We’d all rather hope that someone trying to teach economics in he UK is up to date with one of the foundational pieces of the subject. Ronald Coase on why the firm exists.
The essential answer being that there are costs – and benefits – to doing everything within one organisation, costs and benefits to contracting out functions. The line we draw around the firm depends upon the specific costs and benefits of the specific activity at that specific time.
Ford uses steel. For uses headlights. Ford uses seat covers. Ford uses engines. Which of the four should Ford be making inside the firm of Ford and which should is subcontract out? Where should the line be between Ford and not-Ford?
Depends really. As far as I know the first is definitely subbed out, the second is too. The third didn’t used to be at least – there was a strike by the lady seat cover makers which is a milestone in equal pay gubbins. And engines are made by Ford.
This is the background. So, the Senior Lecturer:
The fact is that outsourced models only save by doing one of three things. Those are providing a worse service; cutting staff costs; or reducing commitment to service renewal (R&D, training, etc). All are fatal to the quality of outcomes over anything but the very short term. And that’s precisely why this model has to come to an end.
Presumably the NHS is now going to start making its own mops – hey, hospital floors must be cleaned and contracting out doesn’t work. The sausages in the canteens will be made by the NHS. Because contracting out doesn’t work.
Yes, you’re right, Ritchie’s an idiot.
The question about outsourcing is only when is it better and when isn’t it? And it really was Coase who pointed out the basics here.