Tuesday, 23 December 2014

Public v private

There is an insane belief fostered e.g. by the Tory Party that the private sector always does everything better than the public sector. The Labour Party says the exact opposite.

Please note, in this post I'm using the word 'government' in a vague sort of sense, you could also say 'the state' or 'the taxpayer' or 'collectively', it's all the same principle.

As per usual, they are both wrong what we end up with is the worst of all worlds:

- The government doing stuff it should not be doing and/or not doing stuff it should be doing,

- Even worse, the government sub-contracts stuff to the private sector at a higher cost than it could have done it itself,

You can mix and match these failings and double up the problems:

- the government flogs off borderline state-owned assets (viable in public or private sector) like the post office or social housing at a massive discount,

- the government decides that something unnecessary must be done… and then outsourcing it at an even bigger expense,

- the government fails to provide a public good allowing a lucky corporation to collect the 'rent', see.g. payday lenders.

- We can safely assume, that if there is real private demand for something, somebody will do it, so there is no need to delineate or define what the private sector should be doing. You can have some rules saying how they are allowed to do things, that's a separate issue.

One area where most countries have got it right, and which serves as a good illustration is road traffic.

The government decides where the major roads are going to go, pays for them to be built and maintains them. The government then covers the cost many times over by collecting part of the use value in taxes on motoring (mainly fuel duty and VAT).

The private sector then builds the vehicles and everybody uses the roads for whatever they see fit: haulage, passenger transport, business, commuting or leisure.

That's it. Just think about it.

We've tried nationalising the car industry and it was an epic fail. That's easy.

And if anybody seriously thinks that without government intervention we'd have any sort of road network worth speaking of is clearly living in la-la land:

- Without compulsory purchase orders, not a single road of note would ever have been built. (The same applies to the railway network, even if a lot of it was initially privately financed). As a result, there'd be less incentive to buy a car or vehicle if there's nowhere to drive to.

- "Ah yes," cry the Faux Libertarians, "But what about the M6 toll road? That's private!" For sure it is, but that is a little 27 mile snippet that is plugged into the whole national road system. If the government shut off road access to it at one end, it's value to the motorist would be precisely zero.


Lola said...

MW. I think your characterisations of the Tories and Labour are a bit disingenuous. Personally I think they are both 'rent seekers', they just go about it in different ways.
But, for the purposes of the thought experiment about roads etc., it works.
Whilst I agree that without compulsory purchase road improvements would not be built, the actual 'routes' often grew up based on what worked in history to get goods to market - drove roads for example. Mind you the bulk of the major routes grew up from military expediency - getting troops to far flung places to quell uprisings. The A1 for example. Or the London / Holyhead road. Or the Scottish Military Roads.
I have pondered on this a bit. My current preference is for more private finance for trunk routes and major roads, probably funded by user charges, plus local networks funded out of LVT. Discuss.

Rich Tee said...

There is a saying that "elections are won on the middle ground", that is, a party only wins an election when it has compromised its basic beliefs to a required extent. Most obvious example in recent times is Labour abandoning its commitment to nationalisation (clause 4) which was 1994/1995 iirc.

There are some odd anomalies. For example, France has an extensive network of toll roads despite being a considerably socialist dirigiste economy, although Wikipedia does say that they are semi-government controlled:


Tim Almond said...

There's also the A419/A417 from Swindon to Cirencester which has no tolls, but the state pays the people who run it based on usage.

You can subcontract the building and even running of the roads. What you can't do is subcontract the "what roads are we going to have"?

Golden rule of government: is it something that's a monopoly (e.g. defence) OR is it something that the market won't address (e.g. feeding people without money).

And you want government doing the simplest thing possible. So, feeding people without money means giving them cash and letting them buy food. Giving old people free travel means giving them bus passes and recompensing bus companies for their use of them.

The thing with government outsourcing is that it works fine if you're tapping into existing markets that are supplying. For example: office chairs, fleet management, printing. There's no point in a council having their own printing works - plenty of companies out there competing for business, running large scale printing. Just buy from them.

But doing unique things, like having companies running the Passport Office makes no sense. It's a monopoly, you're going to need the same staff, regardless. And my experience of outsourcing unique stuff to big consultancies is that it's no cheaper than just having an in-house team.

Mark Wadsworth said...

L, yes of course it's a crass generalisation, but you get the point.

The examples you give are still all examples of where 'the government' has pushed through road construction, for fair reasons or foul.

And of course the 'routes' are largely historical, i.e. you start with two towns and you need a road to connect them. It's all a bit chicken and egg, land without road access is worthless, as is a road to nowhere.

L, RT, bugger toll roads, I'm against all tolls, the cost of collection is a huge % of tolls raised, i.e. lorry drivers spend ten minutes queuing to pay a £2 toll. What a waste. Fuel duty covers it nicely, in the absence of a perfect technological system for variable per-mile-travelled pricing and automatic direct debits.

LVT is not particularly there to fund the roads, it is there to capture the land value uplift not already captured in fuel duty/road pricing.

Mark Wadsworth said...

TS, of course private contractors build and maintain the roads, that's just a question of having a transparent tender process (not massive back handers). But we can't allow them to decide what new roads to build at taxpayers' expense.

I agree with all your other examples, they illustrate the public-private divide just as well.

Bayard said...

"There is an insane belief fostered e.g. by the Tory Party that the private sector always does everything better than the private sector."

It's easy to see how this arose. The right-wingers point out examples of where the private sector got it right and the public sector got it wrong and the left-wingers do the reverse. It's like astrology, it all makes sense so long as you only concentrate on the bits that fit.

Nationalisation was a failure because, by and large, it took badly-run companies and allowed them to continue to be badly run for years instead of allowing them to go bust, as they would have done, had they not been nationalised. Thus it was a failure of management, not a failure of nationalisation, as such. The same management is just as capable of cocking things up in the private sector as in the public sector. There are only so many competent managers around. When they are running things in the public sector, that bit of the public sector performs well, ditto private sector. The David Brents of this world can cock things up wherever they are.

A K Haart said...

One consequence of this "insane belief" is that government bodies invent crazy schemes to appear more businesslike instead of just doing the job within budget.

I saw a lot of that, such as internal markets which weren't markets. People just gamed the system while directors pretended to be business savvy. I think that was probably the point.

Bayard said...

While we are discussing privatisation, is it just me or are many more cards being delivered this Christmas without the Post Office bothering to cancel the stamp?

Anonymous said...

@ The Stigler

Outsourcing functions (e.g. running a passport office) can deliver significant cost savings and service improvements where the incumbent service is (and may have been for many years) badly run. The outsourcing of something offers the chance to start afresh in a way that's just not going to fly if done as an 'internal restructure'. If an outsourcer can take over a poor function, cut 30% of the costs, and improve the delivery, then the taxpayer should be happy for them to take (say) a 10% commission on that... provided it's not in perpetuity.

The problem we have is that the pro-outsourcers (and they're both red and blue) seem to think that the benefits only work 'one way' (public to private) and that the private provider will never develop the same issues that the public provider did to make outsourcing a good idea in the first place.

It's not the transition from public to private (per se) that brings the benefits. It's the chance to act like a 'start-up'. There's no reason (in theory, at least) why only those employed by Capita and Deloittes (etc) should be deemed smart enough to know how to fix a broken public function.

Lola said...

MW Agreed re tolls. I didn't make myself clear. I assumed that technology will very soon make it possible to identify users and bill them. OTOH French tolls work quite well, as does the M6 toll.

In re LVT for local roads, I think probably it'd be part of the funding with the balance coming as a transferred share of fuel duty.

Intriguingly the my LA has not repaired my road for a long time - there are a couple of very serious potholes. Pretty soon I will have to buy a couple of bags of DBM and do it myself...

Anonymous said...

@Bayard. My missus has been merrily cutting stamps from envelopes lately. I was laughing at her until she told me how much the stamps cost. I'm going to ask a friend who works down at Mount Pleasant what's occurring.

Mark Wadsworth said...

B, yes, there's too much selective bias going on

As to nationalised car companies, perhaps they weren't run worse after nationalisation - but they were run for much longer than otherwise, that's part of the point. And it is politically easier to allow a private company to go bust than a nationalised one.

AKH, don't get me started on the whole PPI PFI crap, that is one of the few things where proper lefties and proper libertarians agree i.e. it was theft and waste and corruption.

PJH said...

First sentence: "There is an insane belief fostered e.g. by the Tory Party that the private sector always does everything better than the private sector."

I believe you may have a typo there Mark..

Mark Wadsworth said...

PJH, oops, I have duly amended.

DBC Reed said...

Martin Wolf says that the world is suffering from "chronic demand deficiency syndrome".The problem is competitive private sector markets drive down real wages relentlessly as a matter of shoot-yourself-in-the- foot principle despite notable warnings from the likes of Henry Ford (who found that well paid people bought cars) and Karl Marx (who called for an end to the private capital system as being incurable.)
The only rational system was the Douglas system of Social Credit which recognised that banks create money out of nothing, and planned to nationalise the whole shooting match dishing out spending power as a regular National Dividend that would fill the demand gap between the total amount distributed in the economy and the unrealised full potential of the economy working at full capacity. Very sensible .No chance then.

Mark Wadsworth said...

DBC, the problem is not and has never been 'insufficient demand', the problem is Home-Owner-Ism and all its variants, there's no point blaming the symptoms (financial recessions, unemployment, inequality etc).

So having LVT and a Citizen's Dividend not only sorts out most of that but, whether coincidentally or not, is not far from the Major Douglas model.

i.e. there's no need to nationalise credit creation as such, you just need to prevent credit being created on capitalised land values, as to Citizen's Dividend, it is just the best/least bad kind of welfare system (and helps shut down the other kind of 'bad' credit creation i,e. payday loans).

Cooking Lager said...

I thought the logic behind contracting out the public sector wasn't just about costs.

Accepting somethings require social provision, say bin collection because the free loader would create problems for the rest of us if he fly tipped domestic waste.

You have the problem that any organisation can become self serving without competitive pressure. The idea that state employed bin men would be more prone to strike or support outdated practices, but a private firm bidding for work cannot do that.

Most people have dealt with private and public organisations that have poor customer service. With choice comes competitive pressure.

One failure is where you cannot put that choice direct to people and instead vote for councilors to choose the service. There your problems become cronyism and corruption.

James Higham said...

Posted on this myself. The devil's in the right mix.

Bayard said...

"to nationalise the whole shooting match"

Nationalisation will never work so long as it simply changes the owners of a business from private to the state. If the banks are to be nationalised, they need to become part of the state and run by civil servants. Otherwise all that happens is that all the profits go into the pockets of the senior management. IMHO, there is a lot to be said for properly nationalising "retail" banking (current accounts, loans and deposits) and let the "investment banking" boys go bust when they cock it up, having been shorn of their human shield of current account holders and small depositors.

DBC Reed said...

OK the present "system" where the banks create money and pass it off as loans & charge interest on them might just about work if the banks were prevented from shoving newly created money into property bubbles(BY LVT)That's agreed.
If you are going to create National/Citizens Dividends it would be easier for the State to create the money to give to the punters to spend as unearned income (National Dividend) rather than redistribute all the residential land values (MW Citizen's Dividend) which according to Wolf would crash the banking system all over again.Seems very likely.

Lola said...

Going back the original post MW is correct, but...
'Routes' have always being created by the market - the Silk Road for example.
And many of these 'routes' were turned into 'roads' by private landlords (or warlords) with the sole aim of extracting tolls, aka rent, from those using the 'routes'. If that landlord could control that bit of the route the landlord could extract taxes. Robin Hood for example.
Now, at some point, the 'state' arrives, probably as a result of route users getting fed up with paying private taxes and the sellers and buyers at each end of the route, ditto. And the 'state'also quite likes trade. It can tax it.
Now, if you want to build proper road (or railway, or canal come to that) between points A and B sooner or later you will find a reluctant land seller / easement granter who will stick out for a ransom. So in order to make the building of the road (canal, railway) possible you are going to need coercion on that landlord. And there is none better at coercion than the state. It therefore ends up in an alliance between private risk capital and the coercive state to get the job done.
Local travel seems to be rather different in that most local roads were once footpaths or cart tracks put into public rights of way by custom and usage. These became maintained by the parish financed by property taxes since everyone locally could see the benefit.
Overall I reckon the Brits have been pretty good at this.

Lola said...

DBCR. The banks have been nationalised for years and years. That's the whole problem. They were extra nationalised by the FSMA 2000 under the Brown Terror.
And it wasn't investment banking that went bust, it was retail banking (Northern Rock) egged on by massive money and credit expansion by Brown and others. Overall you can never ever trust state bureaucrats to run anything vaguely commercial efficiently and/or not to extract serious amounts of rent and personal advantage from it for themselves.

benj said...

Elastic supply= Private provision/deregulated

Inelastic supply=State provision/highly regulated

So, on that basis education should be privatised, and so should most of the NHS.

While the water industry should re-nationalised.

Mark Wadsworth said...

CL, you give a good example of something which has to be done collectively/by the government = waste collection.

This is now all sub-contracted out, and it works better than when it was nationalised. That does not prove or disprove anything, you can't then generalise that other things should also be sub-contrated out. Some should, some shouldn't.

JH, it's not a question of "right mix", there is not some ideal ratio, you have to work on a case by case basis.

B, agreed.

DBC, I explained MMT to you and you've forgotten it all again. It makes, in practice, absolutely no difference whether
a) A government collects tax and then spends it
b) A government prints money out of thin air and then gets it back/prevents inflation by collecting it tax.

L, yes, but in all your examples, there's always force involved, isn't there? Even 'custom or tradition' is a collective thing, in practice no different from a compulsory purchase order.

BJ, that's a useful rule of thumb when you are looking at goods and services, but what about e.g. welfare and pensions?

Bayard said...

"Overall you can never ever trust state bureaucrats to run anything vaguely commercial efficiently."

Nevil Shute predicted this in "Slide Rule" where he forsaw the end of the landed gentry having a deleterious effect on public servants, in that those with a private income were free to stand up to their superiors as their superiors needed them more than they needed their superiors. The whole idea of "public service" has disappeared: our public servants are careerists like any other employee

"or not to extract serious amounts of rent and personal advantage from it for themselves."

Just like senior management in most private sector businesses, in fact.

Tim Almond said...


"Overall you can never ever trust state bureaucrats to run anything vaguely commercial efficiently and/or not to extract serious amounts of rent and personal advantage from it for themselves"

That's why we used to underpay them. If you're going to take lots of sick leave, get generous pensions and not work very hard, we're not going to pay you much for it.

It's also why I'm more of a privatiser than someone who believes that one bunch can run it better than another, of either party. Philip Hammond and Ken Clarke are about the only people in government with real commercial experience. I had to laugh when IDS talked about how they were rolling out the latest benefits system using a gradual approach. That's something that anyone with senior experience in industry would have been doing from day 1, not after 4 years in the job (you build your software around the biggest wins, and then gradually add the more complex stuff).

DBC Reed said...

Highly condescending of you to explain MMT to me! On June 28th 2010 you were declaring "DBC banks are just middlemen" in a madcap ultra orthodox attempt to prove that banks were passing on pre-existing sums of money as loans. This disagreement went on ad nauseam.Now you are coming at me from the opposite direction! At least you have got yourself straight! Somewhat.
E.G. the difference between your a) and b)is kinda obvious.In a) the Guv takes money out of the
economy then puts it back in, hopefully re-routed to do more general good; in b)the Guv creates an entirely new sum of money (instead of letting the banks do it)increasing the national money supply by paying people directly (with made-up money like the banks do) to build roads/provide goods and services before some of it is corralled by Pigouvian taxes like LVT and then re-introduced into the expanding economy.The immediate advantage is that the Guv is not wasting money borrowing off the banks to close deficits ..as now.

Lola said...

MW. Yes, that's the point I was making. State 'coercion' is required to complete a project like a railway since there will always be those that are reluctant to sell/grant access over their land. And the Brits have been pretty good at this by the use of public enquiries. (In my time in Highway Engineering I worked on several public inquiries and overall the system was fair and open).

B. Indeed re senior (and middle come to that) management. But, they are under the discipline of profit and loss and their shareholders. I know that there are issues with this, but most of those issues are precipitated by cronyist/corporatist liaisons with the State, protectionism/regulation etc. etc.

TS. Indeed. As long as there are genuine 'free market' disciplines then private enterprise works Ok, or rather much less bad than nationalisation.

Re IDS etc. Yup.

Lola said...

DBSR. Crikey! Erm...where to start? Oh sod it. It's Christmas. Have a good one.

Anonymous said...

DBS. But if...in 'b' the government adds to the money stock by printing money ...but then taxes and even if it indicates that it intends to tax in the near future in order to deflate prices then the stimulus afforded by the increase in M is negated; Ricardian equivalence. ...which isn't very xmassy so erm, merry xmas.

DBC Reed said...

Presumably I'm DBS?
So:Guv spends money into existence by commissioning big bucks projects which it pays for with cheques or electronic payments which have absolutely fuck all backing them- the way the banks do when giving a punter a cheque for a loan.The Guv still taxes in your scenario. Why ,when it has already paid for public sector infrastructure/ improvements with phonied up money?No need to raise tax as well.
PS Has Ricardian equivalence ever been proved to exist?

Derek said...

Ricardo proved that it didn't exist. However that doesn't seem to have stopped it.

Derek said...

Bit like Santa Claus really.

Mark Wadsworth said...

TS, your comment about IDS is quite correct but it's o/t. You're just saying HOW he should do something (learn lessons from private sector) rather than WHO should be running the welfare system.

DBC, banks are just middlemen. They create little or nothing. They just pay land sellers slightly less than they charge land buyers.

It might help if you read your own comments. You have often said we should print money and then tax land values to prevent the new money just pushing up rents and prices. I said much the same just the other way round.

It's like the old debate about whether banks take deposits and make loans, or whether they make loans and take deposits. The latter is more correct but it comes to the same thing.

L, agreed.

D, Ricardian Equivalence is a bit of a red herring.

Lola said...

DBCR. Apologies for calling you DBSR....finger trouble.

Bayard said...

TS, Lola, in the old days, one had the idea of public service instead of the discipline of profit and loss, the final end of which former came in the days of "I'm all right, Jack" Thatcherism. Could it reappear? In the absence of world wars, Christian revivals or public servants with private incomes, very unlikely, I'd say.

However it does seem to me that, now that most people buy shares like they buy betting tickets, shareholder are neither interested in, nor are given any control over how large businesses are run.

Tim Almond said...


I'm just pointing out the problem of people in government

To get to be a senior manager in industry, you generally have to have worked your way up, cut your teeth on small projects, learnt lessons from small mistakes. By the time you're in charge of a huge department, spending millions on projects and dealing with what processes to have, you generally know what you're doing.

To be put in charge of a government department you have to have been a barrister who hardly worked, a teacher, a lieutenant in the guards, or a steward on the QE2.

And they're pretty much all the same. The likes of Philip Hammond, someone that's managed a competitive business, are rare.

Anonymous said...

@ DBC Reed. Sorry about the name. Lola's fault. The only reason I mentioned the tax after the deficit finance via printing press was because you specified that: "...before some of it is corralled by Pigouvian taxes like LVT..." So no there is no absolute requirement to raise tax in response to the stimulus if some inflation is what is desired. That said, in order for deficit financing to really work there seems to be a plausible requirement to be credible in making plain that there is no question of the stimulus in period A being sterilised in period B or taxes being raised either at time of the stimulus or any time soon after. Or else people will expect tax rises or monetary tightening which all things equal would be expected to nullify or reduce the stimulative effects of the initial deficit financing. Hope that clears things up...

DBC Reed said...

The traditional bugbear of swamping the country with cheap money or flinging money about schemes is said to be inflation but in the present dire predicament(of parlous demand) a bit of wage inflation would not come amiss.Of course what the evil eccentrics who run this country believe is the complete opposite:house price inflation good ; wage inflation bad.
So it would be as well to spell out that if and when house/land prices start going up as the result of stimulus, a from here on
LVT will kick in scalping any increase only so enacting the proposals of the Land tenure Reform Association made just before Progress and Poverty erupted on the scene, disastrously IMO.
In the transitional year the citizen- punters will have twelve months to self assess how much their property has inflated in value and Ricardian Equivalence may well prove itself to exist: people will likely insist that their property has kept its old value so they don't have to pay any tax.Result : high wage low rent Nirvana, the country benefiting from all the phonied up money spent by the Guv,and flat land/property price inflation.
This form of LVT will not raise much money but Guv expenditure
is covered by its money creating/Public Banking powers.

If I may say so I thought Ben Jamin's formula:
elastic supply= deregulated private sector ;
inelastic supply = regulated public sector
was a good nutshell conclusion to a lot of this.