Are companies any smarter or more efficient than the government? Cactus at Angry Bear doesn't think so:
One of the reasons I don't buy the argument that the private sector is more efficient than the public sector (and I don't buy the reverse argument either - I think both are equally inefficient) is that there seems to be ample evidence that most companies don't know what they're doing. If they're successful for a while, they don't necessarily.. . .
Now, whoda thunk that home prices can't continuously rise faster than the wages of people who buy homes? Clearly not Countrywide and a host of other companies that as little as two months ago would have been considered quite successful by Wall Street Standards (i.e., by very, very highly paid Wall Street analysts). If your typical right wing person thought of companies like Countrywide at all before two months ago, odds are they had such companies labeled as a "success story" in their minds.
Personally, I'm on the record as believing that companies quite often do stupid things. The difference between companies and the government is that thanks to market discipline, companies that do stupid things eventually have to stop, because they run out of money. Government programs that don't work, on the other hand, have a seemingly indefinite shelf life. The US government seems to be doing almost every stupid thing it has ever done, and to be planning to continue doing those stupid things forever. In the past sixty years we've had three serious attempts that I can think of that even partially grappled with the problem of programs that weren't working: the Carter/Reagan deregulations; the Reagan tax simplification; and the Clinton welfare reform. Of those, the first is intact, the second has been gutted, and the third is slowly eroding. This is not a promising track record for people arguing that the government should do more stuff.
For the market, Countrywide is a success story; the market succeeded in weeding this company out. Not perfectly, no instantly, but eventually, that which could not go on forever, stopped. Try that trick with the farm bill.
Overall, I agree with you.
However, I believe that the way economist talk about markets being efficient is very misleading. When economist say a market is efficient all they really mean is that the markets clear. This is no way says anything about whether or not what the market is doing is wasteful or that it could or could not be done in much better way. But the typical students comes out of their introductory economics class thinking that when an economist says market are efficient they really think the economist is saying the market is not wasteful and that is not at all what economic theory says. Of course a major part of the problem is that is also what many economics teachers think.
It always amazes me when statists cite companies such as Enron as an example of how private enterprise comes up short. I wonder how I should explain to them that the fact that Enron, y'know, no longer exists, provides the example of the optimum outcome for a bureaucratic organization which performs exceedingly poorly or fraudulently. If only the same could be said about the Bureau of Indian Affairs.
Organizations or bureaucracies which, absent government subsidy, depend on outside people to voluntarily supply more capital are far, far, easier to reform or do away with than an organization or bureaucracy which only needs to appeal to a very energetic small minority of people to compel taxpayers to supply more capital. People are stupid and venal everywhere, and in every type of organization. Stupidity and venality coupled with the awesome power of the state is far more pernicious.
People are stupid and venal everywhere,
Gee I though libertarians-conservatives believed that people were better able to make choices then
governments.
But if people really are stupid and venal everywhere maybe we really do need big government to protect them from theirselves.
Why, Spencer? So stupid and venal people can maximize their potential for violence by operating a government?
I once heard former libertarian-leaning Robert Bork on C-span denounce libertarian thought because it presumed a sweet human nature. Had I been able to call and challenge him, I would have informed him that there was an entirely rational strain of libertarian-leaning thought which presumed no such thing. In fact, the sentiment was that human beings are reliably nasty and stupid enough (albeit certainly not guaranteed to be nasty and stupid) to guarantee that the state will, eventually, be run by nasty and stupid people, and that since the state is the one human institution which can guarantee, by force, it's access to the resources needed to continue it's existence, it is an outstanding idea to greatly limit the activities of the state.
It’s true that government programs are not subject to market incentives, but they are subject to political incentives. Programs that are unpopular with the voters will inevitably be reformed, or will shrink over time. There is an exception in the case of programs which are low in cost but deliver large benefits to a small group of people, like farm subsidies and earmarks. Such programs tend to persist indefinitely, since the small group of beneficiaries will tend be highly mobilized to preserve their program. However this only accounts for a small percentage of government activity. Most of what the government does is stuff that is popular with the voters.
RC,
Of course, what is popular need have little to do with efficiency.
Megan is correct, when failure is allowed, inefficient firms get euthanized. This is the effective difference between governments and private companies. Of course, private companies the world over often look to governments to prevent their failures through coerced subsidies for themselves and handicaps on their competitors, both foreign and domestic.
Efficient markets only exist when there are some specific conditions:
Competition (many firms)
Low barriers to entry
Good information
If you start meddling with the markets, they can become very inefficient. The housing market, for example, is subject to a fair amount of regulation. Whether this is good or bad, it means the market may not be perfectly efficient.
I have never understood how anyone can think that government (staffed almost entirely by human beings) is going to somehow solve the problem of people being greedy, short-sighted, or stupid. Government is good for situations where perverse incentives exist or a market solution doesn't seem to work. But government bureaucrats are just as greedy, short-sighted, and stupid as people who are not in the government. But they are harder to fire (except for politicians in some cases).
EI
EI
Can't post links without incurring the wrath of She Who Must Be Obeyed, but a quick Google search will remind anyone who wishes to look that Congress dumped $15 billion into the maw of the US airline industry less than 2 weeks after 9/11/2001. That doesn't sound euthanized to me. And while it's polite to say that Enron's demise was an "optimum outcome", it didn't, you know, happen in a vacuum. As any of the former 85,000 employees of Arthur Andersen will tell you. And considering that Enron, acting in its role as a California power utility, deliberately caused over 30 blackouts, well, I'm not even sure what the argument is.
Jonathan,
I'll finish your thoughts for you...
Enron caused blackouts....therefore the government should be in charge
Arhurt Andersen went belly up...therefore the government should be in charge
Airlines needed subsidies after a terrorist attack...therefor the government should be in charge
Gee this is fun.
People run red lights and get in accidents...therefore the government should drive all cars
Chefs pass food borne illinesses through their food to customers....therefore the government should cook all food.
Gee this is great fun. How many more bad things can we point how and discover unique and interesting ways we can involve the government in our lives even more so?
Because the occaisional ticket, trip to the dmv, annual tax preparation just isn't enough. I demand more interference in my life under the threat of a prison or death.
"The difference between companies and the government is that thanks to market discipline, companies that do stupid things eventually have to stop, because they run out of money. "
When you make money the only metric for judgement of stupidity, then, amazingly enough, the stupid lose money.
What I want to know is, why would the government do anything that makes money? There's no shortage of people who want to make money. If we want something done, and there is profit in it, it will get done. Private enterprise can make money. Government should be doing precisely those things that we want done that can not be done on a for-profit basis. By your judgement, the government should only do stupid things.
There are a lot of stupid things that people want done. We want criminals caught and punished. We want poor people fed. We want the elderly who invested poorly to be provided for. We want food prices to be predictable and food sources to be reliable. We want our environments to be relatively harmless when they appear to be so. We want all sorts of things that no one can make a profit delivering.
Something that FDR knew, and many libertarians seem to forget, if you do not give people these things that can not be delivered for profit, they will take away your marketplace. That would really be stupid.
The optimal outcome in the Enron case depends on where you start. If you start early enough, the optimal outcome would be for Enron to be a law-abiding company that tries to make money in new and innovative ways. Once they start commiting fraud and other crimes and doing things that are illegal and/or stupid, then the optimal outcome is for the company to lose money and, possibly, to fail.
Doing stupid things should cause a business to lose money. Losing money is not necessarily a result of only doing stupid things. Sometimes losing money is a result of bad luck or trying to provide a service that is not subject to normal market behavior.
Government should step in to provide the service in the latter cases if there is a public benefit to providing the service. Government should not step in and provide the service if it's stupid.
This all seems pretty straightforward.
EI
Njorl,
Not all that government does are those things that can't be done profitably. However, you are correct that not all that government does can be readily measured by money profit- but, then, that was not the entirety, or even the main thrust of McArdle's point. Her main point was that when government does something stupidly, there is no ready means to judge it is stupid, and no ready means of eliminating those stupid actions, laws, and regulations because we have no ready means of identifying them.
However, I would be quite happy if we could just get government out of the business of suppressing and manipulating the feedback mechanisms for culling the private herd.
Or to put it another way, I am allowed to workaround General Motors' mistakes by buying a Toyota Camry, but I'm not allowed the same "opt out" for government programs without the IRS doing its utmost to put me in jail cell with the murderer, molesters or former corporate executive.
Yes, Jonathan, and one of the problems in the airline industry is that poorly performing organizations aren't liquidated, sometimes due to government bail-outs. This is not strong testimony for government action.
I will also help you with the Enron "argument". Enron was a very poorly performing organization in many ways, some of the worst ones relating to fraud. The optimal outcome for an organization which performs poorly in many ways is for the organization to cease to exist. Hence, it is a very good thing that Enron no longer exists, with many of it's leaders in jail. Given the quality of Arthur Anderson's audits of Enron, the fact that Arthur Anderson no longer exists may be optimal as well.
In contrast, and to pick just one example, the Bureau of Indian Affairs has been a cesspool of corruption and incompetence for many decades. Unfortunately, because the BIA can obtain the capital it needs to continue to exist via compulsory taxation, and does not have to obtain needed capital from individuals who give it willingly, the BIA continues to exist in all it's incompetent and corrupt glory, and is not liquidated, to be replaced by an organization which performs it's role in a superior fashion.
Now, obviously, there are some tasks that there is not a private market for, thus we must turn to government, but one should never ignore the fact that turning to government will inevitably entail toleration for poor performance that an organization which must obtain operating capital by via voluntary contirbution cannot anticipate.
He seems to be confusing a single company with the whole of the economy. If you look at the worst companies, sure they do a lot of dumb things. But for all of those, there are also entrepreneurs doing something that no one ever thought of before and doing it very well. And the market tends to punish the former and reward the latter roughly in proportion to how dumb or entrepreneurial they are.
The problem with the government is that there's only one. If it worked the way the best companies worked, sure it would be at least as good. But the distribution seems to be weighted towards the stupid, so the odds of the lone government being below the median is pretty high. Not to mention Megan's point that with government, the incentives do not punish or reward with the right SIGN most of the time, let alone proportionally.
I'm curious as to what a private, for-profit, Bureau of Indian Affaris would be doing. Would Indians prefer that it do a good job, or a bad job?
cactus claims to be a UCLA econ Phd. A former student of Harberger.
Yet, he appears to have never heard about Public Choice Economics.
Njorl, the point is that the Bureau of Indian Affairs cannot be run on a for profit basis, thus the government performs the task. Because the BIA can obtain needed operating capital by compulsory methods, it is under no threat of being liquidated, no matter how poorly it performs. Thus, it continues on, decade after decade, corruption and incompetence aside. In comparison literally tens of thousands of private organizations have been liquidated in that time span, because they had to obtain needed operating capital via voluntary contributions, but their performance was such that insufficient numbers of people were willing to do so. This is not an argument for anarchy, but merely recognition that organizations which do not have to obtain operating capital from people who provide it willingly have a far, far, smaller margin of error, before liquidation looms.
spencer, students come out of introductory economics thinking no such thing. 18/19-year olds in America are typically out-and-out communists by any objective evaluation, and barely listen to enough of the content of an economics course to pass with their C and move on, without actually absorbing any of it. And that's the best case, where the professor actually favors the market. Heaven help us for all the professors that are communists themselves...
And while it's polite to say that Enron's demise was an "optimum outcome", it didn't, you know, happen in a vacuum. As any of the former 85,000 employees of Arthur Andersen will tell you.
I suspect that most of the former 85,000 employees of Arthur Andersen will tell me that their office, or indeed their entire practice, was sold off to another firm. Very few of them will tell me they've been unemployed for the last five years. Because, you know, there's just as much (or more) accounting and consulting work to be done now as there ever was, it's just spread among the "Big Four" and smaller firms rather than the "Big Five" and smaller firms.
Some observations based on a 30 year marketing career (working with clients in a broad range of industries):
Human nature doesn't change based on whether the human in question is working in government or private industry. Self-delusion, self-protection, the diligent pursuit of immediate self-interest work against "efficiency" in both realms.
Humans are for the most part (and wisely so) very risk averse. Self-flattering mythology and the exhortations of tenured libertarians aside, this is as true in the "private sector" as elsewhere. For all business people the ideal business opportunity is the sure bet, the ideal business environment is zero competition. A very substantial amount of business activity involves doing whatever it takes to find, create, maintain and insure those ideal conditions.
For that reason, the business community as a whole never has, never will, operate free of those dratted "fetters" of government. Because powerful financial interests, powerful individuals, individual businesses, entire industries, etc. always have and always will seek to use government power for their own protection and advantage. In the process of doing so, they forge those fetters themselves. Business interests may cry "freedom!" but, humanly enough, what they mostly seek is protection -- from competitors, from too powerful labor, from too powerful consumers, from competing community interests, from adverse market conditions, etc., etc.
Additionally, people are most likely to take real creative risks when they have little to lose -- and can see real opportunities for gain. But conservative economic policies, advertising and even intention aside, are mostly about helping those who already have a lot (to lose) protect and increase what they have -- rather than helping those who have little create more. The ultimate failure of conservative policies usually can be laid at the door of that reality.
Finally, I agree with Angry Bear's assertion that "there seems to be ample evidence that most companies don't know what they're doing." I'd add that successful companies often don't know why they're successful. The human tendency to give personal virtue more credit for success than is actually warranted quite commonly leads to a failure to adequately appreciate the external conditions, not of their making and outside of their control, that provided the real basis and opportunity for success in the first place. Failing to understand those conditions can leave a company ill prepared to cope when conditions change.
I agree with a lot of what esmense says, but it doesn't contradict Megan's point.
It doesn't matter whether companies understand why they are efficient or not, as long as the inefficient ones get weeded out. Yes, there are some companies that can hang on for decades behaving stupidly because they have some natural or unnatural advantage. But lots do get weeded out, and that makes the private sector, on the whole, more efficient. Well endowed non-profits can be just as inefficient as government, too.
Yes, many "conservatives" tend to support various forms of corporate welfare. As do many liberals. They should all be criticized equally.
Megan is not saying we should get rid of government, she is just pointing out that organizations that do not face a market test will, on average, be more inefficient.
The definition of "efficiency" in government ought to be replaced by "serves a vocal or powerful constituency" in order to make the comparison more meaningful. For instance:
The US government seems to be doing almost every stupid thing it has ever done, and to be planning to continue doing those stupid things forever.
This isn't really true. Many government programs with ambitious starts wither and die; many that are more modest grow to monstrous size. The big determinant is whether it effectively serves a powerful American constituency. Foreign aid has shrunk since the '60s because it benefits foreigners, and thus doesn't have anyone to fight for it. Head Start, similarly, has never been able to really take off, not because it isn't a good program but because its constituency lacks political power. The farm bill, which Megan bemoans, is actually very efficient at funneling large amounts of money to a powerful constituent, viz. agribusiness. The problem isn't so much that the program doesn't "work"; it's that its constituency has more power than it should.
The way to make government more efficient at delivering results for all of us is to smooth out distortions in the democratic representation system that favor rich people and corporations, and to encourage the less-educated and unorganized to organize and fight for their interests, rather than discouraging them.
Ed --
My point goes beyond "corporate welfare." My point is that the distinction between the "private sector" and "government" is in large part a false one. Because the private sector shapes goverment to its own uses, and uses government for its own protection.
It's absurd to, on the one hand, congratulate the "private sector" for occasionally "weeding out" (failing to save may be a better way to look at it) inefficient players in industries where the entire playing field is shaped by and the rules of the game enforced by the industry's self-interested use of government power, yet, on the other hand castigate "government" alone for the inefficiencies created by private sector interests (using government power to protect and serve their interests).
Why, for instance, blame "government" for the "inefficiencies" of farm policy and not the private sector farmers, processors, distributors, etc., who shape and demand that policy?
We miss the boat when we conceptualize "government" as the problem when what we often are really disturbed by is the private sector's use of government -- against the better interests of the economy and society as a whole -- to promote established interests, protect established wealth, and, worst of all, try to artificially maintain established conditions.
Government is us. Government is power. Government is necessary. Government is a tool. It is meant to be put to use. The question is, what use, who's use?
I personally think government works best for all of us, for the society and the economy as a whole, when it makes serving the interest of those who have little but are ambitious to create more its priority, rather than protecting the interests of those who have much and are afraid of losing even a little of it.
"Most of what the government does is stuff that is popular with the voters." Most of the voters have no idea what their Congressman actually voted for. Most of them have no idea how the government programs they do favor actually work in practice - unless they happen to run afoul of the bureaucracy, and then they're no longer supporters...
Most of them have no idea how the government programs they do favor actually work in practice - unless they happen to run afoul of the bureaucracy, and then they're no longer supporters...
Well, let's see. When I lived in the US, I used public transit every day (supported it), highways every weekend (supported), unemployment insurance for a few months once (supported), Federal student loans (supported -- the fact that I got a degree that I didn't really need and am still paying off was my bad), public parks (supported), the police a couple of times in the early '90s to report break-ins (supported), the DMV to get my license renewed (supported, especially great how they cut waiting times with new technology throughout the '90s), the public library (supported)...
Since moving abroad, I've mainly used US consular services to renew passports and get tax information -- very friendly and efficient, though it's annoying how the prices for passports keep rising. Oh, also they have a "warden" service which informs local US citizens of emergencies and risks; this mostly serves to make people more nervous than they ought to be, but whatever.
I think much US foreign aid is being run in a rather ineffective and PR-oriented bureaucratic way, but that has everything to do with the fact that the beneficiaries are not constituents. My own dealings with US government bureaucracy have uniformly been more pleasant and less confusing than my interactions with the US health care system, phone companies, and other commercial services.
Head Start hasn't grown much because it simply DOESN'T WORK. Various studies have shown that while a Head Start student shows initial progress, by the 3rd grade there is NO difference between a Head Start student and an otherwise qualified (for Head Start) student who didn't go through the program.
Exactly what this says is open to interpretation. Maybe the program is worthwhile so that the Head Start students don't feel behind the curve at an early stage in life, doing who knows what damage to their precious little psyches. Or maybe it's worthwhile to get the kids out of the house so that the parent(s) can have a little peace and quiet for a spell.
The theory as to why the program doesn't accomplish what its backers wished for is that the program cannot compensate for the home life conditions that cause the kids to be eligible for Head Start in the first place.
Yet this program continues to get funded, even without a strong voice from its "consitituency" of those kids and parents it serves. Makes you think that its "consitituency" is really other people who are invested in the program, either for jobs or for the ability to "feel good" that something is being done.
Maybe the program is worthwhile so that the Head Start students don't feel behind the curve at an early stage in life, doing who knows what damage to their precious little psyches.
You have any kids there, Rex? Because I can just feel how much empathy you have for kids.
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