Or, why it\’s right to have markets in the public services.
As Paul Krugman said, productivity isn\’t everything but in the long run it\’s pretty much everything. So these aren\’t good numbers:
The ONS calculates public service productivity by counting the number of procedures carried out in hospitals, pupils taught in schools and elderly people cared for in nursing homes (classified as “output”) as well as the number of staff employed by the state such as teachers and doctors and the equipment bought for them to do their jobs (“input”).
It found that the amount of labour and assets used by central and local government rose by an average of 3.2 per cent between 1997 and 2008, with the greatest increase in 2002.
However activity in public services grew by smaller amounts, averaging 2.9 per cent a year.
“Because inputs grew a little faster than output, productivity over the whole period fell, on average by 0.3 per cent.”
Now what we expect to see in the economy as a whole is a rise in productivity: trend appears to be about 2% for labour productivity for example, year on year, decade by decade, we get 2% more per unit of labour, measured across the economy as a whole. The other important one is total factor productivity, which is what is being measured here for public services. Not just labour, but all inputs. Not quite sure what trend is here but it\’s certainly positive.
There is one thing which also needs to be taken into account: Baumol\’s Cost Disease. We would expect services to become more expensive relative to maufactures over time because labour productivity is easier to increase in manufacturing than it is in services….yet average wages are set by average productivity across the entire economy.
Given that the private sector numbers include manufacturing the private sector numbers will likely always be better than the public sector.
However, not by all that much, given that at least half and perhaps 75% of the private sector is also services.
What we get out at the end of all of these hems and haws is that if public sector productivity is going backwards then this is making us all poorer….even, reducing wages across the economy as a whole. We wouldn\’t expect public sector productivity to increase as fast as private, this is true, but we should be expecting it to increase just the same.
All of which brings us to the policy decision we need to take in order to get public sector productivity moving in the right direction. You can see what that is by examining the bones of Krugman\’s argument here. Planned economic systems seem to be near incapable of increasing total factor productivity. As Baumol also notes, it is market systems that seem to be able to create innovation (innovation being the utilisation of inventions….that is, not making some new box that goes \”beep beep\”, but getting the beep beep box into the hands of people where it actually gets used.).
So our lesson here is that, in order to get productivity moving in the right direction we need to bring markets into the public services.
No, this doesn\’t necessarily mean capitalism, multi-nationals or Crapita. It\’s markets, competition among suppliers, whether those suppliers be sole traders, consumer owned mutuals, worker owned co-ops or whatever.
And just to bend over to be absolutely fair, yes, we can also say that markets will be wasteful. There will be duplication, waste as people negotiate. But this is a static analysis and what we want is a dynamic analysis.
So let us provide such a dynamic analysis with made up (but believable) numbers.
We spend around £100 billion on the NHS. Productivity is declining at 0.3 % a year. So after five years we\’re going to be getting 98.5% of what we get for our £100 billion today (yes, I\’m ignoring inflation, or rather assuming that there isn\’t any). After 10 years we\’re getting 97%.
Now we bring in markets and we manage to turn around that productivity number, from minus 0.3% to the 2% we expect of labour productivity as trend (no, not quite the right numbers but this is an example, a model, and I\’m allowed to do that, see, just to make the point).
After five years we\’re now getting 110% for our £100 billion…..and after 10, 121%.
But there\’s a cost of bringing markets in. The cost of having spare capacity, of negotiating, of getting the workforce of the NHS acculturated to actually thinking about prices and efficiency. Call it 10% (entirely made up, it\’s a model, capisce?) of our £100 billion, £10 billion a year.
We can see that in year 1 we\’ve only got 90% of the health treatment we would have had without markets. Bad…and static. After 5 years, our market based system has begun to nudge ahead. The 10% loss is outweighed by the 10% gain in productivity while the non market system will have slipped 1.5%. After a decade though we\’re really motoring. Our non reformed system will have slipped to 97% of output for our £100 billion while the market system will be, after out 10% of costs for markets, be producing 111%.
OK, yes, those percentages aren\’t quite correct. And you can change the numbers around as you wish, assume different levels of productivity growth, costs and so on, leading to different numbers of years that it takes for the market system to move ahead.
But this is the difference between a static and a dynamic analysis of the effects.
If it is true, as a Nobel Laureate and one of the perennial also rans both state, that it is markets, not planned systems, which are able to improve total factor productivity, and markets alone which are able to do this, then a dynamic analysis shows us that moving to a market based system (or even a pseudo market based system) will, in time, leave us all better off even at the pain of short term costs.
And of course this is the very justfication of technocracy, of those wise and omniscient peeps in government organising things for us, isn\’t it? That our individual actions at times do not lead to a collectively optimal outcome. To reach that collective optimum our immediate instincts, immediate self-interests, need to be curbed, curtailed, so that in the long run we\’re all better off.
Like, say, a 10% hit to health care today for a system which in a decade provides 10% more for the same money….and keeps on then getting better by 2% a year forever.
Which is why we need markets, if not capitalism, in public services.