputation of the schools. So enormous costs could be saved on the (out of school) administrative, advisory and supervisory expenditure of most public authorities running an education system. So under such a ‘voucher’ system it would be a ‘win-win’ for everybody important, that is parents, schoolchildren and taxpayers. So I thoroughly recommend ‘education vouchers’ as a ‘privately operated, publicly funded’ better way of running school systems.
Now for my proposed reform of health services. There are particular problems with citizens financing or even negotiating their own healthcare.The requirement over a lifetime that a person might have for health services is indeed a lottery. Somebody might have no or next to no requirement for healthcare and say at seventy years old drop dead from a heart attack. Another person might soon become chronically ill from multiple ailments and then become severely disabled at a young age and for decades require expensive healthcare he could not possibly pay for. Most people are between those two extremes but rather nearer to the first example of a healthy life at least for many decades and ailing towards the end of their life. Anyhow health is unpredictable and some health treatments are very costly. Though for many people insurance that spreads the risks and the costs might be an option, a pay as health incidents occur is not a practical approach for financing healthcare for most people.
Mostly Western countries have opted to make healthcare predominantly a public service where the government is in effect the insurer or the insurance company to which people contribute their tax (like premiums) to spread and finance their health risks. Being a public sector system it is extremely inefficient. It suffers from all the inherent inefficiencies of a public sector activity such as lack of real competition making financial efficiency somewhat irrelevant to it. It deprives customers of choice and the ability or even need to opt for value for money. It does not encourage efficiency from employees via incentive bonuses for good work nor via much likelihood of losing their job for failure. Through lack of financial control it swallows up manpower without getting value for money out of the extra manpower. So overmanning has become rife in hospitals. Instead of everybody pulling together as happened long ago in hospitals, work is hampered by ever more job demarcations. So in Western countries in recent decades ever higher percentages of national income have been spent on publicly operated health services. Yet for all that it has been reckoned that health services on average have only increased average life expectancy by three months and most of the cost probably goes on achieving that last or third month. Improved pharmaceutical products, improved air quality, improved water quality and improved food have probably each done more to extend life than hospitals!
So publicly run health systems are both in theory and in practice very inefficient. However as I pointed out earlier, a purely privately run system in the case of health is also generally unsatisfactory. That is largely due to ill people (and their caring families) who anyhow both lack time (medical conditions are usually painful and often urgent) and lack medical expertise being in no position to negotiate directly with massive corporations. Indeed ill people who lack the medical knowledge and time ‘to shop around’ are usually not in the position of ‘genuine customers’ within a free-market. Insurance companies on behalf of customers also have their hands tied because their customers and their families will want ‘the best healthcare’ and the best doctors (who can then become the most expensive) rather than the best value for money. If insurers don’t largely accede to this they will lose customers to other insurers who do accede. So that is one of the few cases when competition does not militate towards efficiency as in this case insurers are primarily
paid to provide quality rather than cost efficiency.
So two fundamental reforms are required to greatly improve value for money from healthcare. The first reform is the introduction of real competition (foreign as well as domestic as for most conditions one may surely go to a foreign surgery or health centre for treatment and this has increasingly been happening) into the market. Having smaller and more private hospitals or treatment centres and therefore more real competition would help (though for some ailments there is a good case for large centres of very specialist medical expertise). The second reform is customers and especially their funders have a requirement for expert negotiation with health providers, especially hospitals. Just as it is usually inadvisable for most people to defend a major case in a Court without a professional lawyer or advocate, it is unfortunately inadvisable to fund a major treatment in hospital without a specialist negotiator or advocate to help settle on a treatment and its price. So though I say healthcare should be publicly funded while being privately operated the state should also employ, train and provide (or better still subcontract from the private sector) expert negotiators to protect the customer and the taxpayers from excessive costs, over-medication, poor service and poor value for money. It seems it is largely due to that lack of advisers with real expertise and real leverage ( such as the state should have as a buyer of hospital or medical services) that the privately run and privately funded system is failing in value for money terms in the U.S.A.
Another activity which is appropriately ‘privately run, publicly financed’ are prisons (after all prisoners can seldom fully afford to pay upfront for their own imprisonment), as sometimes now happens in Britain which has reduced costs there. That should be extended to all prisons so as to make them ‘privately run, publicly funded’.
So when people say that an activity should be publicly run or privately run, I say there is a third alternative which is ‘privately operated and publicly financed’. I contend most activities should be ‘privately run and privately financed’. Yet there are some essential things for which private financing is impractical for most people or deficient. I say those things need not necessarily be publicly operated and publicly financed except where competition would be contrary to the interests of a democratic state. For most essential things for which private financing is impractical or deficient one can massively increase the extent of private operation to achieve competitive cost and efficiency by making such services ‘privately operated, publicly funded’. There is usually also the advantage in the generally non-monopolistic ‘privately operated, publicly funded’ model that the public funder can change the operator if the operator in the private sector is unsatisfactory but in the’publicly operated, publicly funded’ model the state is unlikely to be able to change itself as operator in the event of poor service.
K) CONCLUSION
Most people would be truly astonished by a certain fact if they knew it which is average public expenditure in Britain at the time of writing is over 40,000 British pounds or over 50,000 U.S. dollars each year per household. (Even that is not high by the standards of wealthy Western countries.) That is nearly four times as much as the state pension in Britain and more than the median pay of a full time worker (and nearly twice as much as such workers receive after paying taxes, Income Tax, Council Tax and National Insurance). What do governments provide for all that money? In many cases the answer is next to nothing and in practically all cases it is not £40,000 worth of ‘value’. If people knew that most would surely favour at least halving public spending and putting the money into their own pockets instead – and I agree with that!
So with that record of massive governmental spending and governmental waste, the analytical and logical case I have already presented here for downsizing the scope and size of the public sector is only rational and sensible. I am happy that as well as analysing why that is so I have been able to put forward in this Bulletin via ‘private operation, public funding’ a way of extending the advantages of the private sector into activities which up to now the private sector has been largely precluded from due to the financial limitations most people face.
When I proclaim ‘maximise the private sector, minimise the public sector’ most people would agree with me if only they knew just how wasteful and costly and poor value for money the public sector really is. So not only could this be popular politics but when one understands the inherent and largely incurable systemic faults of the public sector it is also very much rational politics, rational governance. Indeed the only rational thing to do is ‘maximise the private sector, minimise the public sector’.
Geoffrey H L Berg