Differences between Private and Public

In the video from yesterday’s post, Fukuyama focuses on how to improve government services. He notes that one must first recognize the differences between the private and public sectors

1. Private firms can go bankrupt- public cannot. Incentives perform
2. Subject to mandates- matrix of provisions healthy water, plentiful
3. Cannot retain earnings, and thus, no profit incentive
4. Worker relations are subject to multiple demands and protections

I’m wondering, though, whether it would be valuable to look through these differences, not from the perspective of trying to fit public goods into the private mold, but rather from the perspective of why certain goods fall into upon the public conscience.

For instance, there’s no bankruptcy in government because the supply of these services is too important to have them fail. If a shoe producer sets her factory to make 5000 shoes that no one buys, and this closes her down, then she might take the hint that she’s not good at shoes. No harm except to her pocketbook.

However, when a fire consumes a building, people want firefighters to show up. People want the police to break up fights, and they want clean water to come out of their pipes, without fail. People don’t want to be tested by start-ups that make imprudent decisions. The goods and services that fall under formalized government are there because they are deemed necessary for a certain standard of living.

So, if the threat of bankruptcy is gone, what is another threat that would incentivize the bureaucracy to a higher level of performance? Let’s go to #2 first and see how things unfold.

Fukuyama argues that governments are subject to multiple mandates, whereas private companies can focus solely on generating profits. The water department is not only producing clean potable water, but they also must make provisions for vulnerable people on the edge of financial distress. I wonder if this is because goods that tend to fall into the public sphere are those expected by a group– not only do the parents want water, but the kids and the seniors. With a wide range of participants in a group, some are bound to be less capable than others. The relationships, however, dictate the standard that everyone is expected to receive.

Although the group values consistency, they also desire affordability. So this isn’t a realm of profits and retained earnings. The idea is to meet the standard at the least possible expense instead of creating something fantastic and interesting that everyone will throw money at you to obtain. The fact that departments must return their unspent budgets, however, might be a policy flaw. But that topic is for another day.

It shouldn’t be surprising that the environment subject to providing goods and services under multiple mandates cloaks their employment contract with the same tribal protections. It has long been understood that public servants earn less than private sector employees but have greater job stability and larger pension benefits. Fukuyama feels this is a drawback in pressing for higher performance on the job. And perhaps that’s right.

So, it seems the trick for improved performance in the public sphere is three-fold. First off, only those services that are suited to the no-bankruptcy nature of things should fall to the public. If it is an unfettered good, let the private sector figure it out. Secondly, figure out how to measure the group as a whole or the individual. Individuals really don’t matter in and of themselves; only the group counts. Incentivize people as members of the group, give them pride in that, and tucked away social capital over and above the dollars safely sitting in their pension funds.