Do not let John Nash ruin the government

The current government is pursuing a program of public sector reforms more aggressively than any other previous administration. This is more than an effort to balance the budget but is an ideological drive to put the mantra of choice at the heart of state provided services. This notion of choice is borrowed from the market meaning of the word as in competitions between different providers offering a range of services and products. In the market, the spending choice of the consumer is the feedback mechanism which determines which products remain on the market and which are withdrawn. When the government says choice what they actually mean is competition between providers with public choice acting as the feedback mechanise. Through their reforms the government intend to create a market for public services.

For those on the right these reforms represent an opportunity to inject market efficiencies into the ailing public infrastructure. For those on the left, this bill is seen as an attempt to privatise by stealth publicly owned industry.

The changes being put forward by the coalition government will allow private companies, charities and groups of private individuals to bid to run local services. Charities or parent groups can bid to run schools. Patient groups can bid to run hospitals. GPs will be allowed to choose which providers they purchase health care from. All of this is driven by the view that the competition created by a choice will make public spending more efficient. What I fear the most is that the coalition government’s plans will have the opposite result from what they intend, that their reforms will lead to a much more inefficient public sector.

The idea of introducing market based competition to the public sector is not new. It first emerged in the late 1970s as John Forbes Nash, Jr.’s economic theory became widely accepted. Nash posseted that individual’s selfishness will always undermine the success of government programs. He believed that competition for resources between departments and programs as well as competition between individuals for promotions would ultimately sabotage the best interests of government. The TV show Yes Minister is Nash propaganda. The struggle between Sir Humphrey and Jim Hacker usually ends up derailing both of their schemes.

Margret Thatcher was a big believer in both the works of John Nash and Yes Minister and dismantled the old consensus of government work as public service which Nash believed was impossible. In its place she and those who followed her have put the mantra of free market competition as the optimum method to distributed resources.

This legacy was continued by the following Labour government and now redoubled under the current coalition. The logic of Cameron is that the competition in state services will use the profit maximising incentive to harness the power of human selfishness to create the most efficient public sector. As in the private sector, costs to consumers will be driven down (in other words taxes will be lower) and output will be raised in the form waiting lists disappearing.

Rather than apply market efficiencies to public services, these reforms will fall victim to the very pitfalls Nash railed against. The powers given over the external bodies which will run our public services will effectively make them the new management class of the public sector. Instead of using their new powers to drive down costs, a perverse incentive to raise costs will be created by management’s selfish drive to maximise their wages and bonuses.

We have seen this demonstrated during the banking crisis. Unbridled self-interest was let loose on our finical markets in the belief that this will build a robust finical system through optimising the allocation of funds to where they were most effective. The motivation for optimum fund allocation was drawn from the monetary incentive offered to investment managers. However, the selfish motivation for personal wealth failed to create the most efficient banking system and ultimately led to a deeply flawed system vulnerable to collapse.

The government’s reforms will also cause public sector efficiency to suffer by reducing the quality of services provided to the public. This is because most of these external bodies outside government that will be competing to run our services will either be or function as private companies and will follow a profit maximising incentive. The incentive to increase profits will cause the external bodies to drive down the cost of delivery public services as the government has planned but this will not always be through a more efficient allocation of resources. In some cases this cost savings will take the form of reducing the quality of services delivered to the public. This behaviour will be reinforced by the profit maximising incentive of because the profits for these external bodies will be the remainder left over from our taxes after the external body has delivered the service. A good example of this process is the collapse in the nutritional value of school meals since the service was privatised.

Economic efficiency is not always a job done at the lowest cost by cutting as many corners as possible. Sometimes it costs more for a job to be done more effectively. A good demonstration of this is investment in infrastructure and training staff which can be expensive and drive up the costs of delivering a service; however, there are net gains for the whole economy derived from improved infrastructure and having a better trained workforce. Long-term investments such as these will suffer under a system drive by a short-term profit maximising incentive.

Much has been written about the perils of privatising public services at the lowest cost per unit. I will not insult the writers who can explain these problems much more eloquently than I by paraphrasing them here. I seek simply to debunk the idea that enlightened self-interest will lead to the most efficient economic system.

My message to MPs is not to let John Nash and selfishness run our public services. Headlines of waiting lists and rising costs might prompt radical change but once we open up a closed system to market competition it will be all but impossible to restore the values of government work as public service. Selfishness will not optimise state provided services but will instead provide new inefficiencies. We should think gravely about the consequences of opening the door to competition in the public sector. These reforms will offer the public a choice between a series of cost-cutting, bloated over paid private organisations. This is not the road to economic efficiency in public services.