I do wish Ritchie would learn some economics

Third, the cost of government provided services are rising much faster than inflation in general. Automation is reducing the cost of many private sector supplies and you can’t automate large chucks of tat the government does. There are no productivity gains to be had in them, so their relative cost is rising.

This is Baumol\’s Cost Disease.

And the point isn\’t that services cannot have their productivity improved. It is that productivity improvement in services is more difficult, not impossible.

To take a trivial example, one oft used by myself. There was a time when the cure for a headache was bed rest with a comely maiden gently dabbing the temples with a cloth dipped in cool water. It is aboslutely true that as society gets richer, as average wages increase, then this service will become more expansive. Must do, it is based upon pretty much pure human labour and a useful definition of society getting richer is that labour earns more.

We no longer use this method and not just because of the dreadful shortage of maidens, comely or not, in our modern world. We don\’t use this method because someone automated it.

By inventing aspirin.

Oh, and what system is it that increases productivity? Yup, a market based one. Which is the second part of Baumol\’s teaching. That precisely and exactly because much of what government does is services, services where productivity improvements are more difficult, this is why we need markets in the provision of government services.

18 thoughts on “I do wish Ritchie would learn some economics”

  1. 1) It surely can’t be beyond the wit of science to be able to fully computerise HMRC at some stage in the not too distant future.

    2) And the Japanese are investing billions in developing robots that can do all the “comely maiden with a damp towel” service sector jobs. An aging population, few kids and a reluctance to allow in cheap immigrants is a strong incentive for success.

    3) And hasn’t there been a 3 year wage freeze on all public employees earning over £17k ? And 400,000 public sector job losses. So why is there any cost inflation at all ?

  2. 1) It surely can’t be beyond the wit of science to be able to fully computerise Murphy at some stage in the not too distant future.

  3. well … maybe. In some cases attempts to introduce competition come with costly problems – I’m thinking of contracting problems, armies of lawyers and too many ways for firms to extract rents. Plus there may also be natural monopoly style arguments when a large scale centralized process may be more efficient.

    Of course I recognise large scale centralized processes can also be a shambles. My point is merely that you need a case-by-case approach and sweeping statements about competition always being better aren’t really justified.

    Years ago I used to cover the public services software sector, and everybody back then was very optimistic about the possibility of large productivity gains from automation in all sorts of places. That was before the NHS IT projects had turned out like they did. I still seems to me like there ought to be big productivity gains from IT in the public sector, but evidently there are some serious barriers to achieving them.

  4. The other thing is necessity. We all know that businesses produce a lot of productivity savings because they are almost always under huge pressure to rein in costs.

    Also public sector “output” is normally measured by the amount spent on it. £33bn invested in health services”, etc.”. And cuts in spending are accompanied by accusations that the service provided must have been cut by the same percentage.

    Until the demos grows up a bit then the public sector will go on wasting.

  5. Shinsei,

    Would Tim really want a robot replacement for a comely maiden – or would he rather take the aspirin so he is well enough to go and look for a comely maiden?

  6. And there is good automation and bad automation. Government automation innovations, like those of HMRC sometimes adds burden to others as their system is so inflexible that it becomes more difficult to deal with them.

  7. as society gets richer, as average wages increase, then this service will become more expansive

    Must be the obesity crisis I keep hearing about.

  8. Anyway, his argument that there are no productivity gains to be had in services is rubbish, even without competition. The Australian Tax Office developed an application for people to complete their returns at home and file electronically years ago. It was developed in-house and AFAIK without problems or cost blowouts. You download it, it saves everything locally so you can fill it in bit by bit, calculates an estimated refund for you, retrieves and pre-fills information they already have (withholding info from your employer, for example). It will handle pretty complex personal tax returns with lots of help and links to the online resources. You get your refund within 48 hours of filing so I’m certain no human ever sees it.

    Of course, it means you don’t need a “registered and regulated” tax agent to file electronically, so I’m sure Ritchie would hate it. Is there anything similar in the UK?

    I can think of plenty of other examples of automated government services too.

  9. The UK online annual tax return is inferior but similar – it is a pdf form but doesn’t do the pre-population from employers’ records, etc.

    Your tax refund takes a little longer too – but normally on the order of a month or so.

  10. The stste exists to perpetuate and increase its own power and thieving. Most of the “services” it provides are shoddy and many are a joke. Others–“security” for example, are the state using your money to secure its power over you and to reduce your choices and opportunities in life. They can stuff their improvements.

  11. So SE, it’s basically an electronically transmitted paper form? From your description I’m guessing it still goes to data entry staff for processing.

  12. It’s hard to come up with a sharp distinction between services and manufacturing anyway. Isn’t, say, mining, just the service of extracting valuable minerals from one location and transporting them to another – a bit like a courier dealing with awkwardly-sized packaging? Or steel-making a matter of applying heat to iron ore and moving the raw materials around in a factory, a bit like radiotherapy being applied to a cancer patient?
    Mining and steel-making may be dangerous, physically demanding and often unpleasant, but the same’s true of dealing with drunks at 3 am on a Saturday night.

    Of course there may be some qualitative difference I haven’t thought of.

  13. Tracy,

    Ah, but real men need real jobs – which means anything that enables you to get very dirty. Poncey service industries where even your hands stay clean aren’t for real men.

    Possibly dealing with drunks in the middle of the night might qualify as a real job, as it does offer opportunities to get very dirty…..oh, but it’s dealing with people, and real men don’t do that, either.

  14. One of the truest phrases I can ever recall is that there is nothing so dangerous as a half-truth. That’s what makes Murhpy’s arguments so insidious and dangerous.

    The obvious counter to this is that a fair portion of what government does is at best of dubious value or at worst utterly destructive to the social weel-being. Arguably the most obvious example is the EHRC, but if you went through the Guardian’s Society section from 1997 to 2010, I’d wager you could find upwards of a million positions whose only contribution to wellbeing was to the jobholders (almost all Labour supporters to a person) themselves.

    As Blue Eyes (5) points out, the standard argument from the Left is that the more than two fold increase in total expenditure over the 13 years of Blair/Brown was ‘Investment’ rather than expenditure. It’s a mistake that no-one with even the vaguest exposure to Private Sector budget setting could make. If I had gone to any Finance Director in a previous job and tried to equate my expenditure with investment, odds are he would have called for security to have me escorted from the building. The man is clueless, and the terrifying thing is from 2015 he will have a huge role in setting up the taxation system of the country…

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